Vous êtes sur la page 1sur 18

INTRODUCTION LIQUIDATION VALUE VERSUS GOING-CONCERN VALUE Liquidation value is the amount or money that could be realized if an asset

or a group of assets (e.g., a firm) is sold separately from its operating organization. This value is in marked contrast to the going-concern value of a firm, which is the amount the firm could be sold for as a continuing operating business. These two values are rarely equal, and sometimes a company is actually worth more dead than alive. The security valuation models that we will discuss in this chapter will generally assume that we are dealing with going concerns operating firms able to generate positive cash flows to security investors. In instances where this assumption is not appropriate (e.g., impending bankruptcy), the firm's liquidation value will have a major role in determining the value of the firm's financial securities. BOOK VALUE VERSUS MARKET VALUE. The book value of an asset is the accounting value of the asset - the asset's cost minus its accumulated depreciation. The book value of a firm, on the other hand, is equal to the dollar difference between the firm's total assets and its liabilities and preferred stock as listed on its balance sheet. Because book value is based on historical values, it may bear little relationship to an asset's or firm's market value. In general, the market value of an asset is simply the market price at which the asset (or a similar asset) trades in an open marketplace. For a firm, market value is often viewed as being the higher of the firm's liquidation or going-concern value. MARKET VALUE VERSUS INTRINSIC VALUE Based on our general definition for market value, the market value of a security is the market price of the security. For an actively traded security, it would be the last reported price at which the security was sold. For an inactively traded security, an estimated market price would be needed. The intrinsic value of a security, on the other hand, is what the price of a security should be if properly priced, based on all factors bearing on valuation - assets, earnings, future prospects, management, and so on. In short, the intrinsic value of a security is its economic value. If
1

markets are reasonably efficient and informed, the current market price of a security should fluctuate closely around its intrinsic value. :

The valuation approach taken ip this chapter is one of determining a security's intrinsic value what the security ought to be worth based on hard facts. This value is the present value of the cash-flow stream provided to the investor, discounted at a required rate of return appropriate for the risk involved. With this general valuation concept in mind, we are now able to explore in more detail the valuation of specific types of securities.

BOND VALUATON

A bond is a security that pays a stated amount of interest to the investor, period after period, until it is finally retired by the issuing company. Before we can fully understand the valuation of such a security, certain terms must be discussed. For one thing, a bond has a face value. 1 This value is usually $1,000 per bond in the United States. The bond almost always has a stated maturity, which is the time when the company is obligated to pay the bondholder the face value of the instrument. Finally, the coupon rate, or nominal annual rate of interest, is stated on the bond's face.2 If, for example, the coupon rate is 12 percent on a $l,000-face-value bond, the company pays the holder $120 each year until the bond matures. In valuing a bond, or any security for that matter, we are primarily concerned with discounting, or capitalizing, the cash-flow stream that the security holder would receive over the life of the instrument. The terms of a bond establish a legally binding payment pattern at the time the bond is originally issued. This pattern consists of the payment of a stated amount of interest over a given number of years coupled with a final payment, when the bond matures, equal to the bond's face value. The discount,-or capitalization, rate applied to the cash-flow stream will differ among bonds depending on the risk structure of the bond issue. In general, however, this rate can be thought of as being composed of the risk-free rate plus a premium for risk.

PERPETUAL BONDS The first (and easiest) place" to start determining the value of bonds is with a unique class of bonds that never matures. These are indeed rare, but they help illustrate the valuation technique in its simplest form. Originally issued by Great Britain after the Napoleonic Wars to consolidate debt issues, the British conso! (short for consolidated annuities) is one such example. This bond carries the obligation of the British government to pay a fixed interest payment in perpetuity. The present value of a perpetual bond would simply be equal to the capitalized value of an infinite stream of interest payments. If a bond promises a fixed annual payment of / forever, its present (intrinsic) value, V, at the investor's required rate of return for this debt issue, kd, is

= =I( Thus the present value of a perpetual bond is simply the periodic interest payment divided by the appropriate discount rate per period. Suppose you could buy a bond that paid $50 a year forever. Assuming that your required rate of return-for this type of bond is 12 percent, the present value of this security would be V= $50/0.12 = $416.67 This is the maximum amount that you would be willing to pay for this bond. If the market price is greater than this amount, however, you would not want to buy it. BONDS WITH A FINITE MATURITY Nonzero Coupon Bonds If a bond has a finite maturity, then we must consider not only the interest stream but also the terminal or maturity value (face value) in valuing the bond. The valuation equation for such a bond that pays interest at the end of each year is

=I(

+ MV (

where n is the number of years until final maturity and MV is the maturity value of the bond. We might wish to determine the value of a $l,000-par-value bond with a 10 percent coupon and nine years to maturity. The coupon rate corresponds to interest payments of S100 a year. If our required rate of return on the bond is 12 percent, then

