A Report on

Stock Valuation & Option Pricing

Submitted to:

Farhana Zahir, CFA, FRM, CAIA,

Lecturer,
Department of Accounting and Finance,
School of Business and Economics,
North South University

Submitted by:

NAME ID
SUJIT KUMAR DHAR 1411666030
MD. AYUBUR RAHMAN 1410071030
MD. ASAD- UZ- JAMAN 1411166030
MD. SHORAB PATOARY 1410420030

Course: FIN480
Section: 01

Date of Submission: December 6, 2016

Page | 1
 Table of Contents
Content Page Number
Stock Selection for Call Option 3
Company Profile 3
Fundamental Analysis 5
Technical Analysis 8
Price Volume Chart 10
Regression Analysis 11
Return Distribution 12
Option Pricing Using Binomial Model 13
Option Pricing Using Black Scholes Model 14
Stock Selection for Put Option 15
Company Profile 13
Fundamental Analysis 17
Technical Analysis 19
Price Volume Chart 21
Regression Analysis 22
Return Distribution 23
Option Pricing Using Binomial Model 24
Option Pricing Using Black Scholes Model 25
Reference 26

Page | 2
 Stock Selection for Call Option
HEIDELBERG CEMENT

Company Profile
Basic Information
Company Name Heidelberg Cement Bangladesh
Limited
Financial Year End December
Owner Heidelberg cement-Netherlands
Holding ( 39.80 % )

Stock Statistics
Market Capitalization (BDT) 30,641,891,434.00
Shareholders Equity (BDT) 577,884,700.00
Book Value Per Share (BDT) 102.27
Forward P/E 14.11
EPS (BDT) 24.81
Audited P/E (x) 21.94
Trading Currency Bangladeshi Taka
Market Category A
Market Lot 1
Last Dividend Declaration Date Sunday, February 28, 2016
AGM Date Wednesday, April 13, 2016

Share Capital
56,503,580.00
Total Shares

Paid Up Capital (BDT) 565,035,800.00

Growth

Annual Revenue Growth -0.18%

Annual Net Profit Growth 18.86%
Operating Profit Growth 30.26%

Page | 3
 Profitability & Investment Return
Gross Profit Margin 24.20%
Operating Profit Margin 16.24%
Net Profit Margin 13.37%
ROA 25.15% Sector P/E
ROE 39.48% Cement 30.85

Page | 4
Fundamental Analysis
Market Multiplier Model

We have used market multiplier model to find the intrinsic value of HEIDELBERG CEMENT.

Name Price Dividend Payout Dividend NAV P/E EPS ROA ROE
yield ratio
HEIDELBCEM 550.2 5.45% 144% 300% 102.70 22.18 24.8 25.15% 39.48%
CONFIDCEM 91.3 3.01% 38% 28% 68.95 17.16 5.3 4.96% 8.21%
MEGHNACEM 101.2 1.48% 33% 15% 36.10 22.59 4.5 2.43% 12.33%
ARAMITCEM 37.2 2.69% 204% 10% 14.98 72.94 0.5 0.82% 3.19%
LAFSURCEML 74.6 0.67% 25% 5% 12.37 37.87 2.0 14.91% 21.93%
MICEMENT 82.7 3.02% 57% 25% 39.59 18.92 4.4 5.54% 11.23%
PREMIERCEM 93.1 2.15% 31% 20% 40.39 24.31 3.8 4.11% 12.20%

From the above chart of cement industry, we can see that is Heidelberg trading at a lower P/E ratio
than industry average but has a higher ROA and Revenue growth than industry average. Therefore,
we think it is cheaper compared to industry.
Heidelberg EPS = 22.18

Page | 5
Dividend Discount Model

Year Net income After tax EPS EPS Growth Price P/E
2011 749,661,000.00 13.27 255.90 19.29
2012 1,291,095,000.00 22.85 72% 264.70 11.58
2013 1,474,077,000.00 26.09 14% 380.70 14.59
2014 1,179,554,000.00 20.88 -20% 499.40 23.92
2015 1,401,983,000.00 24.81 19% 562.10 22.65
2016 1,639,502,959.48 29.02 17% 657.33 22.65
2017 1,917,262,872.77 33.93 17% 768.69 22.65
2018 2,242,080,078.01 39.68 17% 898.92 22.65
2019 2,621,926,887.34 46.40 17% 1051.21 22.65
2020 3,066,126,259.26 54.26 17% 1229.31 22.65

