FINANCIAL ANALYSIS:

Submitted To:

Submitted By:

Submission Date:

To,

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 anal!sis will trul! be useful for each of us in our own field of work. We will thus greatl! value the opportunit! !ou gave us in this course. "n case of an! #uestions regarding our findings please do contact an! of the group members $ we will remain obliged to clarif! wherever necessar!. Thanking %ou,

EXECUTIVE SUMMARY
The ob&ective of this report is to pro&ect the Stock 'rice of a specific compan!, as in this case Square Pharmaceuticals Limited through different financial anal!sis, which started off with identif!ing variables affecting the stock price and then through Stock (aluation. This anal!sis is done mainl! based on the information collected from the annual report issued b! Square Pharmaceuticals Limited in the fiscal !ears )**+ )**, $ )**, )**-. Dail! .arket "nde/ and Stock price was collected from DSE. The different growth rate anal!sis for the compan!0s sales $ profitabilit! led to choose an optimum growth rate, which in this case is the Sustainable 1rowth 2ate or S12. 3sing this &ustified growth rate, pro forma statements 45alance Sheet $ "ncome Statement6 were prepared along with different scenario anal!sis. The anal!sis suggested that S'7 maintains a sustainable growth without re#uiring an! e/ternal financing e/cepting for the case of a highl! optimistic scenario. "t has been observed empiricall! that a good number of variables affect the variations of Stock 'rice $ the proceedings have been discussed in the report. This research also revealed that apart from #uantitative variables, some compan! specific and market specific information including dividend declaration, 8/ date, etc. also affect the stock price valuation. "n 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.E !ecte" #eturn o$ SP% using &AP'............................................................18 (.)i*i"en" )eclaration+ Firm S!eci$ic ,e-s an" 'ar.et ,e-s............................1(

10. ST !" #aluation.....................................................................................................$$

11. &onclusion............................................................................................./3

1.0 !om%any

&er&ie'

S#uare 'harmaceuticals is a renowned 'harmaceutical 9ompan! of our countr!. "t is currentl! the leading corporation in its field of e/pertise. S#uare 'harmaceuticals began its operations in the !ear :;<- as a 'artnership =irm. "t converted into a 'rivate 7imited 9ompan! in :;+>. The compan! became 'ublic $ became listed in the DS8 in the !ear :;;:, since then there was no looking back. The supremac! of S#uare is such that the closest competitor 5e/imco 'harmaceuticals is not even close in comparison to the market share? the latter has onl! about half the market share. S#uare 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 19 ! and has been exporting antibiotics and other pharmaceutical products since then. This extension in business and services has increased the credibility of "#uare Pharmaceuticals Limited ten folds.

$.0 Problem Statement

'rospective investors are alwa!s ver! interested to know how a compan! is going to perform financiall! in order to benefit their investment decisions. There are man! variables which can affect the actual financial position and the stock value of a particular compan!. .ost of these variables are not controllable or predictable. "t is not ver! eas! to figure out how these variables affect the compan! value and the stock price. This case stud! was undertaken in order to identif! some of these variables and see how the! affect the compan!0s market value and its stock price. @lso to tr! to pro&ect the future stock price depending on these variables. Different financial anal!sis and techni#ues have been emplo!ed to &ustif! the prediction about the stock price

(.0

b)ecti&e o* the Study

The specific ob&ectives aimed for this report are: To focus on some crucial information b! anal!sis and interpretation of S'7 such ratio anal!sis, pro forma statement anal!sis etc. To identif! the variables that can affect the stock price of S'7. To find out the recent financial situation or trend of S'7. To pro&ect the future financial state of the compan!. To predict the future stock price of S'7 share based on these pro&ected financial performance data

+.0 ,ethodology
"n this case stud! various methods and techni#ues have been used to help reach and solidif! the findings. This section outlines reasoning for choosing and using these methods

+.1 Statistical -nalysis Technique

This case used some important concepts of corporate finance such as ratio anal!sis, pro forma statement, growth rate anal!sis, scenario anal!sis, etc. to clarif! how each variable affects the stock price of S'7. @ccounting theories and practices were also closel! applied. "t is also worth! to mention that man! tables and graphs were used to give visual aid for #uick understanding of the scenarios. These tables and graphs help the reader to #uickl! identif! &ustification behind our conclusion about various scenarios.

+.$ Data Ty%e

Primary Data: @ll S'7 annual reports, the primar! data were used in most parts in the order to calculate important factors. The dail! share price for both 1la/oSmith and DS8 "nde/ were also collected from the Dhaka Stock 8/change in order to help with the anal!sis.

