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FINANCIAL ANALYSIS:

Submitted To:

Dr. Masud Rahman

Submitted By:

Nogmaye Habiba Mehrin Afroze Chowdhury M. Rubbyat Akram

ID # 073293060 ID # 072 475 060 ID # 063085060

Submission Date:

12th April, 2009

April 12, 2009

To, Dr. Masud Rahman Professor, MBA Program North South University

Dear Sir, We are pleased to work on our group term paper: Predicting Stock Price: Square Pharmaceuticals Ltd. This stimulating work has helped us to better understand the different variables affecting the stock price of a firm. This in-depth financial analysis will truly be useful for each of us in our own field of work. We will thus greatly value the opportunity you gave us in this course. In case of any questions regarding our findings please do contact any of the group members & we will remain obliged to clarify wherever necessary. Thanking You,

______________________ Mehrin Afroze Cowdhury ID# 072-475-060

________________________ Nogmaye Habiba ID# 073293060

______________________ M. Rubbyat Akram ID# 063085060

EXECUTIVE SUMMARY
The objective of this report is to project the Stock Price of a specific company, as in this case Square Pharmaceuticals Limited through different financial analysis, which started off with identifying variables affecting the stock price and then through Stock Valuation. This analysis is done mainly based on the information collected from the annual report issued by Square Pharmaceuticals Limited in the fiscal years 2006-2007 & 2007-2008. Daily Market Index and Stock price was collected from DSE. The different growth rate analysis for the companys sales & profitability led to choose an optimum growth rate, which in this case is the Sustainable Growth Rate or SGR. Using this justified growth rate, pro forma statements (Balance Sheet & Income Statement) were prepared along with different scenario analysis. The analysis suggested that SPL maintains a sustainable growth without requiring any external financing excepting for the case of a highly optimistic scenario. It has been observed empirically that a good number of variables affect the variations of Stock Price & the proceedings have been discussed in the report. This research also revealed that apart from quantitative variables, some company specific and market specific information including dividend declaration, Ex-date, etc. also affect the stock price valuation. In conclusion it can be stated that as a Blue Chip share SPL shows a sustainable constant growth potential and it reflects a high confidence level from the investors.

TABLE OF CONTENTS
4.1 Balance Sheet Analysis.............................................................................8 Pro Forma Statements..................................................................................13 Plug Variables .............................................................................................15 Scenario Analysis.........................................................................................15 7.Beta........................................................................................................17 8.Expected Return of SPL using CAPM............................................................18 9.Dividend Declaration, Firm Specific News and Market News............................19

10. STOCK Valuation.....................................................................................................22


11. Conclusion.............................................................................................23

1.0 Company Overview


Square Pharmaceuticals is a renowned Pharmaceutical Company of our country. It is currently the leading corporation in its field of expertise. Square Pharmaceuticals began its operations in the year 1958 as a Partnership Firm. It converted into a Private Limited Company in 1964. The company became Public & became listed in the DSE in the year 1991, since then there was no looking back. The supremacy of Square is such that the closest competitor Beximco Pharmaceuticals is not even close in comparison to the market share; the latter has only about half the market share. Square Pharmaceuticals Limited has extended its range of services towards the highway of
global market. The company pioneered exports of medicines from Bangladesh in the year 1987 and has been exporting antibiotics and other pharmaceutical products since then. This extension in business and services has increased the credibility of Square Pharmaceuticals Limited ten folds.

2.0 Problem Statement


Prospective investors are always very interested to know how a company is going to perform financially in order to benefit their investment decisions. There are many variables which can affect the actual financial position and the stock value of a particular company. Most of these variables are not controllable or predictable. It is not very easy to figure out how these variables affect the company value and the stock price. This case study was undertaken in order to identify some of these variables and see how they affect the companys market value and its stock price. Also to try to project the future stock price depending on these variables. Different financial analysis and techniques have been employed to justify the prediction about the stock price

3.0 Objective of the Study


The specific objectives aimed for this report are: To focus on some crucial information by analysis and interpretation of SPL such ratio analysis, pro forma statement analysis etc. To identify the variables that can affect the stock price of SPL. To find out the recent financial situation or trend of SPL. To project the future financial state of the company. To predict the future stock price of SPL share based on these projected financial performance data