= 100 (

+ 1000 (

Referring to Table IV in the Appendix at the back of the book, we find that the present value interest factor of an annuity at 12 percent for nine periods is 5.328. Table II in the Appendix reveals under the 12 percent column that the present value interest factor for a single payment nine periods in the future is 0.361. Therefore the value, V, of the bond is = 100(5.328) + 1000(0.361) = 532.8 + 361.00 = 893.8 The interest payments have a present value of $532.80, whereas the" principal payment at maturity has a present value of $360.00. [Note: All of these figures are approximate because the present value tables used are rounded to the third decimal place; the true present value of the bond is $893.44.) If the appropriate discount rate is 8 percent instead of 12 percent, the valuation equation becomes

= 100

+ 1000

Looking up the appropriate interest factors in Tables, we determine that V = 100(6.247) + 1000(.5) V = 624.7 + 500 = 1124.7 In this case, the present value of the bond is in excess of its $1,000 par value because the required rate of return is less than the coupon rate. Investors would be willing to pay a premium to buy the bond. In the previous case, the required rate of return was greater than the coupon rate. As a result, the bond has a present value less than its par value. Investors would be willing to buy the bond only if it sold at a discount from par value. Now if the required rate of return equals the coupon rate, the bond has a present value equal to its par value, $1,000. More will be said about these concepts shortly when we discuss the behavior of bond prices. Zero-Coupon Bonds A zero-coupon bond makes no periodic interest payments but instead is sold at a deep discount from its face value. Why buy a bond that pays no interest? The answer lies in the fact that the buyer of such a bond does receive a return! This return consists of the gradual increase (or appreciation) in the value of the security from its original, below-face-value purchase price until it is redeemed at face value on its maturity date. The valuation equation for a zero-coupon bond is a truncated version of that used for a normal interest-paying bond. The "present value of interest payments" component is lopped off, and we are left with value being determined solely by the "present value of principal payment at maturity," or V= V = MV ( Suppose that Espinosa Enterprises issues a zero-coupon bond having a 10-year maturity and a $1,000 face value. If you required return is 12 percent, then

V = 1000 (

Using Table, we find that the present value interest factor for a single payment 10 periods in the future at 12 percent is 0.322. Therefore: V = 1000(0.322) = 322 If you could purchase this bond for $322 and redeem it 10 years lifter for $1,000; your initial investment would thus provide you with a 12 percent compound annual rate of return. PREFERRED STOCK VALUATION A type of stock that promises a (usually) fixed dividend, but at the discretion of the board of directors. It has preference over common stock in the payment of dividends and claims on assets. Most preferred stock pays a fixed dividend at regular intervals. The features of this financial instrument are discussed in Chapter 20. Preferred stock has no stated maturity date and, given the fixed nature of its payments, is similar to a perpetual bond. It is not surprising, then, that we use the same general approach as applied to valuing a perpetual bond to the valuation of preferred stock." Thus the present value of preferred stock is

where Dp is the stated annual dividend per share of preferred stock and kp is the appropriate discount rate. If Margana Cipher Corporation had a 9 percent, $100-par-value preferred stock issue outstanding and your required return was 14 percent on this investment, its value per share to you would be V = 9/0.14 = 64.29 COMMON STOCK VALUATION The theory surrounding the valuation of common stock has undergone profound change during the last few decades. It is a subject of considerable controversy, and no one method for valuation is universally accepted. Still, in recent years there has emerged growing acceptance of the idea that individual common stocks should be analyzed as part of a total portfolio of common stocks that the investor might hold. In other words, investors are not as concerned with whether a particular stock goes up or down as they are with what happens to the overall value of their portfolios. This concept has important implications for determining the required rate of return on a security. First, however, we need to focus on the size and pattern of the
6

returns to the common stock investor. Unlike bond and preferred stock cash flows, which are contractually stated, much more uncertainty surrounds the future stream of returns connected with common stock. When valuing bonds and preferred stock, we determined the discounted value of all the cash distributions made by the firm to the investor. In a similar fashion, the value of a share of common stock can be viewed as the discounted value of all expected cash dividends provided by the issuing firm until the end of time. In other words,

= Where, D1 is the cash dividend at the end of time period f and kt is the investor's required return, or capitalization rate, for this equity investment. This seems consistent with what we have been doing so far. 'But what if we plan to own the stock for only two years? In this case, our model becomes

Where, P2 is the expected sales price of our stock at the end of two years. This assumes that investors will be willing to buy our stock two years from now. In turn, these future investors will base their judgments of what the stock is worth on expectations of future dividends and a future selling price (or terminal value). And so the process goes through successive investors.

