Financial ManagementAssignment 02

Team Members

Name ID

ABIR, MD.ZABER TAUHID 14-97517-1

AUBHI, REZWAN UL HAQUE 14-97535-1

ROY, SAWRAV 14-97698-1

AHMED, MOHIUDDIN 14-97536-1

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Financial ManagementSection: D

Masters of Business AdministrationAmerican International University-Bangladesh

Financial ManagementAssignment 02

Stock Valuation - Gordon Model

1. Given,Rf = 6%Rm = 10%β = 1.75E(R) = ?

E(R) = Rf + β (Rm - Rf) = 6% + 1.75 (10% - 6%) = 13%Nations Bank's required rate of return on common stock was 13%.

2. Let us assume that the future dividend will grow at a constant rate forever. In order to calculate the growth (g), let us take the average of growth rate of the past given in the table.

Let us consider,FV = $ 2.00PV = $ 0.86n = 8r=g = ?

r = ( FVPV )t−1

- 1

= ( 2.000.86 )

8−1

- 1 = 11.13%

The growth rate (g) is 11.13%.Now, let us take,

D0 = $ 2.00g = 11.13%k = 13%

P0 = D1

k−g =

D0(1+g)k−g

= 2.00(1+0.1113)0.13−0.1113

= $ 118.86

Considering the first time period from 2005-2013 & therefore using the Gordon Growth Model, the price of Nations Bank's common stock was $ 118.86.

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3. Let us assume that the future dividend will grow at a constant rate forever. In order to calculate the growth (g), let us take the average of growth rate of the past given in the table.

Let us consider,FV = $ 2.00PV = $ 1.42n = 5r=g = ?

r = ( FVPV )t−1

- 1

= ( 2.001.42 )

5−1

- 1 = 7.09%

The growth rate (g) is 7.09%.Now, let us take,

D0 = $ 2.00g = 7.09%k = 13%

P0 = D1

k−g =

D0(1+g)k−g

= 2.00(1+0.0709)

0.13−0.0709 = $ 36.24

Considering the first time period from 2008-2013 & therefore using the Gordon Growth Model, the price of Nations Bank's common stock was $ 36.24.

4. In general, The Gordon Growth Model has a major limitation that we are not certain about what the true future growth rate in dividends is or will be. As we have just assumed, depending on the periods we have considered, the stock's price has fluctuated widely. Due to our calculation of growth rate based on the past data, the prices were much different than the observed one. If the true growth rate were known, the price would have been as same as the observed one.

5. The required rate of return calculation has a strong effect on the stock's price. When the required rate of return is close to the growth rate, the stock price will be strongly sensitive to the required rate of return.

6. P0 = Dk =

2.000.13 = $ 15.38

7. A dividend of $ 2.00 paid one year from now will give a present value of $ 1.77 (2

1.13 ), dividend

paid ten years from now will give $ 0.59 and dividend paid one hundred years from now will give $ 0.0000098.

It indicates that the present value decreases as time increases.

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Common Stock Valuation - The Variable Growth Model

1. The dividends over the first growth stage:

D10 = $2.50

D11 = $2.50(1.09)1 = $2.73

D12 = $2.50(1.09)2 = $2.97

D13 = $2.50(1.09)3 = $3.24

D14 = $2.50(1.09)4 = $3.53

D15 = $2.50(1.09)5 = $3.85

2. P15 = D16

k−g = D15(1+g)k−g = 3.85(1+0.04)

0.13−0.04 = $ 44.49

3. P0 = 2.5

(1.13)10 + 2.73

(1.13)11 + 2.97

(1.13)12 + 3.24

(1.13)13 + 3.53

(1.13)14 + 3.85+44.49

(1.13)15 = $ 11.17

4. As the intrinsic value of Aether (P0 = $ 11.17) is greater than the market price of $10, it indicates

a buy decision. This Aether share can be bought until the market price reaches the intrinsic value

of Aether.

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Financial Statement Analysis [BEXIMCO PHARMA 2011-2012-2013]

01. Current Ratio

Current Ratio= Current AssetsCurrent Liabilities

Current Ratio2011=7,148,462,7532,648,161,988

=2.70׿

Current Ratio2012=8,197,421,9533,064,944,769

=2.67׿

Current Ratio2013=8,903,422,3284,382,581,278

=2.03׿

2011 2012 20130

0.5

1

1.5

2

2.5

3

Current Ratio Trend

Current Ratio tells us about the short-term liquidity performance of the company. We can see here is

always good scenario in the curve, which implies the company can pay its obligations more than

twice in each and every year which indicates if any unwanted circumstances happen then the

company doesn’t have to sell the fixed assets or borrow, it can be covered only with the liquid assets.

02. Days Sales Outstanding (DSO)

DSO=(Accounts Receiveables∗365)Annual Sales

DSO2011=978,224,317∗365

7,890,241,843=45.25Days

DSO2012=1,162,404,807∗365

9,289,115,284=45.67 Days

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DSO2013=1,249,434,697∗365

10,490,699,094=43.47 Days

2011 2012 201342

42.5

43

43.5

44

44.5

45

45.5

46

DSO Trend

It’s a measure of the average number of days that a company takes to collect revenue after a sale has

been made. We can see here the average number of days required are moderately good, which

indicates that it takes fewer days to collect its accounts receivable. By quickly turning sales into cash,

a company has the chance to put the cash to use again - ideally, to reinvest and make more sales.