Secondary Data: "nformation was also collected from the "nternet and the different dail! newspapers. 8/amples of such data are S'7 histor! and other basic compan! information, medicine companies that are enlisted in share market etc. @lso, an! firm specific or market specific news which can affect the share price of S'7.

+.( Data Source

=ew different data sources were used to collect the necessar! data, like 4a6 @nnual 2eports )**+ A )**- 4b6 the "nternet and 4c6 Bewspapers. The ma&or source was Dhaka Stock E.change from where the annual )**+ )**- reports, dail! stock price for SPL and DSE /nde. were collected. The "nternet and newspapers were also helpful to collect information about the recent incidents.

+.+ Time Period taken under !onsideration

=or this case stud!, a time period of > !ears )**+ )**- was taken under consideration. "n most cases, these > !ears data were used as the basis for growth pro&ection. Though it is not a lot, it is good enough to identif! some trends in data to make some realistic predictions about the future of SPL.

0.0 Limitation o* Study

The following limitations can be found in this case stud!: @s it is an academic research restricted to a period of onl! C months not all the possible variables were considered in deducing the financial position of S'7. S'7 9orporate Dffice said that the! cooperate and share information onl! with the share holders and other stakeholders? and thus, the! have limitations to distribute information to general public 4who are not in the categor! of stakeholders6.

1.0 2inancial -nalysis

There are man! financial anal!sis techni#ues which can measure the financial position of a compan!. "n this section few of these techni#ues are discussed in an attempt to outline the financial health of Square Pharmaceuticals Ltd.

>.: Balance Sheet -nalysis

Table: Balance Sheet analysis based on Book #alue and ,arket #alue
@sset 9urrent @sset Bon current @sset Tangible asset "ntangible asset Total @sset 1$340(31$43+$0 Total 7iabilities 1$340(31$43+$0 -,);:,);*,;-> 5ook (alue )**, @mount 7iabilities >,>::,-C+,>C+ 9urrent 7iabilities Bon 9urrent liabilities Share holderEs e#uit! 4-;>)>** shares6 @mount C,<**,-><,:*C ,-<,)>:,+:) -,>:,,*>*,,*<

@sset 9urrent @sset Bon current @sset Tangible asset "ntangible asset Total @sset

.arket value )**, @mount 7iabilities >,>::,-C+,>C+ 9urrent 7iabilities Bon 9urrent liabilities :<,);:,);*,;-> ):,CC+,))C,);< +130(53(003410 Total 7iabilities Share holderEs e#uit! 4-;>)>** shares6

@mount C,<**,-><,:*C ,-<,)>:,+:) C+,,<C,)+>,***

+130(53(003410

The above table shows the balance sheet as it was presented in the annual report )**, of S#uare 'harmaceuticals 7td. @ccording to this balance sheet the book value of SPL shares for the da! December C:, )**, should be Tk.;>:.)<. 5ut in realit! the actual market price on that da! was much higher than that, Tk. >::*. "t is good news for a compan! because the market value is much higher than the book value. That good news also gives a sign that the compan! has goodwill in the market which can be considered as intangible asset of the compan!.

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

-ssum%tions o* balance sheet based on ,arket #alue: :. The compan! has other subsidiaries and uses same fi/ed assets such as furniture and fi/ture, motor vehicles etc in both companies. 5ut two companies follows two different depreciation method which makes the value of those assets lower than actual market value. ). The balance sheet does not incorporate an! intangible assets, like goodwill. S#uare 'harmaceuticals 7td is a renowned and well established compan! and e/panded its business in international market. "t has gained much reputation in both the market. C. @s shareholders of S'7 are highl! 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 S'7 make high intangible asset.

>. The e#uit! of the compan! has been severel! understated. The compan! calculates its e#uit! from :;;: when SPL was first listed with the Dhaka Stock 8/change. 5ut according to the time value of mone! theor! the value of mone! has increased a lot over these !ears. 0. Table 1: 6atio analysis o* SPL
6atio
Current ratio Quick ratio Cash ratio

$0087$004 :.)+ *.+*.*<;

Short7term Sol&ency $0047$001 $0017$000 $0007$00+ :.>> *.-> *.*<< :.,:.:; *.:>* Long7term Sol&ency :.++ :.**.:;+

$00+7$00( :.+: *.;*.*>)

Total Debt Times interest earned (TIE) Cash Coverage

CC.,>F +.<+.+

C*.*,F -.+> -.+

C:.:<F :).<: :).< -sset ,anagement

);.<-F :<.;) :<.;

):.;*F :).:C :).:

Inventory Turnover
DSO (Days Sales outstanding)