4.0 Methodology
In this case study various methods and techniques have been used to help reach and solidify the findings. This section outlines reasoning for choosing and using these methods

4.1 Statistical Analysis Technique


This case used some important concepts of corporate finance such as ratio analysis, pro forma statement, growth rate analysis, scenario analysis, etc. to clarify how each variable affects the stock price of SPL. Accounting theories and practices were also closely applied. It is also worthy to mention that many tables and graphs were used to give visual aid for quick understanding of the scenarios. These tables and graphs help the reader to quickly identify justification behind our conclusion about various scenarios.

4.2 Data Type


Primary Data: All SPL annual reports, the primary data were used in most parts in the order to calculate important factors. The daily share price for both GlaxoSmith and DSE Index were also collected from the Dhaka Stock Exchange in order to help with the analysis.

Secondary Data: Information was also collected from the Internet and the different daily newspapers. Examples of such data are SPL history and other basic company information, medicine companies that are enlisted in share market etc. Also, any firm specific or market specific news which can affect the share price of SPL.

4.3 Data Source


Few different data sources were used to collect the necessary data, like (a) Annual Reports 2006 2008 (b) the Internet and (c) Newspapers. The major source was Dhaka Stock Exchange from where the annual 2006- 2008 reports, daily stock price for SPL and DSE Index were collected. The Internet and newspapers were also helpful to collect information about the recent incidents.

4.4 Time Period taken under Consideration


For this case study, a time period of 4 years 2006-2008 was taken under consideration. In most cases, these 4 years data were used as the basis for growth projection. Though it is not a lot, it is good enough to identify some trends in data to make some realistic predictions about the future of SPL.

5.0 Limitation of Study


The following limitations can be found in this case study: As it is an academic research restricted to a period of only 3 months not all the possible variables were considered in deducing the financial position of SPL. SPL Corporate Office said that they cooperate and share information only with the share holders and other stakeholders; and thus, they have limitations to distribute information to general public (who are not in the category of stakeholders).

6.0 Financial Analysis


There are many financial analysis techniques which can measure the financial position of a company. In this section few of these techniques are discussed in an attempt to outline the financial health of Square Pharmaceuticals Ltd.

4.1 Balance Sheet Analysis


Table: Balance Sheet analysis based on Book Value and Market Value
Asset Current Asset Non current Asset Tangible asset Intangible asset Total Asset 12,703,127,420 Total Liabilities 12,703,127,420 8,291,290,984 Book Value - 2007 Amount Liabilities 4,411,836,436 Current Liabilities Non-Current liabilities Share holder's equity (8942400 shares) Amount 3,500,845,103 785,241,612 8,417,040,705

Asset Current Asset Non current Asset Tangible asset Intangible asset Total Asset

Market value - 2007 Amount Liabilities 4,411,836,436 Current Liabilities Non-Current liabilities 15,291,290,984 21,336,223,295 41,039,350,715 Total Liabilities Share holder's equity (8942400 shares)

Amount 3,500,845,103 785,241,612 36,753,264,000

41,039,350,715

The above table shows the balance sheet as it was presented in the annual report 2007 of Square Pharmaceuticals Ltd. According to this balance sheet the book value of SPL shares for the day December 31, 2007 should be Tk.941.25. But in reality the actual market price on that day was much higher than that, Tk. 4110. It is good news for a company because the market value is much higher than the book value. That good news also gives a sign that the company has goodwill in the market which can be considered as intangible asset of the company.

Figure 1: Comparison between Book Value and Market Value of SPL stock

Assumptions of balance sheet based on Market Value: 1. The company has other subsidiaries and uses same fixed assets such as furniture and fixture, motor vehicles etc in both companies. But two companies follows two different depreciation method which makes the value of those assets lower than actual market value. 2. The balance sheet does not incorporate any intangible assets, like goodwill. Square Pharmaceuticals Ltd is a renowned and well established company and expanded its business in international market. It has gained much reputation in both the market. 3. As shareholders of SPL are highly satisfied about their performance and there is significant differences between book value and market value of share. So there is strong confidence in shareholders mind about the efficient performance of SPL make high intangible asset.

