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Chapter-1
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Introduction
This course Financial Market and Institution ( F-304) shows the importance of importance
of financial markets and institution in the present era. The stock market activities and
procedure is thoroughly discussed in this course .To understand the stock pricing valuations
from practical viewpoint, we discussed in this report about various ways of valuation
methods for stock of Singer BD and factors that affect the Singer , BDs stock prices
1.3 Methodology
The type of methods used in this report is mainly of a descriptive nature. Mainly secondary
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Certain data for this report has been extracted from secondary sources, since the descriptive
nature of the study to prepare this report calls for existing facts and information compilation.
1.4 Limitations
Although we have tried our level best to prepare a fault free report by valuing stock for
previous several years. But because of our lack of professional knowledge we may make
some unintentional mistakes in case of interpreting the ratios. We are also unable to some
extent to understand the firms management policy in case of internal important executive
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Chapter-2
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Theoretical overview
Dn
(1+r)n
Where, n = period
Dn = Dividend in t period
r = Discount rate
Limitation of Dividend Discount Model: The DDM may result in an inaccurate
valuation for a firm if errors are made in determining the dividend to be paid over the
next year or in the growth rate or the required rate of return. The limitations of this model
are more pronounced when valuing firms that retain most of their earnings, rather than
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distributing them as dividend, because the model relies on the dividend base for applying
Adjusted Dividend Discount Model: The dividend discount model can b adapted to
assess of any firm, even those that retain most or all of their earnings. From the
investors perspective , the value of the stock is
(1) The PV of the future dividends to be received over the investment horizon,
(2) The PV of the forecasted price at which the stock will be sold at the end of
the investment horizon
Limitation of Adjusted Dividend Discount Model: The Adjusted Dividend
Discount Model may result in an inaccurate valuation for a firm if errors are made in
deriving the PV of dividends over the investment horizon or the PV of the forecasted
price at which the stock can be sold at the end of the investment horizon. The required
rate of return may also lead to error.
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given below:
particular firm.
to include factors which are relevant in deriving the required rate of return for a
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An increase in economic growth is expected to increase the demand for products and
services produced by firms and therefore increase a firms cash flows and valuation.
Participants in the stock market monitor economic indicators such as employment, gross
domestic products, retail sales, and personal income because this indicators may signal
information about economic growth and therefore affect cash flows. In general,
unexpected favorable information about the economy tends to cause a favorable revision
of a firms expected cash flows and therefore places upward pressure on the firms value.
Because the government fiscal and monetary policies affect economic growth, they are
also continually monitored by investors. If it looks like the economy is going to expand,
stock prices may rise. Investors may buy more stocks thinking they will see future profits
and higher stock prices. If the economic outlook is uncertain, investors may reduce their
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ii.
The Bangladesh bank can raise or lower interest rates to stabilize or stimulate the
Bangladesh economy. This is known as monetary policy. If a company borrows money
to expand and improve its business, higher interest rates will affect the cost of its debt.
This can reduce company profits and the dividends it pays shareholders. As a result, its
share price may drop. And, in times of higher interest rates, investments that pay interest
tend to be more attractive to investors than stocks.
iii.
Investors sentiment:
Investor sentiment or confidence can cause the market to go up or down, which can cause
stock prices to rise or fall. Since the stock valuations reflect expectations in some periods
the stock market performance is not highly correlated with existing economic conditions.
For example, even though the economy is weak stock prices may rise if most investors
expect that the economy will improve in the near future. That is there is a positive
sentiment because of optimistic expectations. The general direction that the stock price
takes can affect the value of a stock:
Bull market a strong stock market where stock prices are rising and investor
Bear market a weak market where stock prices are falling and investor confidence
is fading. It often happens when an economy is in recession and unemployment is
high, with rising prices.
ii.
January effect:
The January effect is a hypothesis that there is a seasonal anomaly in the financial market
where securities' prices increase in the month of January more than in any other month.
Because many portfolio managers are evaluated over the calendar year, they tend to
invest in riskier small stocks at the beginning of the year and shift to larger companies
near the end of the year to lock in their gains. This tendency places upward pressure on
small stocks in January of every year, causing the so called January effect. Some studies
have found that most of the annual stock market gains occur in January. Once investors
discover the January effect they attempted to take more positions in the prior month. This
has placed upward pressure on stocks in mid- December, causing the January effect to
begin in December.
ii.
Earnings Surprises:
Earnings are used to forecast a firms future cash flows. When a firms announced
earnings are higher than expected, some investors raise their estimates of the firms future
iii.
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cash flows and revalue its stock upward. If announced expected earnings are lower than
The expected acquisition of a firm increases its demand for targets stock and therefore
raises the stock price. But this effect is less clear, as it depends on the perceived synergies
that could result from acquisition. On the other hand, divestitures tend to be regarded as a
favorable signal about a firm if the divested assets are unrelated to the firms core
business. This indicates that firm intends to focus on its core business.