).>* :C.,< *.,<

).,+ :C.<C *.-C

).+C :>.-, *.,+ Pro*itability Per*ormance

).,+ :<.,< *.,-

C.<> :>.;; *.;C

Total Asset turnover

ro!it "argin #eturn on Asset #eturn on E$uity

:>.><F :*.--F :+.>)F

:>.;+F :).>CF :,.,,F

:+.><F :).<>F :-.):F ,arket7&alue ,easures

)*.)+F :<.--F )).<<F

:,.+;F :+.<*F ):.:CF

E S E ratio ( rice Earning) %ook &alue 'er share "arket %ook #atio

:<>.<C )+.+* ;>:.)< >.C,

):-.+: ::.:; :)C*.*:.;;

)C>.+, ;.,* :)--.+< :.,,

);*.,: :).;+ :)-;.*, ).;)

)+;.>+ -.>C :),<.*> :.,-

/nter%retation o* 6atio:

=rom the trend it can be concluded that S#uare0s current assets are increasing and current liabilities are decreasing. So, its li#uidit! position is relativel! stronger compare to others. "t has got an inconsistent #uick ratio which means that difference between assets and inventories and also liabilities fre#uentl! fluctuates. S'70s inventor! turnover ratio is also inconsistent. So it means that compan! management is not able to manage its inventor! efficientl! all the time. "ts receivable turnover ratio is increasing. "t means that compan!0s management has dealt proficienc! with its collection policies. The fi/ed asset turnover ratio is decreasing. "t means that compan! does not use its fi/ed assets efficientl! and intensivel!. The total asset turnover ratio of S'7 is stable. "t means that compan! is generating sufficient volume of business given its total investment. "ts total interest turn ratio is increasing. "t means that compan! is not able to meet its annual interest cost. The profit margin on sales is increasing. "t means that compan! has low cost of debt and also operating e/penses are going down signif!ing the compan!0s efficienc!.2D@ is increasing. "t means that compan!0s high 58' plus low interest cost resulting from its low use of debt. "ts 2D8 has increased more than 2D@. "t means that compan!0s greater use of e#uit!. 2inancial strength and 'eaknesses o* SPL: "n this section the strengths and weaknesses for the companies have been summariGed. Square Pharmaceuticals Ltd. Strengths: 7i#uidit! position is relativel! stronger compare to others. 9ompan! management has proven efficienc! in managing its inventor!. 9ompan!0s management has dealt proficienc! with its collection policies 9ompan! is generating sufficient volume of business given its total investment Dperating e/penses are going down signif!ing the compan!0s efficienc!. 9eaknesses: 9ompan! does not use its fi/ed assets efficientl! and intensivel!. 9ompan! is not able to meet its annual interest cost. 4. 2inancial Planning and :ro'th

=inancial planning formulates the method b! which financial goals of a compan! are to be achieved which has two dimensions: a time frame and a level of aggregation. To identif! which factors positivel! contribute to the growth of the stock price of S#uare 'harmaceuticals 7td. 4S'76, we have anal!Ged the trend of different variables from the five !ear financial statement and detected the growth or reduction of ever! item. @fter that we have selected few components which show a growing trend and positivel! contribute to the growth of S'7.

:ro'th 6ate To predict the performance of an! firm in the future, it is ver! important to understand the growth of that compan!. The following table shows the compan!0s, growth over the last seven !ear 4)**> )**-6.
Table : !rowt" rates and t"eir geometric mean
''() ''* 10.101 /1.851 /0.301 /01 //.481 3/.301 34.(81 3/01 ( ''*) ''+ /31 /(.18 4/.(81 3(1 /4.041 35.(81 13.041 1/.011 38( ''+) '', 14./11 131 17.8(1 /41 35.441 43.471 15.(31 3/1 318 '',) ''131 /0.8/1 /3./41 411 48.071 (451 55.(11 /01 /8 !./M.01 '21-34 '2+--, '2 -,'23, 1 '2 +, '2,(+'2 ,+' '2141( '2 , '

!rowt" #ates $%& Sales Fi e" Asset 2!erating &ost &urrent Asset #etaine" Earning ,on3current %iability &urrent %iability )i*i"en" EPS

The growth rates that have been shown in the chart, we can find that geometric mean of sales growth is :>.C; F. @s the world econom! is e/periencing the recession and the impact of recession is also started affecting our econom!, so it will be a highl! optimistic choice if we e/pect that the compan! will grow at the rate of :>F. Dn the other hand, the other growth rates that have been calculated also give us the indication that we can not consider them as compan! growth rate given 1D' growth of 5angladesh is <.><F and world econom! is in recession. 7et0s see what the other variables that we can consider as growth rate for the compan!.

