Dvp Vfm Group2

8/13/2019 Dvp Vfm Group2

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GROUPASSIGNMENT 1DINH VU PORT DEVELOPMENT AND

INVESTMENT JOINT STOCK COMPANY

GROUP: 2

CLASS: SB0765

LECTURER: DINH TIEN THANH

TOPIC: EVALUATE DVPS COST OF CAPITAL


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GROUP ASSIGNMENT 1 VALUATION AND FINANCIAL MODELING

1

TABLE CONTENT

Executive summary .................................................................................... 2

Company introduction .............................................................................. 3

The process to calculate cost of capital .................................................... 10

1. cost of equity ............................................................................... 112. cost of debt .................................................................................. 183. Calculate tax rate for DVP ........................................................ 204. Cost of capital ............................................................................. 20

Comment about the cost of capital in two methods ................................ 22

References ................................................................................................... 28

Appendices .................................................................................................. 28

MEMBERS

Tran Thi Hanh Trang

Tran Huynh Nhu

Huynh Anh Kim

Huynh Manh Tung

Le Minh Hiep


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of investors and the choice in using method will impact with development of

the company. To go to details, we will understand clearly about DVP and we

will make decision to invest into DVP or not.

II. DINHVU PORT INTRODUCTION1.Company overview

- Company: DinhVu Port Development and Investment Joint StockCompany.

- Certificate of Business Registration No: 0203000364- Capital : 200,000,000,000 VND- Capital investment of the owner: 83,682,913,000 VND- Phone number: 0313.769992- Tax number: 0313.769992- Website: www.dinhvuport.com.vn


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- Stock code: DVP2. The formation and developmentDinhVu Port (DVP) was established under Decision No. 990/QD-TGD

November 11, 2002 by General Director of the Vietnam Maritime

Corporation.

14/01/2003, DVP was officially put into operation.

1/12/2009, the shares of DVP was officially listed on the Stock Exchange

Ho Chi Minh city Decision No. 147/QD-SGDHCM November 24, 2009 the

following contents:

Type of shares: Ordinary shares Stock code: DVP Par value: 10,000VND/share The number of listed share: 20,000,000 shares The total value of listed shares at par value: 200,000,000,000 VNDIn 2012, the 2nd consecutive time, Vietnam Tax Magazines and VNR are

assessed name one of top 1000 Enterprises highest income tax Vietnam.

Also in 2012, DVP was honored with the award for Strong brand Dai Viet

2012. This is award of Union of Science and Technology Vietnam held to

honor businesses that have tried to build brand strives for sustainable

development through the promotion and application of science and


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technology to create products, quality services to meet market needs

improving competitiveness, contribute to the economic development of the

country. Especially in 2012, on the occasion of the 10th anniversary of

incorporation 12/19/2002 -19/12/2012, DVP was honor awarded by the

President Medal for the Second Labour achievements achieve excellence in

the manufacturing business.

Also in 2012 the company Hai Phong city People's Committee

compliments distention files carry the "10 years of construction, Integration

and Sustainable Development".

* Business Scope

a.Business, exploit portThe company will carry out loading and unloading of goods from

ships in port warehouses, yards outside the port request services of shipping

agents. Infrastructure DinhVu Port today mainly consists of two ports to be

able to receive ships from 20.000 to 40.000 DWT. Two ports were put into

operation between 2005 and 2008.

Production of goods through ports in the annual average of about 3 to

4 million tons, container output through the port of DinhVu from 350,000 to

400,000 TEUs, the average proportion of 20% -25% of the total output of


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goods through the system Haiphong port. Compared with national market

share, production of goods through the DinhVu port accounts 2-3%.

b.Warehouse for rent and delivery goods.The goods are stored in warehouses or yards as required by the

shipping agent or owner goods, DVP responsible custodian, preserving all

goods until the goods pickup.

Currently, DVP has a warehouse with an area of 6000m2 and a yard

containing an area of 10,000 m2. Every year, this segment contributed

average 5% of the total revenue of the company.

3. Development strategyDevelopment strategy of the company through two main directions:

* Develop in-depth:

The company continued to invest in modern equipment, infrastructure,

and training and improving the quality of human resources, the system

applies advanced information technology in the management and control of

the port, towards the goal of becoming a container handling port and modern

professional.

* Development of the width:


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To take maximum advantage of the resources and to increase

profitability, the company has expanded business scope and development of

industries related to port activities such as:

Continue investments in joint ventures SITC-Dinhvu Logistics and

Dinh Vu Logistics Joint Stock Company.

