Page 0 of 12

Financial Management
Assignment 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


Financial Management
Section: D
Masters of Business Administration
American International University-Bangladesh

Page 1 of 12

Financial Management
Assignment 02
Stock Valuation - Gordon Model
1. Given,
R
f
= 6%
R
m
= 10%
= 1.75
E(R) = ?

E(R) = R
f
+

(R
m
- R
f
)
= 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 = $ 2.00
PV = $ 0.86
n = 8
r=g = ?

r = (

1
- 1

= (
2.00
0.86
)
8
1
- 1 = 11.13%

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

D
0
= $ 2.00
g = 11.13%
k = 13%

P
0
=

1
;
=

0
(1:)
;
=
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.

Page 2 of 12

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 = $ 2.00
PV = $ 1.42
n = 5
r=g = ?

r = (

1
- 1

= (
2.00
1.42
)
5
1
- 1 = 7.09%

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

D
0
= $ 2.00
g = 7.09%
k = 13%

P
0
=

1
;
=

0
(1:)
;
=
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. P
0
=

=
2.00
0.13
= $ 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.

Page 3 of 12

Common Stock Valuation - The Variable Growth Model
1. The dividends over the first growth stage:

D
10
= $2.50
D
11
= $2.50(1.09)
1
= $2.73
D
12
= $2.50(1.09)
2
= $2.97
D
13
= $2.50(1.09)
3
= $3.24
D
14
= $2.50(1.09)
4
= $3.53
D
15
= $2.50(1.09)
5
= $3.85


2. P
15
=

16
;
=

15
(1:)
;
=
3.85 (1:0.04)
0.13;0.04
= $ 44.49

3. P
0
=
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 (P
0
= $ 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.










Page 4 of 12

Financial Statement Analysis [BEXIMCO PHARMA 2011-2012-2013]
01. Current Ratio






2011

.

2012

.

2013

.

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 doesnt have to sell the fixed assets or borrow, it can be covered only with the liquid assets.

02. Days Sales Outstanding (DSO)

( )

2011

2012

2013

.
0
1
2
3
2011 2012 2013
Current Ratio Trend
Page 5 of 12


Its 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)

2011

2012

2013

.



42
43
44
45
46
2011 2012 2013
DSO Trend
32.00%
34.00%
36.00%
38.00%
40.00%
2011 2012 2013
TATO Trend
Page 6 of 12

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






2011

.

2012

.

2013

.



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.


23.00%
24.00%
25.00%
26.00%
27.00%
28.00%
29.00%
2011 2012 2013
Debt Ratio Trend
Page 7 of 12

05. Time Interest Earned (TIE)

2011

.

2012

.

2013

.

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






2011

.

2012

.

2013

.
3.80
4.00
4.20
4.40
4.60
2011 2012 2013
TIE Ratio Trend
Page 8 of 12


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
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)

2011

2012

2013

.

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.
12.00%
13.00%
14.00%
15.00%
16.00%
2011 2012 2013
NPM Trend
4.90%
5.00%
5.10%
5.20%
5.30%
5.40%
2011 2012 2013
ROA Trend
Page 9 of 12

08. Return on Equity (ROE)

2011

2012

2013

.

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)

2011

2012

2013

.
6.90%
6.95%
7.00%
7.05%
7.10%
7.15%
7.20%
2011 2012 2013
ROE Trend
Page 10 of 12


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 Pharmas EPS shows a moderate view. They need to emphasis on generating more income.

10. Market Value/Book Value Ratio










Book Value MV/BV

2011

.

2012

.

2013

2011

.
.
.

2012

.
.
.

2013

.
.
.

**Market Value is taken from the Dhaka Stock Exchange [Last Trading Day of the year 2011, 2012 and 2013]
**Source: www.stockbangladesh.com


3.60
3.70
3.80
3.90
4.00
4.10
2011 2012 2013
EPS Trend
Page 11 of 12


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.
0.00
1.00
2.00
3.00
2011 2012 2013
MV/BV Ratio Trend