4. The equity of the company has been severely understated. The company calculates its equity from 1991 when SPL was first listed with the Dhaka Stock Exchange. But according to the time value of money theory the value of money has increased a lot over these years. 5. Table 1: Ratio analysis of SPL
Ratio
Current ratio Quick ratio Cash ratio

2008-2007 1.26 0.68 0.059

Short-term Solvency 2007-2006 2006-2005 2005-2004 1.44 0.84 0.055 1.78 1.19 0.140 Long-term Solvency 1.66 1.08 0.196

2004-2003 1.61 0.98 0.042

Total Debt Times interest earned (TIE) Cash Coverage

33.74% 6.58 6.6

30.07% 8.64 8.6

31.15% 12.51 12.5 Asset Management

29.58% 15.92 15.9

21.90% 12.13 12.1

Inventory Turnover
DSO (Days Sales outstanding)

2.40 13.75 0.75

2.76 13.53 0.83

2.63 14.87 0.76 Profitability Performance

2.76 15.75 0.78

3.54 14.99 0.93

Total Asset turnover

Profit Margin Return on Asset Return on Equity

14.45% 10.88% 16.42%

14.96% 12.43% 17.77%

16.45% 12.54% 18.21% Market-value Measures

20.26% 15.88% 22.55%

17.69% 16.50% 21.13%

EPS PE ratio (Price Earning) Book Value per share Market Book Ratio

154.53 26.60 941.25 4.37

218.61 11.19 1230.08 1.99

234.67 9.70 1288.65 1.77

290.71 12.96 1289.07 2.92

269.46 8.43 1275.04 1.78

Interpretation of Ratio:

From the trend it can be concluded that Squares current assets are increasing and current liabilities are decreasing. So, its liquidity position is relatively stronger compare to others. It has got an inconsistent quick ratio which means that difference between assets and inventories and also liabilities frequently fluctuates. SPLs inventory turnover ratio is also inconsistent. So it means that company management is not able to manage its inventory efficiently all the time. Its receivable turnover ratio is increasing. It means that companys management has dealt proficiency with its collection policies. The fixed asset turnover ratio is decreasing. It means that company does not use its fixed assets efficiently and intensively. The total asset turnover ratio of SPL is stable. It means that company is generating sufficient volume of business given its total investment. Its total interest turn ratio is increasing. It means that company is not able to meet its annual interest cost. The profit margin on sales is increasing. It means that company has low cost of debt and also operating expenses are going down signifying the companys efficiency.ROA is increasing. It means that companys high BEP plus low interest cost resulting from its low use of debt. Its ROE has increased more than ROA. It means that companys greater use of equity. Financial strength and weaknesses of SPL: In this section the strengths and weaknesses for the companies have been summarized. Square Pharmaceuticals Ltd. Strengths: Liquidity position is relatively stronger compare to others. Company management has proven efficiency in managing its inventory. Companys management has dealt proficiency with its collection policies Company is generating sufficient volume of business given its total investment Operating expenses are going down signifying the companys efficiency. Weaknesses: Company does not use its fixed assets efficiently and intensively. Company is not able to meet its annual interest cost. 7. Financial Planning and Growth

Financial planning formulates the method by which financial goals of a company are to be achieved which has two dimensions: a time frame and a level of aggregation. To identify which factors positively contribute to the growth of the stock price of Square Pharmaceuticals Ltd. (SPL), we have analyzed the trend of different variables from the five year financial statement and detected the growth or reduction of every item. After that we have selected few components which show a growing trend and positively contribute to the growth of SPL.