Expectations:
Investors attempt to anticipate new policies so that they can make their move in the
market before other investors. These help them to pay a lower price for a specific stock or
sell the stock at a higher price. But investors may not properly anticipate the firms
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iv.
Chapter-3
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Practical overview
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In this case, the price of the stock depends on the expected dividend, growth rate and discount
rate.
Year-1
22
0.090
1.090
1.090
20.175
Year-2
22
0.090
1.090
1.189
18.502
Year-3
22
0.090
1.090
1.297
16.967
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Accounts
Dividend
R
1+r
(1+r)^n
Dividend/(1+r)^n
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PV of stock:
prices will also often lead to higher interest rates. For example, the Bangladesh Bank may
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Inflation means higher consumer prices. This often slows sales and reduces profits. Higher
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Impact of Inflation:
raise interest rates to slow down inflation. These changes will tend to bring down stock
prices. Commodities however, may do better with inflation, so their prices may rise.
Impact of Deflation:
Falling prices tend to mean lower profits for companies and decreased economic activity.
Stock prices may go down, and investors may start selling their shares and move to fixedincome investments like bonds. Interest rates may be lowered to encourage people to borrow
more. The goal is increased spending and economic activity. The Great Depression (19291939) was one of the worst periods of deflation ever.
Impact of Economic and political shocks:
Changes around the world can affect both the economy and stock prices. For example, a rise
in energy costs can lead to lower sales, lower profits and lower stock prices. An act of
terrorism can also lead to a downturn in economic activity and a fall in stock prices.
Impact of Changes in economic policy:
If a new government comes into power, it may decide to make new policies. Sometimes these
changes can be seen as good for business, and sometimes not. They may lead to changes in
inflation and interest rates, which in turn may affect stock prices.
The value of the Bangladeshi Taka:
Many Bangladeshi companies sell products to buyers in other countries. If the Bangladeshi
taka rises, their customers will have to spend more to buy Bangladeshi goods. This can drive
down sales, which in turn can lead to lower stock prices. When the price of the Bangladeshi
taka falls, it makes it cheaper for others to buy our products. This can make stock prices raise.
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Investor sentiment:
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Investor sentiment or confidence can cause the market to go up or down, which can cause
stock prices to rise or fall. Since the stock valuations reflect expectations in some periods the
stock market performance is not highly correlated with existing economic conditions. Even
though the economy is weak stock prices of Singer BD rise sometimes if most investors
expect that the economy will improve in the near future. That is there is a positive sentiment
because of optimistic expectations
January effect:
The January effect is a hypothesis that there is a seasonal anomaly in the financial market
where securities' prices increase in the month of January more than in any other month the
prior month. This has placed upward pressure on stocks in mid- December, causing the
January effect to begin in December. But its impact is not so much severe in case of Singer
BD in Bangladesh
2014
219.00
22.00
2013
186.80
21.00
2012
164.00
15.00
2011
287.40
3.00
2010
716.90
67.50
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Year
The company declares 195% cash dividend and 25% stock dividend constantly. Here we can
see that the stock price is reflected by the change in dividend payment. As of 2013 data, the
dividend per share increases to 21.00 from 15.00 and the market value per share increases
from 164.00 to 186.80. In 2014 the dividend per share is 22.00 and market value per share is
219.00. So, we can say that the market value per share data is consistent with the dividend
per share data.
Earnings surprises:
Expectation about earnings and future earnings affect Singer BDs stock price. Investors
monitor closely the P/E ratio, EPS, ROI, and R/E to accurately value the company. These
ratios provide the investors with the future expected cash flow of the company. Base on their
expectation, investors value the Singer BDs stock price.
The higher P/E ratio is the greater investors confidence. If the price of the share is too much
lower than the earning of the company, the stock is undervalued and it has the potential to
rise in the near future and vice versa. EPS helps decide the health of the company and
influence the buying tendency in the market. And Net income is the reason of high dividend
and important determinant, because expected dividend depends on it.
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Conclusion
Finally we can say that valuation is very important for a company. The stock price of a
company represent it current market condition. Here we follow several methods for valuating
Singer BDs stock. We basically use CAPM, PE ratio and Dividend Discount Model for its
stock valuation. Each of the methods are important for valuation. And there are some macro
and micro economic factors that affect the price of a stock. The stock price of Singer BD is
also affected by such factors like economic factors, market related factors and firm specific
factors. We have learnt that how much each of the factors affect the market price of Singer
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BD stock. Inflation, deflation, exchange rate also influence the stock prices.
Reference:
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Appendix
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