Year EPS DPS Payout Ratio P/E Dividend

yield
2011 13.27 4.50 34% 19.29 2%
2012 22.85 5.00 22% 11.58 2%
2013 26.09 38.00 146% 14.59 10%
2014 20.88 38.00 182% 23.92 8%
2015 24.81 30.00 121% 22.65 5%
2016 29.02 42.78 147% 22.65 7%
2017 33.93 50.03 147% 22.65 7%
2018 39.68 58.51 147% 22.65 7%
2019 46.40 68.42 147% 22.65 7%
2020 54.26 80.01 147% 22.65 7%

S/L Year DPS Present value Terminal value

1 2016 42.78 32.17
2 2017 50.03 28.29
3 2018 58.51 24.87
4 2019 68.42 21.87
5 2020 80.01 19.23 1229.31

Page | 6
HEIDELBERG CEMENT
Number of share 56,503,580.00
Average EPS Growth 17%
Average P/E 18.41
Required Rate of Return 33%
Market Price 546.9
Intrinsic value 1355.7
Decision Under valued

Industry
Sector P/E 25.5
Beta Coefficient 1.13
Risk Free Rate 7.25%
Market Return 30%

Year Dividend
2011 45%
2012 50%
2013 380%
2014 380%
2015 300%

Page | 7
Technical Analysis

Page | 8
To support our fundamental analysis, we also did technical analysis which positively react with our
fundamental analysis. For technical analysis, we took 3/4 indicator to confirm our decision about
price. In technical price graph, we saw that Heidelberg price decreasing for a longtime, which shows
that Heidelberg price correction is almost done, so price will go up.

MACD: Moving average convergence and divergence shows that in near future price will go
up because price line (blue color) is crossing the signal line (orange color). So, we are predicting price
will go up.

Bollinger band: Recently Heidelberg Bollinger band is narrowing, so we can

expect that it will expand by increasing price level. when Bollinger band is narrowing down (lower
standard deviation) price will move by expanding it. So, we predict that Heidelberg price will
positively move forward.

William %R: William %R value shows identical stock is overbought or oversold. In

technical graph, we saw that price is close to lower bound so oversold and expecting price will go up.

Accumulation/Distribution: In Graph, we saw that Heidelberg price

is close to lower bound which means the stock is in accumulation level and after accumulation price
will go up.

Page | 9
 Closing Price

470
480
490
500
510
520
530
540
550
560
570
7-Apr-16
11-Apr-16
13-Apr-16
18-Apr-16
20-Apr-16
24-Apr-16
26-Apr-16
28-Apr-16
3-May-16
5-May-16
9-May-16
11-May-16
15-May-16
17-May-16
19-May-16
24-May-16
26-May-16
30-May-16
1-Jun-16
5-Jun-16
7-Jun-16
9-Jun-16
13-Jun-16
15-Jun-16
19-Jun-16
21-Jun-16

Volume
23-Jun-16
27-Jun-16
29-Jun-16
10-Jul-16
12-Jul-16
14-Jul-16
17-Jul-16
19-Jul-16
Heidelberg

21-Jul-16
25-Jul-16
27-Jul-16
31-Jul-16

Closing Price
2-Aug-16
Price & Volume Chart

4-Aug-16
8-Aug-16
10-Aug-16
14-Aug-16
Price and Volume Chart

17-Aug-16
21-Aug-16
23-Aug-16
28-Aug-16
30-Aug-16
1-Sep-16
5-Sep-16
7-Sep-16
18-Sep-16
20-Sep-16
22-Sep-16
25-Sep-16
27-Sep-16
29-Sep-16

Page | 10
2000
22000
42000
62000
82000
102000
122000
142000
162000
182000
202000

Volume
Regression Analysis

0.03

y = 0.4459x + 4E-05
0.03 R = 0.0687

0.02

0.02

0.01

0.01

0.00
-1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

-0.01

-0.01

-0.02

-0.02

-0.03

Series1 Linear (Series1) Linear (Series1)