Growth Rate To predict the performance of any firm in the future, it is very important to understand the growth of that company. The following table shows the companys, growth over the last seven year (2004 - 2008).
Table 2: Growth rates and their geometric mean
Growth Rates (%) Sales Fixed Asset Operating Cost Current Asset Retained Earning Non-current Liability Current Liability Dividend EPS 2008-2007 10.10% 21.85% 20.30% 20% 22.48% 32.30% 36.98% -20% 9 2007-2006 23% 29.18 42.98% -9% 24.06% -5.98% 13.04% 12.01% -89 2006-2005 14.21% 13% 17.89% 24% 35.66% 63.47% 15.93% 32% -18 2005-2004 13% 20.82% 23.24% 61% 68.07% 965% 55.91% 20% 28 GEOMEAN 0.1439 0.6445 0.2454 0.3521 0.2265 0.5864 0.2560 0.1918 0.2520

The growth rates that have been shown in the chart, we can find that geometric mean of sales growth is 14.39 %. As the world economy is experiencing the recession and the impact of recession is also started affecting our economy, so it will be a highly optimistic choice if we expect that the company will grow at the rate of 14%. On the other hand, the other growth rates that have been calculated also give us the indication that we can not consider them as company growth rate given GDP growth of Bangladesh is 5.45% and world economy is in recession. Lets see what the other variables that we can consider as growth rate for the company.

Variables Growth

GDP 5.45%

Sustainable growth Rate 9%

Br 7%

If the Square pharmaceuticals Ltd. maintains constant retention ratio and the return is also expected to be constant in future then the company can expect to grow at 7% growth rate. Though the rate is higher than GDP growth but considering the future opportunity to have higher return and the sustainable growth rate we are taking the growth rate in between these two. At the same time, keeping a constant retention ratio will give an indication to the share holders that the company does not have any liquidity problem and company is efficient enough in investment decision. Because at the present situation of world economy and our economy, while new investment is risky SPL is not retaining profit unnecessarily rather distributing to shareholders. It will increase shareholders confidence regarding the company and thus will increase the share price. Pro Forma Statements According to the Growth Rate section of this case, a single growth rate (7%) has been selected at the overall growth rate for SPL. Assuming a constant growth rate, the table below shows the pro forma income statement for coming 5 years. Table : Pro Forma income statement for the next 5 years
2012
11,582,053,02 8 6,810,878,069 4,771,174,959 2,373,785,126

2011
10,824,348,62 4 6,365,306,606 4,459,042,018 2,218,490,772

2010
10,116,213,66 8 5,948,884,679 4,167,328,989 2,073,355,862

2009

2008

2007

(Growth Rate = 7%)


Sales COGS Gross Profit Operating Expenses Operations Profit/(Loss) Other Income Other Cost Depreciation EBIT 2,397,389,833 848,022,755 624,556,471 495,241,508 2,125,614,609 2,240,551,246 792,544,631 583,697,636 462,842,531 1,986,555,709 2,093,973,127 740,695,916 545,511,810 432,563,113 1,856,594,121 1,956,984,231 692,239,174 509,824,121 404,264,592 1,735,134,692 1,828,957,225 646,952,499 476,471,141 377,817,375 1,621,621,208 1,709,305,818 604,628,504 445,300,132 353,100,35 1 1,515,533,839 9,454,405,297 5,559,705,307 3,894,699,990 1,937,715,759 8,835,892,801 5,195,986,268 3,639,906,532 1,810,949,307 8,257,843,739 4,856,061,933 3,401,781,806 1,692,475,988