Variables Growth

GDP 5.45%

Sustainable growth Rate 9%

Br 7%

"f the S#uare pharmaceuticals 7td. maintains constant retention ratio and the return is also e/pected to be constant in future then the compan! can e/pect to grow at ,F growth rate. Though the rate is higher than 1D' growth but considering the future opportunit! to have higher return and the sustainable growth rate we are taking the growth rate in between these two. @t the same time, keeping a constant retention ratio will give an indication to the share holders that the compan! does not have an! li#uidit! problem and compan! is efficient enough in investment decision. 5ecause at the present situation of world econom! and our econom!, while new investment is risk! S'7 is not retaining profit unnecessaril! rather distributing to shareholders. "t will increase shareholders confidence regarding the compan! and thus will increase the share price. Pro 2orma Statements @ccording to the 1rowth 2ate section of this case, a single growth rate 4,F6 has been selected at the overall growth rate for S'7. @ssuming a constant growth rate, the table below shows the pro forma income statement for coming < !ears. Table : Pro 2orma income statement *or the ne.t 0 years
$01$
::,<-),*<C,*) +,-:*,-,-,*+; 4,771,174,959 ),C,C,,-<,:)+

$011
:*,-)>,C>-,+) > +,C+<,C*+,+*+ 4,459,042,018 ),):-,>;*,,,)

$010
:*,::+,):C,++ <,;>-,-->,+,; 4,167,328,989 ),*,C,C<<,-+)

$005

$008

''*

$:ro'th 6ate ; 4<=

Sales &25S Gross Profit 2!erating E !enses Operations Profit/(Loss) 2ther 6ncome 2ther &ost )e!reciation EBIT 2,397,389,833 ->-,*)),,<< +)>,<<+,>,: >;<,)>:,<*2,125,614,609 2,240,551,246 ,;),<>>,+C: <-C,+;,,+C+ >+),->),<C: 1,986,555,709 2,093,973,127 ,>*,+;<,;:+ <><,<::,-:* >C),<+C,::C 1,856,594,121 1,956,984,231 +;),)C;,:,> <*;,-)>,:): >*>,)+>,<;) 1,735,134,692 1,828,957,225 +>+,;<),>;; >,+,>,:,:>: C,,,-:,,C,< 1,621,621,208 1,709,305,818 +*>,+)-,<*> >><,C**,:C) C<C,:**,C< : 1,515,533,839 ;,><>,>*<,);, <,<<;,,*<,C*, 3,894,699,990 :,;C,,,:<,,<; -,-C<,-;),-*: <,:;<,;-+,)+3,639,906,532 :,-:*,;>;,C*, -,)<,,->C,,C; >,-<+,*+:,;CC 3,401,781,806 :,+;),>,<,;--

7a Net Income )i*i"en" A""ition Earnings to #etaine"

)*),C)>,<;) 135$(3$503014 +,C,:<:,<*+ :,)<*,:C-,<::

:-;,*--,>*> 134543+143(00 +);,::C,<<, :,:+-,C<C,,>;

:,+,,:-,:C> 1314538403581 <-,,;<+,<;< :,*;:,;:;,C;:

:+<,:<,,:C< 1301535443004 <>;,>;),:>< :,*)*,>-<,>:)

:<>,C<),>+C 13+143$1834+0 <:C,<>>,*+: ;<C,,)>,+->

:>>,)<>,+C 13(413$453$01 >,;,;>,,,)* -;:,CC:,>-:

Table : Pro 2orma balance sheet *or the ne.t 0 years

'1 '11 '1' ''4 ''( ''*

$!rowt" #ate 5 *%& &urrent Assets Fi e" Assets Total 0ssets &urrent %iabilities ,on3current %iabilities 7otal %iabilities &ommon Stoc. #eser*es #etaine" Earnings brought $or-ar" #etaine" Earnings Total .6uit7 Total Liabilities and .6uit7 E cess Fun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

The above table shows the pro forma balance sheets for the coming < !ears. There are some assumptions are made in preparing the pro forma income statement and balance sheet. "nitiall! all assets, including fi/ed assets, accounts pa!able var! directl! with sales. 7ong term debt and common stock won0t var! with sales as management decision is to keep a constant long term debt and common stock. @s the compan! decided to maintain a constant retention rate, the compan! will pa! dividend ever! !ear at the same rate.

The balance sheets indicate the compan! has e/cess fund, which can be financed distributed to pa!off long term debt and reduce the obligations of interest e/penses.