Page | 11
Return Distribution

Return Distribution
25

20
Frequency

15

10

Return

We have calculated the skewness and kurtosis of the return distribution ofHEIDELBERG CEMENT.
The skewness of HEIDELBERG CEMENT is 0.383045284 and kurtosis is0.479109
Skewness measures the degree of asymmetry of a distribution around its mean. Positive skewness
indicates a distribution with an asymmetric tail extending toward more positive values. Negative
skewness indicates a distribution with an asymmetric tail extending toward more negative values.
Kurtosis measures the degree to which a distribution is more or less peaked than a normal
distribution. Positive kurtosis indicates a relatively peaked distribution. Negative kurtosis indicates a
relatively flat distribution. A normal distribution has a kurtosis of 3. Therefore, an investment
characterized by high kurtosis will have "fat tails" (higher frequencies of outcomes) at the extreme
negative and positive ends of the distribution curve. A distribution of returns exhibiting high kurtosis
tends to overestimate the probability of achieving the mean return. In order to be normally
distributed, return distributions should have a skewness close to 0 and kurtosis close to 3.
Based on our data, the skewness of HEIDELBERG CEMENT is 0.383045284 and kurtosis
is0.479109; while the skewness of HEIDELBERG CEMENT suggests normal distribution with an
asymmetric tail extending toward more positive values although it is very close to 1, kurtosis
measurement points away from normal distribution rather it indicates relatively peaked distribution

Page | 12
Option Pricing Using Binomial Model
Current Market Price, So 544.00
Exercise Price, X 625.60
Risk Free Rate, rf 4.54%
Time to Maturity, T 2
Probability of going up 20%
Probability of going down 20%
u , (Up factor) 1.20
d , (down factor) 0.8
Risk Neutral Probability of going up, 61%
Risk Neutral Probability of going down, 1 39%

61% 783.36
157.76
20% Up

61% 652.8
92.58
20% Up
20% Down
544.00 522.24
54.33 0
20% Up
20% Down
0
39% 435.2

20% Down
0
39% 348.16

Page | 13
Option Pricing Using Black Scholes Model

Option Pricing
Current Market Price, So 544.00
Exercise Price, X 625.6
Risk Free Rate, rf 4.54%
Time to Maturity, T 2
Annualized Standard Deviation, 12%
Annualized Variance 1.5%
Continuous Risk Free Rate, rc 4.44%
1 -0.205
2 -0.380
N(d1) 0.423
N(d2) 0.356

Call Option Price, C=25.7848

Page | 14
 Stock Selection for Put Option
BSRM Steel
We have select BSRM-Steel Stock expected to go down by 20%. We have done our fundamental and
technical analysis to support our hypothesis.

Company Profile

Basic Information
Company Name BSRM Steels Limited
Establishing Date 1952
Financial Year End December
Auditor Rahman & Rahman Huq

Stock Statistics
Market Capitalization (BDT)
35,476,245,000
Shareholders Equity (BDT)
10,369,794,575
Book Value Per Share (BDT) 30.34
Last Audited P/B Ratio (x) 3.42
Forward P/E 9.51
EPS (BDT) 6.14
Audited P/E (x) 17.04
Trading Currency Bangladeshi Taka
Market Category A
Market Lot 1
Last Dividend Declaration Date Thursday, February 11, 2016
AGM Date Wednesday, March 30, 2016

Page | 15
 Share Capital
Total Shares 341,775,000
Paid Up Capital (BDT) 3,417,750,000

Growth
Annual Revenue Growth -13%
Annual Net Profit Growth 68%
Annual Operating Profit Growth 44%

Profitability& Investment Ratio

Gross Profit Margin 14%
Operating Profit Margin 11%
Net Profit Margin 6%
ROA 7%
ROE 22%

Liquidity Position
Current Ratio 0.59
Quick Ratio 0.29
Debt to Equity Ratio 1.48
Debt to Total Capital 0.6
Debt to Total Assets 0.54
Financial Leverage 2.75
Interest Coverage 2.58

Page | 16
Fundamental Analysis
We use dividend discount model to calculate intrinsic value of BSRM Steel.

