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BBF305 Management | Appropriate Stock Valuation Method

1.A Malaysian company wants to issue a bond that is redeemable in ten (10) years for its par value of RM1000. Estimate the annual coupon rate and the price at which the bond should be issued. Justify your answer.
 
3.(a) Give ONE (1) example of blue-chip stocks listed in the KLCI. Explain what are the criteria used for determining “blue-chip” stocks. 

(b) Answer the following questions:

(i) Choose any TWO (2) appropriate stock valuation methods and estimate the intrinsic value of the stock of your choice in Part (a).

(ii) Explain why you chose the two valuation methods in Part b(i) as the most appropriate valuation methods.

(iii?Explain the difference in the intrinsic value based on the two different valuation methods. What intrinsic value should you take? 

Answer:

1.A Malaysian company wants to issue a bond that is redeemable in ten (10) years for its par value of RM1000. Estimate the annual coupon rate and the price at which the bond should be issued. Justify your answer. (Hint: you should conduct


some research on the existing coupon rates that take place in the market)

Annual coupon rate is 17%

Yield to maturity (Interpretation of the results in excel)

A bond comprising a market value of RM910, with 1 coupon of 9% annually and its maturity date is 10 years will have a yield to maturity of 10.50%.

This shows that bond investor do not consider only purchase of freshly acquired bonds but also prioritize the purchase of other bonds from different investors. Though it depends on how the bond is purchased in the secondary market whether at a discounted rate or premium which shows that the actual return rate might be higher or less compared to the yearly quoted coupon rate. For this reason most investors should look into the need for YTM since it evaluates the bond’s yield from the purchase to the maturity date.

Bond price  Taking into account the a bond which is required for settling on 10/26/1998 consisting of face value of RM1000 and its maturity date is 10/26/2019, its coupon rate being 9%, and the marketing yield of 11%, then the bond price will be RM217.5206.

The above statement implies that the above stated factors are essential in achieving an appropriate bond price. The difference of the settlement period and the maturity mainly reveals the duration of time in possession of the bond (10 years). The bond price will decrease as the time increases. Thus the market yield is assessed by the coupon’s annual rate with the greater the difference will thus lead to a lower bond price. Lastly the redemption value is contrasted to the Face value, the greater the difference, the lesser the bond price value.

2.aKLCI blue-chip stocks – Maybank; KLCI weight of 9.40; the free float factor of 75; Stock code; 1155

Due to wide range of factors to select from, being in a position of determining a blue chip stock is very challenging which requires every investor in employing their own criterion which would abide by their portfolio strategies. This is why every financial institution always uses available dividend payments, the earnings growth, interest coverage, and the bond ratings on its debt since they clearly show whether a particular stock has achieved its debts. This criterion is useful due to the fact that most blue chips comprise of secure and steady progress whereas others have the capability of growing and becoming unstable.

b.i.The appropriate stock valuation techniques used in the determining of the intrinsic values are the net interest income and the high side dividend yield.

The cash flow value –this is a good method used in evaluating the growth rate of the Maybank. Over the last five year this blue chip stock has shown considerable rise from about RM9.30 to RM12.15billion. This was initiated by the progressive rise in the prices of financing assets, loans, and assets from RM311.8 to RM485.6 billion making it uphold its present interest rates which were 2.3% to 2.5%.

The current share price value – This shows that Maybank has held its dividend per share at 5 to 6o over the past five years. Therefore, according to the present stock prices Maybank dividend is estimated to be:

  1. Lowest: 5.38% (2013)
  2. Highest: 6.43% (2015)
  3. 5-Year Average: 6.00%

With the Maybank’s share price being RM8.88 its present dividend yield will be about 6% in an event when Maybank sustains its present DPS at 55sen. Consequently, their dividend rates are shown to be high over the past few years which signified to be about 6%.

Due to the above stated stock valuation methods employed on Maybank its intrinsic value is estimated to be 28% of the total market stock values.

b.ii.The valuation methods selected in part b of this question are the most appropriate techniques due to the following reasons:

  • They provide reliable information about the value of assets in a certain financial year
  • It carries various assets which might incur reduced costs and thus would be included in the balance sheets of the company.
  • It enables the investor know the economic value of his/her business

iii.Comparing the intrinsic values of Maybank based on the discounted cash flow and the current price share, it is noticed that the discounted share in mainly focused on company’s total market price taking into account the total amount of cash the company is stipulated to acquire in the upcoming years.

Therefore the major difference evolving in these two set pieces is that the intrinsic value of the Maybank which arises from the cash flow value is 28% while the undervalued figure for the current share price is said to be at least 29% but less than 40%. Thus is projected that the intrinsic based cash flow valuation method is much more effective compared to that of the current share price.

Bibliography

Ferna?ndez, Pablo. Valuation Methods And Shareholder Value Creation. 3rd ed. Reprint, San Diego, Calif.: Academic Press, 2016.

Saravalle, Andrea. "Methods Of Business Valuation". SSRN Electronic Journal 5, no. 2 (2011): 789-876. doi:10.2139/ssrn.2007521.

Scarrett, Douglas, and Sylvia Osborn. Property Valuation. 6th ed. Reprint, Hoboken: Taylor and Francis, 2014.

Shapiro, Eric F, David Mackmin, and Gary Sams. Modern Methods Of Valuation. 2nd ed. Reprint, Abingdon, Oxon: Routledge, 2013.

Walsh, Sean Drysdale. "MAXIMALITY, DUPLICATION, AND INTRINSIC VALUE". Ratio24, no. 3 (2011): 311-325. doi:10.1111/j.1467-9329.2011.00502.x.

?elazowski, Konrad. "Application Of Multiple-Based Methods In Valuation Of Real Estate Development Companies". Real Estate Management And Valuation 23, no. 3 (2015): 26-35. doi:10.1515/remav-2015-0022.

?elazowski, Konrad. "Application Of Multiple-Based Methods In Valuation Of Real Estate Development Companies". Real Estate Management And Valuation 23, no. 3 (2015): 26-35. doi:10.1515/remav-2015-0022.

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