Cooperation with strategic partners is to conduct a feasibility study of a

joint venture investment projects, development of ports in the outer region:

investment, construction and operation of the maritime business.

4. The producing situation and business activities in 2012.* Results of business activities in 2012

Through production: 4,647,017 tons was to 104.54% compared with

the plan and increase 7.7% from 2011. In which container cargo: 462 686

TEUs was 103.97% compared with 5.28% increase plan and over 2011.

Sales: 502,962,272,978 VND gain 115.62% and increase 13.51% increase

compared to 2011. Profit before tax 201,207,923,357 VND gain 143.72%

and increase 21.97% compared to 2011.


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5. Financial situation

Targets 2011 2012

%

Up

down

Total assets 699.092.684.156 789.281.178.343 11,3

Net sales 402.616.672.584 475.244.373.615 11,8

Net profit from business

activities157.489.265.002 200.831.099.069 27,5

Profit 7.477.167.924 394.824.288 (94,72)

Profit before tax 164.966.432.926 201.207.923.357 21,97

Profit after tax 151.613.829.681 188.054.786.012 24,03

The rate of profit to pay

dividends47,71% 30,29% (36,51)

Targets 2011 2012 Notes

1. Liquidity ratios+ Current ratio

+ Quick ratio:

3,74

3,69

2,98

2,91

2. Capital structure ratio+ Debt/Total assets:

+ Debt/ Equity:

0,36

0,57

0,31

0,44

3. Asset utilizer+ Inventory turnover:

+ Net sales/Total assets:

40,44

0,57

31,54

0,60


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4. Profitability ratiosProfit after tax/ Net sales:

Profit after tax/ Equity:

Profit before tax/ Revenue:

Business activities/ Net sales:

0,38

0,34

0,21

0,39

0,40

0,34

0,24

0,42

6. Shareholder structure

a. Stock

- Total number of shares: 20,000,000 shares

- Type of outstanding shares: Common Shares

- Charter: The charter application form for companies listed on the

Stock Exchange

b. Shareholder Structure:

- Currently DVP shareholders individuals and shareholder

organizations in Vietnam accounted for 90.46%. Foreign investors

accounted for 9.54%

- The biggest individual shareholder is Nguyen Thi Thanh who holds

557,450 (makes up 2.79%)


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- The biggest organization shareholder in Vietnam is Haiphong port

Company holds 10,200,000 (makes up 51%)

- The biggest foreign investor is Mutual Fund Elite (Non- Ucits) holds

979,000 (make up 4.90%)

III. THE PROCESS OF CALCULATE COST OF CAPITALIn fact, the cost of capital is used for financing a business. To DVP,

because the business is financed through a combination of debt and equity,

which is why its overall cost of capital is calculated from a weighted

average of all capital sources (WACC):

WACC = xE*kE+ xD*kD*(1-t)

Haiphong Port

51%

MFE

5%

Nguyen Thi

Thanh

3%

Other foreign

ones

2%

Other domesticones

39%

DVP's Shareholder Structure in 2012


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In which, kE, kD are the cost of equity and the cost of debt respectively. xE

and xD are the portion of equity and debt respectively of the total finance

sources. Last one is t, it is tax rate.

Based on the formula above, of course, if we want to have the cost of capital,

we must find out the cost of equity and the cost of debt. That is why the

following parts will determine that process.

1.Cost of equi tyTo calculate DVPs cost of equity, we have two methods, such as direct

one and indirect one. Each of them has its advantages and disadvantages, so

we will do both of them to compare.

a.Di rect method (CAPM model)The CAPM model is usually used to estimate the firms cost of equity in

the world, so we also use this model in this case DVP. According to the

CAPM model, the cost of equity depends on three elements like risk free

rate, market risk premium and beta.

kDVP = rf+ DVP*(E[rM]rf)

kDVP is the cost of equity of DVP

rfis risk free rate


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DVPis the DVPs beta

E[rM] is the expected market return

E[rM]rfis the market risk premium

In fact, each element above is calculated based on the current and

historical data. Moreover, DVPs share is listed on financial Vietnam

market, so to get the cost of equity we have to base on the market data.

a-1. Risk free rate

Everyone knows the risk-free rate is a return rate that t the investors can

definitely get for a certain investment period. For an investment to be risk-

free, it has to have no default risk and no reinvestment risk. The 3-month T-

bill seems to be quite suitable because it has no default risk and liquidity risk

(the safest). But the investing time is too short (the rate of return will change

over time and not stable) so the reinvestment risk will appear. Therefore, to

DVP the one year period is suitable term to analyze. As a result, the yield to

maturity of government one year bond up to September 2013 is considered

as the risk-free rate. We can get the risk-free rate of 6.60% in Appendix 3

Another choice is the interest rate of interbank, but when we look at the

historical data of interest rate of interbank, we can see that the gaps between

every year can be very high and it looks not good when we use it to be the Rf.