Plug #ariables
The pro forma statements from the above section indicate the firm will have e/cess fund if it will grow at ,F rate. The compan! can decrease its long term debts b! the e/tra fund, thus will decrease the debt e#uit! ratio. @s the compan! decided to maintain a constant retention rate, it ends up with e/tra fund at the end of the !ear. "n the current recession of econom!, it will be risk! to do an! new investment. So, the compan! can pa!off its debt which will give an encouraging signal to the shareholders. The table below lists the change is capital structure of the compan!.

Table : E.%ected change in ca%ital structure o* Square Pharmaceuticals Ltd.

'1 '11 '1' ''4 ''( ''*

8nitial #atio #e;ised #atio

9ebt:.6uit7 33.531 9ebt:.6uit7 1(1 /01 /11 //1 /41 /4.801 3/.541 31.411 30.4(1 /8.481 /4.801

The above table shows that the debtHe#uit! ratio of the compan!0s capital structure will go down from the current $1.80< to 15<.

Scenario -nalysis
"n this case stud!, the growth rate of 4< has been selected as the constant growth rate and the pro forma statement has been generated based on this growth rate. =or scenario anal!sis, both optimistic and pessimistic scenarios are being considered.

Table : Scenario analysis *or both o%timistic and %essimistic situations

%timistic >ormal Pessimistic

:ro'th 6ate
/ncome Statement Sales 9D1S 1ross 'rofit Dperating 8/penses Operations Profit/( oss! Dther "ncome Dther 9ost Depreciation "B#$ Ta/ >et /ncome Dividend 2etained 8arnings Balance Sheet 9urrent @ssets =i/ed @ssets Total @ssets 9urrent 7iabilities Bon current 7iabilities $otal ia%ilities 9ommon Stock 2eserves 2etained 8arnings $otal "&uit' Total 7iabilities 8#uit! and

1$.00<
;,)>-,,->,;-<,>C-,,-;,C+< C,-*;,;;<,+)C :,-;<,<,C,:*, 1,914,422,516 +,,,:-C,;)> >;-,,C+,:>C;<,>,),C;C 1,697,397,900 :+:,<+<,:;< 130(038($3400 <C,,<>:,>>, ;;-,);:,)<-

10.00<
;,*-C,+)-,::C <,C>:,++-,:)+ C,,>:,;<;,;-, :,-+:,,)C,<-, 1,880,236,400 ++<,*;:,C<> >-;,-C*,:>< C--,>:*,C-+ 1,667,087,223 :<-,+-*,:*) 130083+0431$1 <),,;>),>;) ;-*,>+>,+);

4.00<
-,-C<,-;),-*: <,:;<,;-+,)+C,+C;,;*+,<C) :,-:*,;>;,C*, 1,828,957,225 +>+,;<),>;; >,+,>,:,:>: C,,,-:,,C,< 1,621,621,208 :<>,C<),>+C 13+143$1834+0 <:C,<>>,*+: ;<C,,)>,+->

0.00<
-,+,*,,C<,;)+ <,*;-,-+<,*C* C,<,:,-,*,-;+ :,,,,,*;;,,-, 1,794,771,109 +C>,-<;,;); >+,,<+<,:C; C,*,,<<,C+; 1,591,310,531 :<:,>+,,C,* 13+(538+(3111 <*C,;><,:*+ ;C<,-;-,*<<

(.00<
-,<*<,<,;,*<: <,**:,,>C,,;: C,<*C,-C<,)+* :,,>C,)<*,)+1,760,584,993 +)),,+,,C<; ><-,+<;,:C+ C+C,+;C,C+) 1,560,999,854 :>-,<-),),, 13+1$3+143044 >;>,C>+,:<) ;:-,*,:,>)<

>,;>:,)<+,-*;,)-+,)><,;*) 1+3$$4300$341 0 C,;)*,;>+,<:< -,;,>,*,+*< 4,800,417,121 ),;);,,*<,*** :,)*,,-:C,>C, ;;-,);:,)<; 5,135,809,696 535(13$$13814 >,);:,),<,-;> C*F

>,-<C,*)*,*-* ;,:)*,>)*,*-) 1(354(3++0311 $ C,-<*,;);,+:C -+C,,+<,,,C 4,714,695,387 ),;);,,*<,*** :,)*,,-:C,>C, ;-*,>+>,+); 5,117,983,066 538($31483+0( >,:>*,,+:,,*; );.>-F

>,,)*,++>,;-, -,-,:,+-:,C<C 1(305$3(+13(( 5 C,,><,;*>,)+* ->*,)*-,<)< 4,586,112,785 ),;);,,*<,*** :,)*,,-:C,>C, ;<C,,)>,+-< 5,091,243,122 531443(003504 C,;:>,;;*,>CC )-.+-F