Tax Net Income Dividend Addition Earnings to Retained

202,324,592 1,923,290,017 673,151,506 1,250,138,511

189,088,404 1,797,467,305 629,113,557 1,168,353,749

176,718,134 1,679,875,986 587,956,595 1,091,919,391

165,157,135 1,569,977,557 549,492,145 1,020,485,412

154,352,463 1,467,268,745 513,544,061 953,724,684

144,254,63 8 1,371,279,201 479,947,720 891,331,481

Table : Pro Forma balance sheet for the next 5 years


2012 2011 2010 2009 2008 2007

(Growth Rate = 7%) Current Assets Fixed Assets Total Assets Current Liabilities Non-current Liabilities Total Liabilities Common Stock Reserves Retained Earnings brought forward Retained Earnings Total Equity Total Liabilities and Equity Excess Fund 5,519,485,955 10,372,928,55 2 15,892,414,50 7 4,379,778,275 785,241,612 5,165,019,887 2,929,705,000 1,207,813,437 8,236,983,236 1,168,353,749 13,542,855,42 2 18,707,875,30 9 2,815,460,802 5,358,724,228 10,070,804,42 0 15,429,528,64 8 4,252,211,918 785,241,612 5,037,453,530 2,929,705,000 1,207,813,437 7,145,063,845 1,091,919,391 12,374,501,67 3 17,411,955,20 3 1,982,426,555 5,202,644,882 9,777,480,019 14,980,124,901 4,128,361,085 785,241,612 4,913,602,697 2,929,705,000 1,207,813,437 6,124,578,433 1,020,485,412 11,282,582,282 16,196,184,979 1,216,060,078 5,051,111,536 9,492,699,048 14,543,810,583 4,008,117,558 785,241,612 4,793,359,170 2,929,705,000 1,207,813,437 5,170,853,749 953,724,684 10,262,096,870 15,055,456,040 511,645,457 4,720,664,987 8,871,681,353 13,592,346,339 3,745,904,260 785,241,612 4,531,145,872 2,929,705,000 1,207,813,437 4,279,522,268 891,331,481 9,308,372,186 13,839,518,058 247,171,719 4,411,836,436 8,291,290,984 12,703,127,420 3,500,845,103 785,241,612 4,286,086,715 2,929,705,000 1,207,813,437 3,043,819,175 1,235,703,093 8,417,040,705 12,703,127,420 0

The above table shows the pro forma balance sheets for the coming 5 years. There are some assumptions are made in preparing the pro forma income statement and balance sheet. Initially all assets, including fixed assets, accounts payable vary directly with sales. Long term debt and common stock wont vary with sales as management decision is to keep a constant long term debt and common stock. As the company decided to maintain a constant retention rate, the company will pay dividend every year at the same rate.

The balance sheets indicate the company has excess fund, which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses.

Plug Variables
The pro forma statements from the above section indicate the firm will have excess fund if it will grow at 7% rate. The company can decrease its long term debts by the extra fund, thus will decrease the debt equity ratio. As the company decided to maintain a constant retention rate, it ends up with extra fund at the end of the year. In the current recession of economy, it will be risky to do any new investment. So, the company can payoff its debt which will give an encouraging signal to the shareholders. The table below lists the change is capital structure of the company.

Table : Expected change in capital structure of Square Pharmaceuticals Ltd.


2012 2011 2010 2009 2008 2007

Initial Ratio Revised Ratio

Debt/Equity 33.53% Debt/Equity 19% 20% 21% 22% 24% 26.80% 32.56% 31.61% 30.69% 28.68% 26.80%

The above table shows that the debt/equity ratio of the companys capital structure will go down from the current 26.80% to 19%.

Scenario Analysis
In this case study, the growth rate of 7% has been selected as the constant growth rate and the pro forma statement has been generated based on this growth rate. For scenario analysis, both optimistic and pessimistic scenarios are being considered.

Table : Scenario analysis for both optimistic and pessimistic situations


Optimistic Normal Pessimistic

Growth Rate
Income Statement Sales COGS Gross Profit Operating Expenses Operations Profit/(Loss) Other Income Other Cost Depreciation EBIT Tax Net Income Dividend Retained Earnings Balance Sheet Current Assets Fixed Assets Total Assets Current Liabilities Non-current Liabilities Total Liabilities Common Stock Reserves Retained Earnings Total Equity Total Liabilities Equity and

12.00%
9,248,784,988 5,438,789,365 3,809,995,623 1,895,573,107 1,914,422,516 677,183,924 498,736,148 395,472,393 1,697,397,900 161,565,195 1,535,832,705 537,541,447 998,291,258

10.00%
9,083,628,113 5,341,668,126 3,741,959,987 1,861,723,587 1,880,236,400 665,091,354 489,830,145 388,410,386 1,667,087,223 158,680,102 1,508,407,121 527,942,492 980,464,629

7.00%
8,835,892,801 5,195,986,268 3,639,906,532 1,810,949,307 1,828,957,225 646,952,499 476,471,141 377,817,375 1,621,621,208 154,352,463 1,467,268,745 513,544,061 953,724,684