Dividend Discount Models


Dividend discount models are designed to compute the intrinsic value of a share of common stock under specific assumptions as to the expected growth pattern of future dividends and the appropriate discount rate to employ. It is designed to compute the intrinsic value of a share of common stock under specific assumption as to the expected growth pattern of future dividend and appropriate discount rate to employee while dividend growth rate is constant.

V=
Where, D1 is the dividend, Ke is the required rate of return and g is the constant rate of return.

CASE STUDY OF MCB

HISTORY
MCB Bank Limited was incorporated by the Adamjee Group on July 9, 1947, under the Indian Companies Act, VII of 1913 as a limited company. The bank was established with a view to provide banking facilities to the business community of the South Asia. The bank was nationalized in 1974 during the government of Zulfikar Ali Bhutto. This was the first bank to be privatized in 1991 and the bank was purchased by a consortium of Pakistani corporate groups led by Nishat Group. As of June 2008, the Nishat Group owns a majority stake in the bank. The president of the bank is M.U.A Usmani. Founded in 1948, Nishat Group is one of the leading and most diversified business groups in Pakistan. The group has strong presence in the most important business sectors of the country such as banking, textile, cement and insurance. Mian Mohammad Mansha is the Chairman of the group (and also MCB) and has played instrumental role in its success. In recognition of Mr. Manshas contribution, the Government of Pakistan has conferred him with "Sitara-e-Imtiaz", one of the most prestigious civil awards of the country.

VISION STATEMENT
To be the leading financial services provider, partnering with our customers for a more prosperous and secure future.

MISSION STATEMENT
We are a team of committed professionals, providing innovative and efficient financial solutions to create and nurture long-term relationships with our customers. In doing so, we ensure that our shareholders can invest with confidence in us.

PRODUCTS Current Account


MCB Bank offers a variety of current accounts to cater to the everyday transactional needs of various customers. These accounts ensure ease and freedom to bank from any of the 1100+ branches across the country. The different accounts include: the Basic Banking Account that has no minimum balance; Business Account offering free online transactions, Demand Drafts, Pay Orders and lots more to meet the day to day business requirements; Current Life Account which offers the security of life insurance free of cost; and for all others, the conventional Current Account.

Savings Account
MCB Bank offers a wide array of savings products that suit short term growth & transactional needs. Our savings accounts offer attractive profit rates as well as flexibility to transact. Savings Xtra is targeted for customers having Rs. 5 million + deposit, 365 Gold offers profit rate on daily balance while PLS savings has a lower minimum balance requirement. In addition, two unique products: Smart Savings and Savings Maximizer are special saving accounts run solely via debit cards and other remote banking channels, offering a very competitive rate to both high and low end savers.

Term Deposit
MCB Term Deposit offer attractive short to mid-term investment options with flexibility, convenience and security. With various tenor options available, customers can choose one that suit their needs. This is combined with different profit payout options and the added facility of being able to avail credit facility against their deposits.

10

MCB Online Banking


MCB has a fast growing network of 1100+ online branches in the country providing customers real-time online transaction facilities.

MCB MNET
MNET is an electronic inter-bank connectivity platform for online transactions on ATM and other remote banking channels. It offers other value added services that include a portfolio of ebanking and payment system products as well as management and day-to-day operations of the same. Members include 10 local and foreign financial institutions enjoying ATM sharing and value added services.

MCB Home Remittance


MCB Home Remittance provides a seamless inflow of foreign remittances credited in the beneficiarys account within minutes. Cash payments can also be made at our designated branches on behalf of XpressMoney, Samba (SpeedCashNow), MoneyGram and Maybank Money Express Malaysia, along with cash payments from other correspondents from all over the world under the brand name of MCB Fast & Easy.

MCB Corporate Financing


MCB Corporate Financing provides access to diversified financing options, including working capital loans, term loans, trade finance services and investment banking.

MCB Islamic Banking


With the help of Shariah specialists, lawyers and professional commercial bankers, MCB Islamic Banking provides Riba Free and Shariah Compliant products and services both on the liability and asset side of the statement of financial position to various customers of all demographic segments with its presence in a growing number of cities. MCBs Islamic Banking products are available to cater the need of Working Capital, Capital Expenditures, International/Local trade and consumers requirements.

MCB Agri Products

11

MCB is committed to the farming community to support their national objectives of self sufficiency & food security to the people of Pakistan. Dedicated and specialized staff, supervised by the Agri Credit Division, is posted in lending branches to cater for strong business relationships & facilitation. The banks extensive branch network in all the provinces and diversified product range extends our reach of agri credit facilities to farmers engaged in any type of activity, encompassing both crop & non crop sectors.