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a-2. Market risk premium (MRP)

To calculate the MRP in Vietnam, we need to know the average expected

return from market E[rm] (the VN-Index return) and the average one-year

bond return. By using the historical data, we can easily find the MRP in

Vietnam is 10.09% by subtracting average annually return on one-year bond

by average return on VN-Index from 2001 to 2013 (September). (Appendix

3).Remember to use the average historical data to compute the E[rm] and rf

because the data in a year cannot reflect well the long history of these two

indicators (The MRP in some years can be negative and positive in another

year but commonly, it must be positive). Sometimes we will be confused

between using average or geometric. Despite the geometric method is more

reliable than the average method, but the average one is usually more

popular, and to DVP we also calculate the MRP by the average method.

a-3. Beta

The beta of DVP reflects the correlation between the return on DVPs

stock and VN-Index. The most popular method to calculate the beta is using

the historical data to estimate the regression line. By doing this, in Appendix

4, we can get a regression line with the function below:


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y is DVPs stock return; x is VN-Index return

In fact, slope of the line is about 0.31, this is the estimated beta of

DVP from December 2009 to September 2013. Because DVP is listed on the

market at the end of 2009, so in this situation we use the data from that point

to September 2013. Moreover R square is about 0.078 and range of beta

(with confidence level of 95%) is (-0.014; 0.626).

From a-1, a-2 and a-3 we have:

- The risk-free rate rfis 6.6% per year- The market risk premium is 10.09%- The beta of DVP = 0.31

Therefore, the DVPs cost of equity is:

kDVP = rf+ DVP(E[rM] rf) = 6.6% + 0.31* 10.09% = 9.68%

y = 0.3056x + 0.0173

R = 0.0776

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-20% -10% 0% 10% 20%DVP

Return

VN-Index Return

Series1Linear (Series1)


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b.I ndir ect methodIn many cases, direct method is the perfect method to calculate the cost

of equity, especially when that stock market and company have the long

historical data. With a young stock market like Vietnam, the data that can be

used to calculate is not significant to ensure the quality of calculation. The

indirect method will be the best alternative for us to calculate the cost of

equity based on the standard measurement like US market.

The basic principle is that the cost of equity of the firm operating in

Vietnam is considered equal to the cost of equity of the similar firm

operating in US plus country risk premium. Moreover, meanwhile the cost

of equity of the firm operating in Vietnam is accounted in Vietnam Dong

(VND), the cost of equity of the similar firm operating in US is accounted in

dollars (US dollars $), that is why we should add a foreign exchange risk

premium.

E[RDVP]VN= E[Rsimilar firm]

US+ RPc+ RPe

E[RDVP

]VNis the estimated return rate of DVP operating in Vietnam

E[Rsimilar firm]US is the the estimated return rate of a similar firm to DVP

operating in US


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RPcis the country risk premium

RPeis the exchange risk premium

As a result, the indirect method requires three elements: the cost of equity

of a similar firm in US, the country risk premium and the exchange risk

premium.

b-1 Cost of equity of a similar firm in US

In this case, we use the CAPM model to calculate based on the historical

data. We have:

The US risk-free rate in September 2013 is about 0.13%. The return on US market is equal to average return on US market

from 1928 to 2012 is 11.26%

The US risk-free rate return is equal to average return on T-bondfrom 1928 to 2012 is 5.38%

So the market risk premium = 11.26% - 5.38% = 5.88%About the beta, because it is so difficult to find a particular US company

which is similar to DVP, so we use the unleveraged beta in US to convert

into the leveraged beta. Besides in 2012 the revenue structure of DVP is 97%

of the maritime and 3% of the warehouse, transport good service, the


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maritime sector make up a large portion, so we assume that unleveraged beta

of DVP is the unleveraged beta of the maritime in US in 2012 of 0.535

(Appendix 5). Therefore the leveraged beta applied for DVP is

( ) Therefore we calculate the cost of equity of a similar firm in US:

E[Rsimilar firm]US

= rf+ * MRP = 0.13% + 0.713*5.88% = 4.32%b-2. Country risk premium

The country risk premium reflects the risk difference between Vietnam

market and US market. In fact the rating of Vietnam based on Moody

measures is currently B1. The current country risk premium in September

2013 is 5.5%.

b-3 Exchange risk premium

The exchange risk premium is the difference between the return on the

stock which is invested by domestic currency and the return on the other

which is invested by UD dollars. In this case, we can get the exchange risk

premium by subtracting the deposite rate by US dollars from the deposite


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rate by VND of a commercial bank or average of some commercial bank in

Vietnam.