>,+C),>)-,)<-,,*<,-<<,<CC 1(3((83$8(345 1 C,+,<,--,,C<-)>,<*C,+;C 4,500,391,051 ),;);,,*<,*** :,)*,,-:C,>C, ;C<,-;-,*<< 5,073,416,492 5304(380430+( C,,+>,>,+,)>)-.:>F

>,<>>,:;:,<); -,<>*,*);,,:> 1(308+3$$13$+( C,+*<,-,*,><+ -*-,,;-,-+* 4,414,669,316 ),;);,,*<,*** :,)*,,-:C,>C, ;:-,*,:,>)< 5,055,589,862 53+403$053145 C,+:C,;+),*+> ),.+:F

8/ternal =und Beeded Bew DebtH8#uit! 2atio

"n the above scenario anal!sis, we have taken the ,F growth rate in normal situation. "f we want to be optimistic enough to predict that the econom! will have a high growth and the compan! will also able to grow at :*F to :)F. Dn the other hand, the situation can

also be worse enough to have a growth lower than the normal and the compan! ma! face a growth of <F or even CF. "n that case the good news for the compan! is that if the compan! will have to grow at <F then compan! doesn0t have to face an! loss as the rate is much closer to 1D' growth rate. @fter anal!Ging the scenario of different situation we can sa! that the pro&ected growth rate is appropriate for the compan! which will help the compan! to operate in the market even if the situation is worse. "t gives a positive indication towards the compan! and increases the shareholders confidence to invest in the compan!0s share.

4.Beta
5eta measures the responsiveness of a securit! to movements in the market portfolio 4i.e., s!stematic risk6.

i =

Co* 4 )i , )( 6

) 4 )( 6

To better understand the relationship with the market inde/ and the stock price volatilit!, 5eta calculation is commonl! used b! the financial anal!sts. 5eta can be thought of as the tendenc! of a securit!Es returns to respond to swings in the market. @ beta of : indicates that the securit!Es price will move with the market. @ beta of less than : means that the securit! will be less volatile than the market. @ beta of greater than : indicates that the securit!Es price will be more volatile than the market. Dur calculation was done using dail! stock price and inde/ price for )**, )**-. The beta value of S#uare 'harmaceuticals 7td. was determined to be 0.48$+0 *or $0047$008. !onsidering $008 the beta 'as 0.4088. "t 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 inde/ price and stock price growth rate. )**, )***.***:C *.***:+< *.,-)>>, )**.***:)) .***:,C .,*--C

9ovariance (ariance 5eta

5elow graph for dail! change in S'7 stock price $ DS8 "nde/ reveals the strong relationship.

Daily Change In SPL Price

1) 1' ) ' %) %1' %1) %(' %() %&' (''!%0ovember%1+

DSE In!e"

('' %0ovember%('

(''!%0ovember%(9

('' %0ovember%')

(''!%*anuary%1+

(''!%*anuary%(9

('' %*anuary%(+

('' %*une%((

(''!%*une%1(

(''!%*une%(!

(''!%*uly%1)

(''!%*uly%&'

('' %*une%'+

('' %*uly%(&

(''9%*anuary%')

(''!%"eptember%19

(''!%/ctober%'+

(''!%/ctober%(9

(''!%1ecember%1!

('' %,ebruary%1'

('' %"eptember%11

('' %/ctober%')

('' %/ctober%(1

(''!%"eptember%'&

"PL change3

1"4 change3

2igure $: Daily !hange in SPL Price ? DSE /nde. @04708=

8.E.%ected 6eturn o* SPL using !-P,

The general idea behind 9@'. is that investors need to be compensated in two wa!s: time value of mone! and risk. The time value of mone! is represented b! the risk free 42f6 rate in the formula and compensates the investors for placing mone! in an! 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 b! taking a risk measure 4beta6 that compares the returns of the asset to the market over a period of time and to the market premium 42m 2f6.
) i = ) + + I i 4 ) ( ) + 6

We have determined market return 2m for !ear )**- taking the Juarterl! change in DS8 "nde/. The average market return in )**- has been found to be :.,+F. "f we post all the

('' %1ecember%1+

(''!%,ebruary%1)

('' %,ebruary%(2

(''9%*anuary%(1

(''!%-arch%(1

(''!%-arch%')

(''!%.pril%(+

(''!%-ay%1&

(''!%.ugust%1+

('' %-arch%1(

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('' %.ugust%'!

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('' %*uly%'

values in the above e#uation 4considering 2fK,.<6 we get the e/pected return ) i to be C.>C<F. This is lower than the risk free rate. This is the outcome of low market return. @s such the e/pected return derived from 9@'. can not be used for stock valuation.