MCB Investment Services


Make the most of your wealth with investment opportunities that match your unique financial aspirations. MCB Investment Services offer distribution of mutual funds managed by the leading fund managers of Pakistan. We can suggest the products most suited for your needs, or work with you to create a personalized solution completely focused on your expectations of the capital markets.

MCB Visa Credit Card


MCB offers a complete suite of Classic, Gold and Platinum Visa Credit Cards focusing on providing, superior services, travel privileges & shopping pleasure. It also offers comprehensive insurance & installment plans, reward points and SMS alerts that give a different feel to the world of credit cards. These unique features include i-revolve, which makes variable mark-up rate available to customers allowing them to repay at affordable rates.

MCB Car4U
MCB Car4U not only gets you a car of your own choice but is also affordable with competitive mark-up, flexible conditions, easy processing and above all, no hidden costs.

MCB ATMs
MCB has one of the nations largest ATM networks with 500 ATMs covering 110 cities across the country and still growing. MCB ATMs give you a 24-hours convenience of cash withdrawal, mini-statement, utility bill payments, mobile top-ups, funds transfer services and much more.
12

MCB Mobile ATM


Through our MCB Mobile ATM we allow for convenient world class banking services. Our innovative MCB Mobile ATM van ensures that we offer our services wherever you are, be it concerts, fairs or any other occasion/special event.

MCB Mobile
MCB Mobile is a quick easy and secure way to recharge mobile phones, transfer money, pay bills and do much more. Visit the nearest MCB ATM or call 111-000-622 to register and logon to www.mcbmobile.com using your mobile phone to start transacting.

VALUATION OF LONG TERM SECURITY OF MCB

13

Dividend discount model to evaluate common stock


A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued.

V= V=
Required Rate of Return
The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The required rate of return (RRR) is used in both equity valuation and in corporate finance.

Growth Rates g
The amount of increase that a specific variable has gained within a specific period and context. For investors, this typically represents the compounded annualized rate of growth of a company's revenues, earnings, dividends and even macro concepts - such as the economy as a whole.

VALUATION OF COMMON STOCK OF MCB. Cash Dividend: 11.5


14

Share Price: 228.54 Growth Rate: Suppose 5% Required Rate: 12%

V= V= V = 164.28
Analysis:
Dividend discount model is a widely accepted financial tool used to evaluate stocks based on the net present value of the future dividends. It works by analyzing and making assumptions related to growth in dividends and interest rates. Its a tool that is heavily based on speculation but what sets it apart from other financial tools is its ability to compare specific numbers based on the given data with accuracy. This result shows that the price of value of stock of the bank is overvalued because the selling price of share is 228.4 and the present value is 164.28 which is not suitable for the investment. The ideal condition was that if the present value of the share is greater then the selling price.

SWOT ANALYSIS

15

MCB is one of the fastest growing banks in Pakistan. In the light of these situations we can make an analysis. Strengths: Bank is in its growing stages so there is good financial position. Professional and Committed workforce Low cost than other major banks Increasing the number of branches in the country Largest ATM network.

Weaknesses: Although the bank is growth had done rapidly but it has some weaknesses which it should remove to make itself further strong in the field of Long-term Securities.

Less Advertisement Slow in introducing new products The staff is not satisfied with the salary structure Give fewer benefits to its Staff. . No online maintenance of accounts for their accounts holders . Long terms securities perceived reliable with the investment point of view in Stock Markets

Opportunities:

Expand its business in International Markets & local markets. Should collaborate with Telecom Companies in order to provide Banking at their doorsteps Due to increase in Populations size a lot of opportunities is coming in retail Markets ATM for cash deposits should be introduced in commercial areas.

Threats:

16

Multinational growth in local Markets Lacking of Customer Confidence due to Privatization Automation of customer Services Customer awareness in Long term Securities

RECOMMENDATIONS
It is observed that the employees were overburdened so they have to stay at branch till late at night. In this way their efficiency is affected and hiring more employees can reduce their work. The employees should be signed jobs for specific period and than they should shifted to other department so that they gain knowledge of other jobs. MCB should properly advertise and Communicate to public about the services provided by it, so that more customers will be attracted. The banks management should give more incentives and pay scale of officers should be revised & improved. System and operations should be more defined and organized. IT draw backs should be improved. Administration drawbacks should be improved by the strict control of general issues.

Secondly, although Muslim Commercial Bank has strong valuation of its long term securities in stock markets, but due to law and order situation bank should switch its monopoly in international stock markets, which helps increase of its investment security which involves low risk. Muslim Commercial should also increase its actual price/ net present values to its common stock so that it could attract investors.

Thats ALL in recommendation I can suggest .

References
17

Web http://www.cbizlinks.com http://www.blurtit.com/q2899395.html www.scribd.com www.mba.com

Books Company Law Business Law

And

Class lectures

18