Use the above to forecast the cash flows and calculate the intrinsic value of the stock using DCF method.

FORECASTING CASH FLOWS FOR DISCOUNTED CASH FLOW VALUATIONS DCF valuation primarily focused on three components: growth rates over the forecasted period, cost of capital of the company, and present-day FCFF. The two pension fund analysts knew that both cost of capital and FCFF could be calculated based on the publicly available reported figures, but they were uncertain about the growth rates because their approximation was highly subjective. Therefore, they determined the growth rate for the forecasted period, followed by the growth rate for the terminal phase. They referred to HDFC Banks's investor presentation and its financial statements to determine forecasted cash flows. One factor advocating significant and sustained growth in the future for the bank was its strong corporate governance, reflected in the composition of its board of directors, with high eminence and credibility in the financial markets. Also, given the strong indicators for the bank as reflected in the CAMELS analysis, both analysts were convinced about using a three-stage DCF model, with two stages of explicit growth followed by a constant growth. Loans and advances showed growth of almost 18.7 per cent over the previous year, while gross advances increased by 23.8 per cent in 2018.19 The two analysts followed the growth rate computation using return on equity and retention ratio variables and arrived at 12.62 per cent for the first five years, followed by 10 per cent for the next five years, and converged the growth rate to 6 per cent in the terminal phase.20 For the cost of capital calculation, beta was determined as 1.05 for the explicit growth phase, converging toward a market beta of 1.0 in the terminal phase. The risk-free rate was taken from the 10-year Treasury bond rate, which was 7.75 per cent in September 2018. They followed Damodaran's model?l to determine a country's equity risk premium and identified it as 7.87 per cent for India. This was based on an average of historical and implied risk premium determined for the Indian markets. For the cost of debt, they used the credit rating assigned to HDFC Bank EXHIBIT 9: HDFC BANK INCOME STATEMENT, 2013 TO 2018 (IN MILLION) 12-Month Period, Ending March 2018 March 2017 March 2016 March 2015 March 2014 INCOME Interest Earned 8,024.136 6,930.596 6,022.145 4,846.990 4,113.553 Other Income 1,522.030 1,229.650 1,075.172 899.635 791.964 Total Income 9,546.166 8,160.246 7,097.317 5,746.626 4,905.518 EXPENDITURES Interest Expended 4,014.649 3,616.673 3,262.993 2,607.424 2,265.2.90 Operating Expenses 2,269.038 1,970.334 1,697.970 1,398.754 1,204.220 Provisions and Contingencies 5,927.490 3,593.310 2,725.610 2,075.010 1,587207 Profit before Tax 2,669.730 2,213.907 1,863.792 1,532.947 1,277.281 Taxes 921.057 758.943 634.171 511.355 429.443 Total 7,797.493 6,705.282 5,867.696 4,725.034 4,057.680 PROFIT AND LOSS Profit after Tax 1,748.673 1,454.964 1,229.621 1,021.592 847.838) Extra Items Profit Brought Forward 3,266.894 2,352.769 1,862.779 1,465.415 1,113.218 Adjustments to Profit and Loss Total Profit and Loss 5,015.567 3,807.733 3,092.401 2,487.007 1,961.056 Equity Dividend (%) 650.00 550.00 475.00 400.00 342.50 Earnings per Share 67.38 56.78 48.64 40.76 35.34 Adjusted Earnings per Share 67.38 56.78 48.64 40.76 35.34 EXHIBIT 10: HDFC BANK BALANCE SHEET, 2013 TO 2018 (IN MILLION) March 2018 March 2017 March 2016 March 2015 March 2014 51.902 51.251 50.564 50.130 47.981 0.00 0.00 0.00 0.00 0.00 10,577.598 8,894.983 7,217.213 6,150.812 4,299.882 78,877.064 64,363.966 54,642.419 45,079.564 36,733.748 12,310.497 7,402.887 8,496.898 4,521.356 3,943.899 4,576.372 5,670.932 3,672.513 3,248.446 4.134.440 106,393.432 86,384.019 74,079.607 59,050.307 49,159.950 10,467.047 3,789.688 3,005.831 2,751.045 2.534.563 SOURCES OF FUNDS Share Capital Share Warrants and Outstanding Total Reserves Deposits Borrowings Other Liabilities and Provisions Total Liabilities APPLICATION OF FUNDS Cash and Balance with Reserve Bank of India Balances with Banks and Money at Call Investments Advances Gross Block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Other Assets Total Assets Contingent Liabilities Bills for Collection Book Value Adjusted Book Value 1,824.461 1,105.522 886.053 882.100 1,423.801 24,220.024 21,446.334 19,583.628 15,164.175 12,095.107 65,833.309 55,456.820 46,459.396 36,549.503 30,300.027 1,093.258 1,015.766 925.262 846.330 770.582 728.113 648.668 586.5221 529.732 472.1651 365.145 (4.425) 367,098 (4.425) 338.740 (4.425) 316.598 (4.425) 298.4.6 (4.425) 3,687.870 4,222.982 3,810.384 3,391.310 2,512.460 106,393.432 86,384.019 74,079.607 59,050.307 49,159.950 87,548.823 81,786.959 85,331.811 97,523.395 72,315.491 4,275.383 3,084.804 2,349.000 2,230.493 2,094.306 40.960 34.912 