In October 10th 2013, the deposite rate by VND and USD with one year

term of Vietcombank is 7.5% and 2.5% respectively. As a result, the

exchange risk premium is 7.25%.

From b-1, b-2 and b-3 we have:

- The cost of equity of a similar firm in US is 4.32%- The country risk premium is 5.5%- The exchange risk premium is 7.25%

Therefore, the DVPs cost of equity is:

kDVP = E[RDVP]

VN

= E[Rsimilar fi rm]

US

+ RPc+ RPe= 4.32% + 5.5% + 7.25%

= 17.07%

2.Cost of debta.Di rect methodAccording to the financial statement in 2012, interest payment of DVP in

2012 was 8,978,313,867 VND.

- Total debt at the end 2012: 193,705353,771 VND- Total debt at beginning 2012: 192,374,796,390 VND


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Average debt in 2012:

Cost of debt = interest payment / average debt

Cost of debt in this company is calculated unreliable. The reason

maybe average debt is not exactly because of changes in the period. If

calculating the cost of debt based on total debt at the beginning, the cost of

debt

b.I ndir ect method

Cost of debt = risk free rate +Vietnam country default spread + company

default spread

Companies in countries with low bond ratings and high default risk

might bear the burden of country default risk, especially if they are smaller

or have all of their revenues within the country. In particular, we assume all

of DVPs revenues in US, thus it does not affect by Vietnam country default

spread. With DVP, we use the 1-year bond to estimate risk free rate (2.97%).

And we have the company default spread is 0.40% (Appendix 6). Therefore,


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Cost of debt = risk free rate + company default spread = 2.97% + 0.4% =

3.37%

ConclusionAccording to two methods to calculate cost of debt, they are unreliable.

To have better measures, we use cost of debt base on market at that time.

Interest rate when making debt of commercial banks in 2013 for high credit

rate companies (DVP) is 12%.

3.Calculate tax rate for DVP- Earnings before tax of DVP in 2012: 201,207,923,357 VND- Tax expense of DVP in 2012: 13,153,137,345 VND

Therefore, effective tax rate of DVP in 2012:

Effective tax rate of DVP in 2012 was lower than policy. However, in long-

term, investors expect DVP will be taxed with tax rate 25%. Thus, it is more

reasonable when tax rate = 25%.

4.Cost of capital

a.Di rect method


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- Market value of Equity

,000In this case, we use the market value of equity to calculate WACC, with the

price market at the end 2012.

- Book value of debt = total debt at the end 2012= 242,695,139,849VND

- Cost of equity (direct method) = 9.68%- Marginal tax rate = 25%- Cost of debt = 12%

b.I ndir ect method

- Market value of equity = 880,000,000,000 VND- Book value of debt = 242,695,139,849 VND- Cost of equity (indirect method) = 17.07%- Cost of debt = 12%


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- Marginal tax rate = 25%

WACC (direct method) = 9.54%WACC (indirect method) = 15.33%

IV. COMMENT ABOUT THE COST OF CAPITAL IN TWOMETHODS

1.Di rect methodApplying Direct method in calculating Cost of equity and Cost of

debt seems to get different results from using Indirect method.

Lets start with calculating Cost of equity. The CAPM model, although

its considered to be one of the most popular ways to calculate Cost of

equity, still has its drawback.

As the CAPM calculation is:

kDVP = rf+ DVP*(E[rM]rf)

The model of CAPM, as it shows in the formula itself, focuses

systematical risks, this is also its characteristic. CAPM uses the historical

data to predict how the values fluctuate in the future. The calculations to find


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out the value of CAPM are hard to be done accurately because they depend

on all other accurate values of other investment (to calculate the Beta); the

fact that investors are not able to borrow the money from the bank with the

risk-free rate, so the return investors ask could be higher to compensate for

their loans from borrowing money from banks. Furthermore, it ignores other

unsystematic risks, there is no way to find out exactly all risk that can

happen in the future and especially, risks directly relates to particular

industry, such as nature disaster, the giving-notice of some core managers

CAPM provides a good view and reasonable prediction, but only in

the perfect market, not in the reality. So investors should take CAPM as a

basis and add as more information and data as they can to keep the CAPMs

value closer to be true.

