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Formula sheet/NISM Series XV: Research Analyst/Valuation Principles
[ VALUATION PRINCIPLES ]

Capital Asset Pricing Model (CAPM) & Weighted Average Cost of Capital (WACC)

Cost of Equity(ke)=Rf+β×(Rm−Rf)\text{Cost of Equity} (k_{e}) = R_{f} + \beta \times (R_{m} - R_{f})
Equity Risk Premium=β×(Rm−Rf)∣Market Risk Premium=Rm−Rf\text{Equity Risk Premium} = \beta \times (R_{m} - R_{f})\quad\Big|\quad \text{Market Risk Premium} = R_{m} - R_{f}
WACC=[ke×(E/(E+D))]+[kd×(1−t)×(D/(E+D))]=(ke×We)+(kd×(1−t)×Wd)WACC = [ k_{e} \times (E / (E + D)) ] + [ k_{d} \times (1 - t) \times (D / (E + D)) ] = (k_{e} \times W_{e}) + (k_{d} \times (1 - t) \times W_{d})
Variables

RfR_{f}: Risk-free rate (10-yr G-Sec yield); β\beta: Stock beta; kdk_{d}: Pre-tax cost of debt; t: Marginal corporate tax rate. RmR_{m}: Expected/market return; E: Market value of equity; D: Market value of debt; WeW_{e}, WdW_{d}: Weight of equity and debt in the capital structure.

Exam note

WACC incorporates the interest tax shield: After-tax cost of debt = kdk_{d} × (1 - t).

Worked examples
Gordon Growth Dividend Discount Model (DDM)

Nestle India paid a dividend of Rs 120 per share last year (D_0). The dividend is expected to grow perpetually at a constant rate of 8% p.a. If the required rate of return on equity (k_e) is 12%, calculate the intrinsic value per share.

CAPM Cost of Equity and WACC Calculation

An analyst is estimating WACC for Titan Company. Data: 10-year G-Sec yield (R_f) = 7.0%, Expected Nifty 50 Return (R_m) = 14.0%, Titan Beta (β) = 1.25. Pre-tax Cost of Debt (k_d) = 8.5%, Corporate Tax Rate = 25%. Capital Structure: Equity = 80%, Debt = 20%. Calculate Cost of Equity (k_e) and WACC.

Two-Stage DCF Valuation with Terminal Value & Equity Value

CleanEnergy Ltd projects FCFF of Rs 500 Cr (Year 1), Rs 650 Cr (Year 2), and Rs 800 Cr (Year 3). Beyond Year 3, FCFF will grow perpetually at 5% p.a. WACC is 12%. The company has Debt of Rs 2,000 Cr and Cash of Rs 500 Cr. Total shares = 10 Crore. Calculate Enterprise Value, Equity Value, and Target Price per share.