5.Di&idend Declaration3 2irm S%eci*ic >e's and ,arket >e's

"t has been empiricall! observed that, movement of Share 'rice of a specific compan! is significantl! influenced b! the ,-nnoun.e/ent of 0i*i1en1 0e.laration2, ,+ir/ 3pe.ifi. 4e5s2 and ,(ar6et 4e5s2. "n case of dividend declaration, one important issue is ,"780i*i1en1 0ate2 affecting share price. @n attempt was made to find whether share price of SPL behaved in accordance with the influence of these variables. -nalysis o* Stock Price 2luctuation during the year $004: The last #uarter of the !ear )**+ was more or less stable which was reflected in the following !ear until :;H*<H*, when a =irm Specific Bews came that S#uare 'harmaceuticals 7td. has obtained L9ertificate of 9.' compliance of a .anufacturerL from the .edicines and Mealthcare products 2egulator! @genc! 4.M2@6 of 7ondon on :;.*<.*,. This approval will help to start e/porting its =inished 'harmaceutical 'roducts to the 3nited Ningdom as well as to enter into the 'harmaceutical markets in other 8uropean countries, in @ustralia, in South @frica and the 199 countries in near future. Due to this news share price graduall! increased b! CC.,CF in :* da!s. This shows that .arket is not efficient enough.

Daily SPL Cl#$e Price %&''()'*+

2''' )''' +''' &''' (''' 1''' ' (''!%1ecember%1' ('' %0ovember%1' ('' %0ovember%(2 (''!%0ovember%') (''!%0ovember%(( (''!%"eptember%(+ ('' %"eptember%11 (''!%"eptember%'2 ('' %1ecember%(& (''!%*anuary%&' (''!%,ebruary%19 (''!%-ay%'2 (''!%-ay%(( (''!%*une%'! (''!%*une%() (''!%*uly%1( (''!%*uly%&' (''!%/ctober%1! ('' %*anuary%(( ('' %,ebruary%'! ('' %,ebruary%(2 ('' %*une%1( ('' %*uly%'( ('' %*uly%(' (''9%*anuary%1+ (''!%*anuary%1+ ('' %*anuary%'& ('' %-arch%1& ('' %-ay%(! ('' %/ctober%'2 ('' %/ctober%(& (''!%.pril%12 ('' %.pril%'( ('' %.pril%(1 ('' %.ugust%(2 (''!%.ugust%12 ('' %.ugust%') (''!%-arch%' (''!%-arch%( ('' %-ay%'

"PL 5lose

2igure (: -nalysis o* stock %rice *luctuation during the year $004708

Then the price remained stable until 11th AulyB04. Dn :+th Oul!0 *, the 5oard of Directors has recommended cash dividend P <*F and stock dividend P <*F for the !ear ended .arch C:, )**,. @s a result share price increased b! ><F in ; da!s. This is also a dela!ed response. @lso this was a overreaction to good news followed b! a reversion of :*.-CF decrement of share price for :C da!s. Then share price again faced a decrement of )>.+<F in C da!s following the 8/ dividend date of :<H*-H*,. -nalysis o* Stock Price 2luctuation during the year $008: Starting of )**- was a continuation of the trend of last !ear. Then it showed a unusual hike of C,.-F starting from )<H*CH*- to )*H<H*- 4C< da!s6. "n response to a DS8 #uer!, the compan! has informed that there is no undisclosed price sensitive information of the compan! for recent unusual price hike. This ma! due to rumor effect as there was no other good news. @nother e/planation ma! be that "nvestors e/pected a high dividend declaration from S'7 like )**,. @ccording to Weak =orm .arket 8fficienc! securit! prices reflect all information found in past prices and volume. So, this phenomena describes Weak =orm .arket 8fficienc!.

Dn ):H*,H*-, The 5oard of Directors has recommended cash dividend P >*F and stock dividend P C<F for the !ear ended .arch C:, )**-. This was not impressive as )**,. @s a result, share price decreased b! :,.;>F in onl! one da!. This shows a rather efficient form. Then again a decrement was found due to the CE.7Di&idend DateD phenomenon , as the Shareholders were willing to dispose their shares after getting the dividend. The record date was :>H*-H*-. @s a result share price decreased b! around )-F from :CH*-H*- to :-H*-H*- 4: da!6. This also shows a rather efficient form. @s a whole, it can be observed that, the stock price of a specific compan! is significantl! influenced b! the 8/ dividend Date phenomenon on dividend declaration, =irm specific news and .arket news. "t can be predicted that 8/ Date phenomenon will occur in somewhere around in the )nd week of @ugust for S#uare 'harmaceuticals 7td..