03. Total Asset Turnover (TATO)

TATO= Net SalesTotal Asset

TATO2011=7,890,241,84323,033,340,533

=34.26 %

TATO2012=9,289,115,284

24,589,810,592=37.78 %

TATO2013=10,490,699,09427,470,751,802

=38.19 %

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2011 2012 201332.00%

33.00%

34.00%

35.00%

36.00%

37.00%

38.00%

39.00%

TATO Trend

The Asset Turnover ratio is an indicator of the efficiency with which a company is investing its

assets. The amount of sales or revenues generated per dollar of assets. For the company we can see a

very decent picture of an average 35% or more which indicates the company can utilize its assets to

generate more sales.

04. Debt Ratio

Debt Ratio= Total DebtTotal Assets

Debt Ratio2011=5,905,212,356

23,033,340,533=25.64 %

Debt Ratio2012=6,181,648,733

24,589,810,592=25.14 %

Debt Ratio2013=7,695,199,337

27,470,751,802=28.01%

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2011 2012 201323.50%

24.00%

24.50%

25.00%

25.50%

26.00%

26.50%

27.00%

27.50%

28.00%

28.50%

Debt Ratio Trend

This ratio indicates the percentage of debt a company has in its total asset. It also indicates the

leverage of the company. The company is using around 25% debt in their capital structure, in 2013

that percentage increased to 28%. If the company uses less debt, then interest payment will be less

and less tax payment will require which is good for the company.

05. Time Interest Earned (TIE)

TIE Ratio= EBITAnnual Interest Expense

TIE Ratio2011=2 ,329 ,387 ,472

567,645,757=4.10׿

TIE Ratio2012=2 ,650 ,727 ,273

645,406,575=4.11׿

TIE Ratio2013=2 ,834 ,860 ,970

636,587,090=4.45׿

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2011 2012 20133.90

4.00

4.10

4.20

4.30

4.40

4.50

TIE Ratio Trend

The TIE ratio measures the ability of a company to pay its debt obligations. If a company failed to

achieve the desired score, the ultimate destination could be a bankruptcy. We can see a good TIE

ratio results here which indicates, company is very much able to pay its debt obligations. The trend is

going upward, this could say the company is not taking much debt to finance its operations and

paying the debt obligations timely.

06. Net Profit Margin

Net Profit Margin=Net IncomeNet Sales

Net Profit Margin2011=1,198,525,3427,890,241,843

=15.20 %

Net Profit Margin2012=1,319,389,3289,289,115,284

=14.20 %

Net Profit Margin2013=1,406,104,39910,490,699,094

=13.40 %

2011 2012 201312.50%

13.00%

13.50%

14.00%

14.50%

15.00%

15.50%

NPM Trend

It measures how much out of every dollar of sales a company actually keeps in earnings. Here we

can find a good trend of profit margin for the company, but the curve is declining year by year which

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is not good sign. A higher profit margin indicates a more profitable company that has better control

over its costs compared to its competitors.

07. Return on Asset (ROA)

ROA= Net IncomeTotal Asset

ROA2011=1,198,525,342

23,033,340,533=5.20%

ROA2012=1,319,389,328

24,589,810,592=5.37 %

ROA2013=1,406,104,399

27,470,751,802=5.12 %

2011 2012 20134.95%

5.00%

5.05%

5.10%

5.15%

5.20%

5.25%

5.30%

5.35%

5.40%

ROA Trend

This ratio indicates how profitable a company is compare to its total assets or investment. ROA gives an idea

as to how efficient management is at using its assets to generate earnings. As a pharmaceuticals company the

trend of about 5% is comparatively good.

08. Return on Equity (ROE)

ROA= Net IncomeShareholde r ' s Equity

ROA2011=1,198,525,342

17,128,128,177=7.00 %

ROA2012=1,319,389,328

18,408,161,859=7.17%

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ROA2013=1,406,104,399

19,775,552,465=7.11%

2011 2012 20136.90%6.95%7.00%7.05%7.10%7.15%7.20%

ROE Trend

Return on equity measures a corporation's profitability by revealing how much profit a company

generates with the money shareholders have invested. On an average of 7% return of the company is

good according to the industry average.

09. Earnings Per Share (EPS)

EPS= Net IncomeNumber of SharesOutstanding

EPS2011=1,198,525,342304,639,050

=3.93

EPS2012=1,319,389,328350,334,907

=3.77

EPS2013=1,406,104,399350,334,907

=4.01

2011 2012 20133.653.703.753.803.853.903.954.004.05

EPS Trend

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Earnings per share serve as an indicator of a company's profitability. It indicates the portion of a

company's profit allocated to each outstanding share of common stock. Earnings per share are

generally considered to be the single most important variable in determining a share's price. Here

Beximco Pharma’s EPS shows a moderate view. They need to emphasis on generating more income.

10. Market Value/Book Value Ratio

BookValuePer Share= Common EquityNumber of SharesOutstanding

MV /BV Ratio= Market ValuePer ShareBookValue Per Share

Book Value MV/BV

BookValue2011=7,787,152,790304,639,050

=25.56

BookValue2012=8,315,865,190350,334,907

=23.74

BookValue2013=8,772,823,760350,334,907

=25.04

MVBV 2011

=63.6025.56

=2.49

MVBV 2012

=46.2023.74

=1.95

MVBV 2013

= 42.1625.04

=1.68

**Market Value is taken from the Dhaka Stock Exchange [Last Trading Day of the year 2011, 2012 and 2013]

**Source: www.stockbangladesh.com

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2011 2012 20130.000.501.001.502.002.503.00

MV/BV Ratio Trend

This ratio used to find the value of a company by comparing the book value of a firm to its market

value. Book value is calculated by looking at the firm's historical cost, or accounting value. Market

value is determined in the stock market (considered DSE).

Here we can see from the year 2010 (stock-market crash) the curve is continuously going downward

trend; the company must try to turn their position back to maximize the wealth of the stockholders.

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