5.00%
8,670,735,926 5,098,865,030 3,571,870,896 1,777,099,787 1,794,771,109 634,859,929 467,565,139 370,755,369 1,591,310,531 151,467,370 1,439,843,161 503,945,106 935,898,055

3.00%
8,505,579,051 5,001,743,791 3,503,835,260 1,743,250,268 1,760,584,993 622,767,359 458,659,136 363,693,362 1,560,999,854 148,582,277 1,412,417,577 494,346,152 918,071,425

4,941,256,808 9,286,245,902 14,227,502,71 0 3,920,946,515 879,470,605 4,800,417,121 2,929,705,000 1,207,813,437 998,291,259 5,135,809,696 9,936,226,817 4,291,275,894 30%

4,853,020,080 9,120,420,082 13,973,440,16 2 3,850,929,613 863,765,773 4,714,695,387 2,929,705,000 1,207,813,437 980,464,629 5,117,983,066 9,832,678,453 4,140,761,709 29.48%

4,720,664,987 8,871,681,353 13,592,346,33 9 3,745,904,260 840,208,525 4,586,112,785 2,929,705,000 1,207,813,437 953,724,685 5,091,243,122 9,677,355,907 3,914,990,433 28.68%

4,632,428,258 8,705,855,533 13,338,283,79 1 3,675,887,358 824,503,693 4,500,391,051 2,929,705,000 1,207,813,437 935,898,055 5,073,416,492 9,573,807,543 3,764,476,248 28.14%

4,544,191,529 8,540,029,714 13,084,221,243 3,605,870,456 808,798,860 4,414,669,316 2,929,705,000 1,207,813,437 918,071,425 5,055,589,862 9,470,259,179 3,613,962,064 27.61%

External Fund Needed New Debt/Equity Ratio

In the above scenario analysis, we have taken the 7% growth rate in normal situation. If we want to be optimistic enough to predict that the economy will have a high growth and the company will also able to grow at 10% to 12%. On the other hand, the situation can

also be worse enough to have a growth lower than the normal and the company may face a growth of 5% or even 3%. In that case the good news for the company is that if the company will have to grow at 5% then company doesnt have to face any loss as the rate is much closer to GDP growth rate. After analyzing the scenario of different situation we can say that the projected growth rate is appropriate for the company which will help the company to operate in the market even if the situation is worse. It gives a positive indication towards the company and increases the shareholders confidence to invest in the companys share.

7.Beta
Beta measures the responsiveness of a security to movements in the market portfolio (i.e., systematic risk).

i =

Cov ( Ri , RM )

2 ( RM )

To better understand the relationship with the market index and the stock price volatility, Beta calculation is commonly used by the financial analysts. Beta can be thought of as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. Our calculation was done using daily stock price and index price for 2007-2008. The beta value of Square Pharmaceuticals Ltd. was determined to be 0.78245 for 2007-2008. Considering 2008 the beta was 0.7088. It has indicated a strong relation between stock return and the market return. The beta value is determined through calculating the covariance and variance of the both the index price and stock price growth rate. 2007-2008 0.00013 0.000165 0.782447 2008 .000122 .000173 .70883

Covariance Variance Beta

Below graph for daily change in SPL stock price & DSE Index reveals the strong relationship.

Daily Change In SPL Price & DSE Index


15 10 5 0 -5 -10 -15 -20 -25 -30 2007-November-14 2008-November-20 2007-November-29 2008-November-05 2007-January-14 2007-January-29 2008-January-08 2008-January-24 2008-June-22 2007-June-12 2007-June-27 2007-July-15 2007-July-30 2008-June-04 2008-July-08 2008-July-23 2009-January-05 2007-September-19 2007-October-04 2007-October-29 2007-December-17 2008-February-10 2008-September-11 2008-October-05 2008-October-21 2007-September-03 2008-December-14 2007-February-15 2008-February-26 2009-January-21 2007-March-21 2007-March-05 2007-April-24 2007-May-13 2007-May-28 2007-August-14 2008-March-12 2008-March-31 2008-May-04 2008-August-07 2008-August-27 2007-April-09 2008-April-16 2008-May-20

SPL change%

DSE change%

Figure 2: Daily Change in SPL Price & DSE Index (07-08)

8.Expected Return of SPL using CAPM


The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (Rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk or risk premium. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-Rf).
R i = R F + i ( R M R F )

We have determined market return Rm for year 2008 taking the Quarterly change in DSE Index. The average market return in 2008 has been found to be 1.76%. If we post all the

values in the above equation (considering Rf=7.5) we get the expected return R i to be 3.435%. This is lower than the risk free rate. This is the outcome of low market return. As such the expected return derived from CAPM can not be used for stock valuation.