28.747 24.739 18.123 40.960 34.912 28.747 24.739 18.123 FORECASTING CASH FLOWS FOR DISCOUNTED CASH FLOW VALUATIONS DCF valuation primarily focused on three components: growth rates over the forecasted period, cost of capital of the company, and present-day FCFF. The two pension fund analysts knew that both cost of capital and FCFF could be calculated based on the publicly available reported figures, but they were uncertain about the growth rates because their approximation was highly subjective. Therefore, they determined the growth rate for the forecasted period, followed by the growth rate for the terminal phase. They referred to HDFC Banks's investor presentation and its financial statements to determine forecasted cash flows. One factor advocating significant and sustained growth in the future for the bank was its strong corporate governance, reflected in the composition of its board of directors, with high eminence and credibility in the financial markets. Also, given the strong indicators for the bank as reflected in the CAMELS analysis, both analysts were convinced about using a three-stage DCF model, with two stages of explicit growth followed by a constant growth. Loans and advances showed growth of almost 18.7 per cent over the previous year, while gross advances increased by 23.8 per cent in 2018.19 The two analysts followed the growth rate computation using return on equity and retention ratio variables and arrived at 12.62 per cent for the first five years, followed by 10 per cent for the next five years, and converged the growth rate to 6 per cent in the terminal phase.20 For the cost of capital calculation, beta was determined as 1.05 for the explicit growth phase, converging toward a market beta of 1.0 in the terminal phase. The risk-free rate was taken from the 10-year Treasury bond rate, which was 7.75 per cent in September 2018. They followed Damodaran's model?l to determine a country's equity risk premium and identified it as 7.87 per cent for India. This was based on an average of historical and implied risk premium determined for the Indian markets. For the cost of debt, they used the credit rating assigned to HDFC Bank EXHIBIT 9: HDFC BANK INCOME STATEMENT, 2013 TO 2018 (IN MILLION) 12-Month Period, Ending March 2018 March 2017 March 2016 March 2015 March 2014 INCOME Interest Earned 8,024.136 6,930.596 6,022.145 4,846.990 4,113.553 Other Income 1,522.030 1,229.650 1,075.172 899.635 791.964 Total Income 9,546.166 8,160.246 7,097.317 5,746.626 4,905.518 EXPENDITURES Interest Expended 4,014.649 3,616.673 3,262.993 2,607.424 2,265.2.90 Operating Expenses 2,269.038 1,970.334 1,697.970 1,398.754 1,204.220 Provisions and Contingencies 5,927.490 3,593.310 2,725.610 2,075.010 1,587207 Profit before Tax 2,669.730 2,213.907 1,863.792 1,532.947 1,277.281 Taxes 921.057 758.943 634.171 511.355 429.443 Total 7,797.493 6,705.282 5,867.696 4,725.034 4,057.680 PROFIT AND LOSS Profit after Tax 1,748.673 1,454.964 1,229.621 1,021.592 847.838) Extra Items Profit Brought Forward 3,266.894 2,352.769 1,862.779 1,465.415 1,113.218 Adjustments to Profit and Loss Total Profit and Loss 5,015.567 3,807.733 3,092.401 2,487.007 1,961.056 Equity Dividend (%) 650.00 550.00 475.00 400.00 342.50 Earnings per Share 67.38 56.78 48.64 40.76 35.34 Adjusted Earnings per Share 67.38 56.78 48.64 40.76 35.34 EXHIBIT 10: HDFC BANK BALANCE SHEET, 2013 TO 2018 (IN MILLION) March 2018 March 2017 March 2016 March 2015 March 2014 51.902 51.251 50.564 50.130 47.981 0.00 0.00 0.00 0.00 0.00 10,577.598 8,894.983 7,217.213 6,150.812 4,299.882 78,877.064 64,363.966 54,642.419 45,079.564 36,733.748 12,310.497 7,402.887 8,496.898 4,521.356 3,943.899 4,576.372 5,670.932 3,672.513 3,248.446 4.134.440 106,393.432 86,384.019 74,079.607 59,050.307 49,159.950 10,467.047 3,789.688 3,005.831 2,751.045 2.534.563 SOURCES OF FUNDS Share Capital Share Warrants and Outstanding Total Reserves Deposits Borrowings Other Liabilities and Provisions Total Liabilities APPLICATION OF FUNDS Cash and Balance with Reserve Bank of India Balances with Banks and Money at Call Investments Advances Gross Block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Other Assets Total Assets Contingent Liabilities Bills for Collection Book Value Adjusted Book Value 1,824.461 1,105.522 886.053 882.100 1,423.801 24,220.024 21,446.334 19,583.628 15,164.175 12,095.107 65,833.309 55,456.820 46,459.396 36,549.503 30,300.027 1,093.258 1,015.766 925.262 846.330 770.582 728.113 648.668 586.5221 529.732 472.1651 365.145 (4.425) 367,098 (4.425) 338.740 (4.425) 316.598 (4.425) 298.4.6 (4.425) 3,687.870 4,222.982 3,810.384 3,391.310 2,512.460 106,393.432 86,384.019 74,079.607 59,050.307 49,159.950 87,548.823 81,786.959 85,331.811 97,523.395 72,315.491 4,275.383 3,084.804 2,349.000 2,230.493 2,094.306 40.960 34.912 28.747 24.739 18.123 40.960 34.912 28.747 24.739 18.123