DAYANANDA SAGAR COLLEGE OF ENGINEERING
(An autonomous Institute affiliated to Visveswaraya Technological University (VTU),
Belagavi, Approved by AICTE and UGC, Accredited by NAAC with ‘A’ Grade and ISO
9001-2015 Certified Institution)
Shavige Malleshwaram Hills, Kumarswamy Layout, Bengaluru-560078
DEPARTMENT OF MANAGEMENT STUDIES
MASTER OF BUSINESS ADMINISTRATION
ASSIGNMENT 1
CORPORATE FINANCE
(MBA24C202)
SUBMITTED BY: SHATAKSHI TIWARI
USN: 1DS24BA102
Under the guidance of
Professor Dr. Vinod Krishna M U
Case Study: Computing Cost of Capital at Infosys
Understanding a key corporate finance metric through a real-world lens
In the world of corporate finance, the cost of capital plays a critical role in determining whether
a company is generating value for its stakeholders. It acts as a benchmark that companies must
exceed to justify investments and strategic decisions. This article explores the theoretical
foundation of cost of capital and applies it to Infosys, one of India’s most prominent IT services
firms.
What is Cost of Capital?
The cost of capital is the expected rate of return that a company must offer to its investors
(debt holders and equity shareholders) to fund its operations and growth. It reflects both the
cost of borrowing (debt) and the opportunity cost of equity capital.
The most common method to compute this is the Weighted Average Cost of Capital (WACC):
WACC = (E/V × Ke) + (D/V × Kd × (1 – Tc))
Where:
E = Market value of equity
D = Market value of debt
V = E + D (Total capital)
Ke = Cost of equity
Kd = Cost of debt
Tc = Corporate tax rate
Why Is Cost of Capital Important?
Investment Evaluation: Used in capital budgeting to discount future cash flows.
Performance Measurement: Return on Capital Employed (ROCE) is often compared to
WACC to assess value creation.
Valuation: Key input in discounted cash flow (DCF) models.
Strategic Decisions: Helps firms allocate capital wisely.
Infosys – A Real-World Example
Infosys offers a compelling case study due to its debt-free or low-debt structure. As of FY2023,
Infosys reported minimal financial liabilities, making its cost of equity the primary driver of
WACC.
Cost of Equity Estimation using CAPM
Infosys’s cost of equity can be estimated using the Capital Asset Pricing Model (CAPM):
Ke = Rf + β(Rm – Rf)
Assumptions based on recent financial data:
Risk-Free Rate (Rf): 6.9% (10-year Indian Government bond)
Beta (β): 0.83 (Infosys Annual Report)
Market Return (Rm): ~12%
Ke = 6.9% + 0.83 × (12% – 6.9%) = 11.13%
Since the company has negligible debt, WACC ≈ 11.1%
Real-World Impact: Strategy & Performance
Infosys uses this cost of capital to:
Evaluate internal projects and investments
Assess mergers or acquisitions
Benchmark returns against expectations
In FY2023, Infosys achieved a Return on Capital Employed (ROCE) of ~38%, significantly higher
than its WACC. This indicates strong value creation and highly efficient capital utilization
Key Takeaways
Cost of capital is a crucial metric for financial decision-making.
Infosys’s case illustrates how companies with low debt can simplify their WACC
estimation.
CAPM is a widely accepted and practical approach for estimating the cost of equity.
Infosys consistently delivers returns well above its cost of capital, confirming sound
financial strategy.
Reflection & Future Implications
This case highlights how traditional finance tools like WACC remain relevant and essential in
today's data-driven decision-making environment. For businesses, understanding their cost of
capital is more than just a theoretical requirement—it's a strategic compass guiding capital
allocation, shareholder value creation, and long-term sustainability.
As financial markets evolve and investor expectations shift, firms like Infosys demonstrate the
value of financial discipline, low-leverage strategies, and transparent communication. For
finance professionals, this underscores the need to blend technical expertise with strategic
insight.