9.Dividend Declaration, Firm Specific News and Market News


It has been empirically observed that, movement of Share Price of a specific company is significantly influenced by the Announcement of Dividend Declaration, Firm Specific News and Market News. In case of dividend declaration, one important issue is Ex-Dividend Date affecting share price. An attempt was made to find whether share price of SPL behaved in accordance with the influence of these variables. Analysis of Stock Price Fluctuation during the year 2007: The last quarter of the year 2006 was more or less stable which was reflected in the following year until 19/05/07 when a Firm Specific News came that Square Pharmaceuticals Ltd. has obtained "Certificate of CMP compliance of a Manufacturer" from the Medicines and Healthcare products Regulatory Agency (MHRA) of London on 19.05.07. This approval will help to start exporting its Finished Pharmaceutical Products to the United Kingdom as well as to enter into the Pharmaceutical markets in other European countries, in Australia, in South Africa and the GCC countries in near future. Due to this news share price gradually increased by 33.73% in 10 days. This shows that Market is not efficient enough.

Daily SPL Close Price (2007-08)


6000 5000 4000 3000 2000 1000 0 2007-December-10 2008-November-10 2008-November-26 2007-November-05 2007-November-22 2007-September-24 2008-September-11 2007-September-06 2008-December-23 2007-January-30 2007-February-19 2007-May-06 2007-May-22 2007-June-07 2007-June-25 2007-July-12 2007-July-30 2007-October-17 2008-January-22 2008-February-07 2008-February-26 2008-June-12 2008-July-02 2008-July-20 2009-January-14 2007-January-14 2007-March-08 2007-March-28 2008-January-03 2008-March-13 2008-May-08 2008-May-27 2008-October-06 2008-October-23 2007-April-16 2008-April-02 2008-April-21 2008-August-26 2007-August-16 2008-August-05

SPL Close

Figure 3: Analysis of stock price fluctuation during the year 2007-08

Then the price remained stable until 16th July07. On 16th July 07 the Board of Directors has recommended cash dividend @ 50% and stock dividend @ 50% for the year ended March 31, 2007. As a result share price increased by 45% in 9 days. This is also a delayed response. Also this was a overreaction to good news followed by a reversion of 10.83% decrement of share price for 13 days. Then share price again faced a decrement of 24.65% in 3 days following the Ex dividend date of 15/08/07. Analysis of Stock Price Fluctuation during the year 2008: Starting of 2008 was a continuation of the trend of last year. Then it showed a unusual hike of 37.8% starting from 25/03/08 to 20/5/08 (35 days). In response to a DSE query, the company has informed that there is no undisclosed price sensitive information of the company for recent unusual price hike. This may due to rumor effect as there was no other good news. Another explanation may be that Investors expected a high dividend declaration from SPL like 2007. According to Weak Form Market Efficiency security prices reflect all information found in past prices and volume. So, this phenomena describes Weak Form Market Efficiency.

On 21/07/08, The Board of Directors has recommended cash dividend @ 40% and stock dividend @ 35% for the year ended March 31, 2008. This was not impressive as 2007. As a result, share price decreased by 17.94% in only one day. This shows a rather efficient form. Then again a decrement was found due to the Ex-Dividend Date phenomenon , as the Shareholders were willing to dispose their shares after getting the dividend. The record date was 14/08/08. As a result share price decreased by around 28% from 13/08/08 to 18/08/08 (1 day). This also shows a rather efficient form. As a whole, it can be observed that, the stock price of a specific company is significantly influenced by the Ex dividend Date phenomenon on dividend declaration, Firm specific news and Market news. It can be predicted that Ex Date phenomenon will occur in somewhere around in the 2nd week of August for Square Pharmaceuticals Ltd..

