Forecasting Future Data for Dividend Discount Valuation

To forecast the future dividends for the valuation exercise, Malhotra needed to forecast the Federal Bank's financial statements Given management's future outlook and the bank's strong financial position, Malhotra was confident that the Federal Bank would be able to grow its loan book at approximately 15 per cent per year for the next five years, until 2019. To forecast the deposits, Malhotra assumed a constant advances-deposit ratio in line with FY 2013/14. Fee growth and provisions were assumed to increase in line with the loan growth in the future. Malhotra further assumed that net interest margins, cost-income ratio, cash and bank balances, and CASAs would be stable and in line with the FY 2013/14 levels. A tax rate of 30 per cent was a reasonable assumption to work with. The notable change Malhotra expected was a growth in the dividend payout ratio to about 30 per centthe higher figure reflecting the bank's strong financial position.

The final consideration for Malhotra was determining the cost of equity that would be used as the discounting factor. To sort out the cost of equity, Malhotra estimated that the one-year beta for Federal Bank would be 1.1 and the average equity risk premium for India was 5 per cent. She visited the RBI's website to get information about the risk-free rate. She learned that the yield on India's 10-year government

treasury securities was 8.84 per cent on March 31, 2014.

Question:

using the dividend discount valuation modelWhat is the long-term growth rate and cost of equity using the (CAPM) model of Federal Bank?