Depends on the industry that the company is taking part in, the

unsystematic risk can be slightly affecting the CAPMs prediction or not. If

the industry is affected by many sensitive factors, the unsystematic should

be concerned more.

With Direct method in calculating Cost of debt, it exposes the

factor that leads Cost of debt bias from the true.


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The average debts calculated by plus the year-beginning and the year-

end value of debt, and then divide it by 2 to get the average value. As the

value of debt may fluctuate in the year, taking it average value by

calculating this way does not really make sense and may lead to the getting

untrue value.

Investors should not put all their trust on this way of Cost of debt

calculating.

2.I ndir ect methodAt first, lets discuss how indirect method works in calculating Cost of

equity.

The idea of this method is choose company which works in the same

industry for a long time and have stable movements to be a basis to calculate

the value of a company which has less true and precise data to be evaluated.

This company is usually chosen from strong and stable economies such as in

the US. The formula for this Indirect method is:

E[RDVP]VN= E[Rsimilar firm]

US+ RPc+ RPe

How they are calculated is shown above, in the previous part. It can

be simply explained as the sum of 1 value calculated by applying CAPM

model (but with more stable movements), 1 value for country risk


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compensation and 1 value of exchange rate premium. This way of

calculating gives more precise look and evaluation of a company, especially

in Vietnam, when the economy of us is still developing and not really stable.

3.ConclusionIn fact, the interest rate affects directly the cost of debt, so the cost of

capital is influenced too. In recession period, the government tries to use

monetary policy to control the interest rate. This was a situation from 2011

to 2012. If in 2011 almost the firms in Vietnam had to pay an interest rate of

18%, up to 2012 this rate was just about 11% - 12%. This supported the firm

to increase investment. DVP was not an exception. From 2011 to 2012, DVP

had an increase in long-term debt to invest heavily in fixed asset, for figure

their fixed asset increased by over 133 billion VND for tangible ones and

about 2 billion VND for intangible VND. Besides, DVP utilized these assets

effectively, increased the firm growth rate to 24.04% in 2012, in comparison

with only 7.09% in 2011. Despite the interest rate decreased, DVPs interest

expense increased because of the increase in book value of debt, for sure that

its cost of debt increased in 2012 and the cost of capital would not avoid

being affected. However, we cannot be sure that an increase in the interest

rate will make the cost of capital increase and vice versa, because the cost of

capital is still depended on the cost of equity.


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V. REFERENCEShttp://s.cafef.vn/hose/DVP-cong-ty-co-phan-dau-tu-va-phat-trien-cang-dinh-

vu.chn

http://www.credittrends.com/blog/2010/05/17/inflation-and-cost-of-capital/

http://asianbondsonline.adb.org/vietnam.php

http://pages.stern.nyu.edu/~adamodar/

Damodaran Book on Investment Valuation, 2ndEdition

Simon BenningaFinancial Modeling

Financial Statement and Annual Report of DVP in 2008 to 2012

VI. APPENDICESAttach file DVP_VFM_GROUP2.xsl
http://s.cafef.vn/hose/DVP-cong-ty-co-phan-dau-tu-va-phat-trien-cang-dinh-vu.chnhttp://s.cafef.vn/hose/DVP-cong-ty-co-phan-dau-tu-va-phat-trien-cang-dinh-vu.chnhttp://s.cafef.vn/hose/DVP-cong-ty-co-phan-dau-tu-va-phat-trien-cang-dinh-vu.chnhttp://www.credittrends.com/blog/2010/05/17/inflation-and-cost-of-capital/http://www.credittrends.com/blog/2010/05/17/inflation-and-cost-of-capital/http://www.credittrends.com/blog/2010/05/17/inflation-and-cost-of-capital/http://asianbondsonline.adb.org/vietnam.phphttp://asianbondsonline.adb.org/vietnam.phphttp://pages.stern.nyu.edu/~adamodar/http://pages.stern.nyu.edu/~adamodar/http://pages.stern.nyu.edu/~adamodar/http://asianbondsonline.adb.org/vietnam.phphttp://www.credittrends.com/blog/2010/05/17/inflation-and-cost-of-capital/http://s.cafef.vn/hose/DVP-cong-ty-co-phan-dau-tu-va-phat-trien-cang-dinh-vu.chnhttp://s.cafef.vn/hose/DVP-cong-ty-co-phan-dau-tu-va-phat-trien-cang-dinh-vu.chn

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Dvp Vfm Group2