10. STOCK VALUATION In this section we shall make a projection of market stock price of Square Pharmaceuticals Ltd.. It has a security specific beta risk of 0.70883 and the expected return for the company is 3.435%. But the expected return 3.435% is based on market return 1.76%. This phenomenon may be due to the fact that in 2008 due to the political situation & anti corruption activity of the government, a lot of money has been invested in DSE. As a result the price of stocks fell.It is vivid from the below graph.

DSE Index in 2008


3300 3200 3100 3000 2900 2800 2700 2600 2500 2400
2008-November-02 2008-November-12 2008-November-24 2008-December-04 2008-September-09 2008-September-21 2008-December-28 2008-January-01 2008-January-24 2008-February-28 2008-May-12 2008-June-04 2008-July-10 2008-October-08 2008-February-05 2008-February-17 2008-October-21 2008-January-13 2008-March-11 2008-March-23 2008-May-25 2008-June-17 2008-June-29 2008-April-06 2008-April-29 2008-July-22 2008-August-03 2008-August-13 2008-August-28 2008-April-17

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Figure : Trend of DSE Index in 2008

As the Expected Return derived from CAPM is too low (3.435%), we shall use another formula for expected rate of return. ks=(D1/P0)+g

For growth rate, we took the g=RR*ROE as 7%. Using this growth rate, from this formula we get the Expected Return 9.23%. Using the above information we can forecast expected stock value for SPL using the Gordon Model (Dividend Valuation Model). We assume that dividends will grow at a constant rate, g, forever. Since future cash flows grow at a constant rate forever, the value of a constant growth stock is the present value of a growing perpetuity: Where,

P0

Div 1 ks g

Div1 = Div 0 (1 + g )

We assume g=7% & k=9.23%. From all the above information we can forecast the future stock price for 2009. So the stock price for 1st January, 2009) would be BDT 3845. But the real average stock price for first three months in 2009 was BDT 2959.41. The average stock price is 23% lower than our forecasted price. This indicates the price of SPL share is undervalued in the market. The explanation for lower market price may be due to decreasing trend in the General Index.

11. Conclusion
After analyzing all the ratios, we have found out the following information about Square Pharmaceuticals Ltd: In the liquidity ratios we can see that both current ratio and quick ratio are below the benchmark and for the last five years the both the ratios have been deteriorated. This reveals that the company is not holding the short-term solvency. Huge inventories have been piled up in last year that consumed cash. Most alarming is cash ratio which has drastically gone down since 2004 but slightly improved in 2007. The firm should be concerned to promote cash sales, may be, by means of cash discount. In asset management ratios we can see inventory turnover ratio, DSO and total asset turnover slightly deteriorated in 2007. However the all the ratios are better than Beximco

Pharmaceuticals Ltd. Also the DSO of Square pharmaceuticals indicates that it collects the sales faster than Beximco Pharmaceuticals Ltd. Debt management ratios give a clear idea about long term solvency of Square Pharmaceuticals Ltd. The debt ratio increased slightly in 2007. TIE and Cash coverage ratio are better than Beximco Pharmaceuticals Ltd. Profit margin Ratio, ROA and ROE of Square pharmaceuticals Ltd has deteriorated compared to the previous years. Although the decrease rate is not so high still it is a problem for Square and they need to try to improve these ratios. Both P/E and M/B ratios have improved to demonstrate that investors have more trust in the firm. There must be some good news not reflected in the accounting ratios. For example, in an inflationary economy inventories being piled up might indicate profit potentials of the next year as the cost of production of the next year would go down compared to industry due to cost savings in inventories. From the total analysis, we can summarize that for the last year 2007, even though Square Pharmaceuticals Ltd. deteriorated in all the ratios, but still holding the better position compared to Beximco Pharmaceuticals Ltd (the best alternative forgone) and this has been reflected through the increment in share price and in P/E and M/B ratios. The firm gained the trust of the investors. Square Pharmaceuticals Ltd might have a good news that is not reflected in other ratios but investors know. Therefore we can come to the conclusion that Square Pharmaceutical Ltd is a better company to invest on.

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