10. ST !" #-LE-T/

>

"n this section we shall make a pro&ection of market stock price of Square Pharmaceuticals Ltd.. "t has a securit! specific beta risk of 0.4088( and the e/pected return for the compan! is (.+(0<. 5ut the e/pected return C.>C<F is based on market return :.,+F. This phenomenon ma! be due to the fact that in )**- due to the political situation $ anti corruption activit! of the government, a lot of mone! has been invested in DS8. @s a result the price of stocks fell."t is vivid from the below graph.

DSE In!e" in &''*

&&'' &('' &1'' &''' (9'' ( '' (!'' (2'' ()'' (+''
('' %0ovember%'( ('' %0ovember%1( ('' %0ovember%(+ ('' %"eptember%'9 ('' %"eptember%(1 ('' %1ecember%'+ ('' %*anuary%'1 ('' %*anuary%(+ ('' %-ay%1( ('' %*une%'+ ('' %*uly%1' ('' %,ebruary%') ('' %,ebruary%1! ('' %/ctober%(1 ('' %*anuary%1& ('' %-arch%11 ('' %-arch%(& ('' %-ay%() ('' %*une%1! ('' %*une%(9 ('' %.pril%'2 ('' %.pril%(9 ('' %*uly%(( ('' %.ugust%'& ('' %.ugust%1& ('' %.pril%1! ('' %1ecember%( ('' %,ebruary%( ('' %/ctober%' ('' %.ugust%(

dse close

2igure : Trend o* DSE /nde. in $008

@s the 8/pected 2eturn derived from 9@'. is too low 4C.>C<F6, we shall use another formula for e/pected rate of return. ksK4D:H'*6Qg

=or growth rate, we took the gK22R2D8 as 4<. 3sing this growth rate, from this formula we get the 8/pected 2eturn 5.$(<. 3sing the above information we can forecast e/pected stock value for SPL using the 1ordon .odel 4Dividend (aluation .odel6. We assume that dividends will grow at a constant rate, 9, 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 perpetuit!: Where,

P0

Div : 6s 9

Div: = Div * 4: + 9 6

We assume gK,F $ kK;.)CF. =rom all the above information we can forecast the future stock price for )**;. So the stock price for :st Oanuar!, )**;6 would be BDT (8+0. 5ut the real average stock price for first three months in )**; was 5DT );<;.>:. The average stock price is )CF lower than our forecasted price. This indicates the price of SPL share is undervalued in the market. The e/planation for lower market price ma! be due to decreasing trend in the 1eneral "nde/.

11. !onclusion
@fter anal!Ging all the ratios, we have found out the following information about S#uare 'harmaceuticals 7td: "n the li#uidit! ratios we can see that both current ratio and #uick ratio are below the benchmark and for the last five !ears the both the ratios have been deteriorated. This reveals that the compan! is not holding the short7term sol&ency. Muge inventories have been piled up in last !ear that consumed cash. .ost alarming is cash ratio which has drasticall! gone down since )**> but slightl! improved in )**,. The firm should be concerned to promote cash sales, ma! be, b! means of cash discount. "n asset management ratios we can see inventor! turnover ratio, DSD and total asset turnover slightl! deteriorated in )**,. Mowever the all the ratios are better than 5e/imco

'harmaceuticals 7td. @lso the DSD of S#uare pharmaceuticals indicates that it collects the sales faster than 5e/imco 'harmaceuticals 7td. Debt management ratios give a clear idea about long term solvenc! of S#uare 'harmaceuticals 7td. The debt ratio increased slightl! in )**,. T"8 and 9ash coverage ratio are better than 5e/imco 'harmaceuticals 7td. 'rofit margin 2atio, 2D@ and 2D8 of S#uare pharmaceuticals 7td has deteriorated compared to the previous !ears. @lthough the decrease rate is not so high still it is a problem for S#uare and the! need to tr! to improve these ratios. 5oth 'H8 and .H5 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. =or e/ample, in an inflationar! econom! inventories being piled up might indicate profit potentials of the ne/t !ear as the cost of production of the ne/t !ear would go down compared to industr! due to cost savings in inventories. =rom the total anal!sis, we can summariGe that for the last !ear )**,, even though S#uare 'harmaceuticals 7td. deteriorated in all the ratios, but still holding the better position compared to 5e/imco 'harmaceuticals 7td @the best alternati&e *orgone= and this has been reflected through the increment in share price and in 'H8 and .H5 ratios. The firm gained the trust of the investors. S#uare 'harmaceuticals 7td might have a good news that is not reflected in other ratios but investors know. Therefore we can come to the conclusion that S#uare 'harmaceutical 7td is a better compan! to invest on.