BSRM Year Net income after EPS EPS Growth Price P/E
Tax
2011 977,328,048 2.86 118.5 41.4
Historical

2012 1,001,207,077 2.93 2% 67.9 23.2

2013 1,401,589,117 4.10 40% 68.7 16.8
2014 1,247,558,867 3.65 -11% 87.7 24.0
2015 2,097,290,420 6.14 68% 96.3 15.7
2016 2,619,280,227 7.66 25% 152.6 19.9
Forecasted

2017 3,271,186,881 9.57 25% 190.6 19.9

2018 4,085,345,089 11.95 25% 238.0 19.9
2019 5,102,137,268 14.93 25% 297.3 19.9
2020 6,371,996,522 18.64 25% 371.2 19.9

In 2011, the EPS of BSRM Steel was 2.86. In 2012, EPS had increased by 2%. The growth rate was
40% in 2013. In 2014, we got a negative growth rate, which was -11%. In 2015, growth rate had
raised in 68%.

Based on former EPS growth rate, we believe that forecasted rate should be 25% on average.

BSRM Year DPS EPS Payout Ratio P/E

2011 1.5 2.86 52% 41.4
Historical

2012 1.0 2.93 34% 23.2

2013 1.5 4.10 37% 16.8
2014 1.5 3.65 41% 24.0
2015 3.0 6.14 49% 15.7
2016 3.3 7.66 43% 19.9
Forecasted

2017 4.1 9.57 43% 19.9

2018 5.1 11.95 43% 19.9
2019 6.4 14.93 43% 19.9
2020 7.9 18.64 43% 19.9

Our average payout ratio is 43%. By multiplying average payout ratio with pervious years DPS, we
get our forecasted DPS of 2016 to 2020.
Page | 17
By discounting forecasted DPS with average payout ratio, we get the present value of DPS; and by
using perpetuity formula we get our terminal value. We also discount it by average payout ratio.

Finally adding all the numbers, we get our intrinsic value, which is67.29 taka. On the other hand,
market value of BSRM is 93.4 taka.

So, BSRM Stock is over-valued by (58.69 93.4) or -34.92 taka.

S/L Year DPS Present value Terminal Value

1 2016 3.3 2.26
2 2017 4.1 1.95
3 2018 5.1 1.68
4 2019 6.4 1.45
5 2020 7.9 1.26 58.69

Page | 18
Technical Analysis
To support our technical analysis, we have taken consider of RSI and William %R of BSRM Steel.

Page | 19
For supporting our fundamental analysis, we also did technical analysis for BSRM. By technical
analysis, we realize that technical analysis positively react with fundamental analysis for BSRM
steel. So, we confirm that BSRM is overprice and in near future price will go down.
In technical price graph which also support that for a long time BSRMsteel price is increasing so price
will go for correction and we expecting price will go down. For technical analysis we use 3/4
technical indicator below:

Stoch RSI: Stoch. RSI also measure overbought and oversold situation of a specific stock
in the marker. BSRM Steel RSI is around 70 which indicates that BSRM steel is overbought and we
are expecting price will go down.

MACD: Moving average convergence and divergennce indicates that whether price will go up
or goes down. Here, Price line (orang color) cross the singnal line (blue line) from up to down so it
indicates that price will go down.

William %R: William %R value shows identical stock is overbought or oversold. In

technical Price graph, the %R shows that BSRM steel %R is close to upper bound so overbought and
expecting price will go down in near future.

Page | 20
Price& Volume Chart

110 5,035,000.00
BSRM Steel 4,535,000.00
105 Price & Volume Chart 4,035,000.00

3,535,000.00
100
3,035,000.00

95 2,535,000.00

Volume
Closing Price

2,035,000.00
90
1,535,000.00

1,035,000.00
85
535,000.00

80 35,000.00

4-Aug-16
3-May-16
5-May-16
9-May-16
30-Mar-16

2-Aug-16
8-Aug-16

18-Sep-16
20-Sep-16
22-Sep-16
25-Sep-16
11-Apr-16

10-Jul-16
12-Jul-16
14-Jul-16
17-Jul-16
19-Jul-16
21-Jul-16
25-Jul-16
27-Jul-16
31-Jul-16

1-Sep-16
5-Sep-16
7-Sep-16
7-Jun-16
13-Apr-16
18-Apr-16
20-Apr-16
24-Apr-16
26-Apr-16
28-Apr-16

13-Jun-16
15-Jun-16
19-Jun-16
21-Jun-16
23-Jun-16
27-Jun-16
29-Jun-16
3-Apr-16
5-Apr-16
7-Apr-16

11-May-16
15-May-16
17-May-16
19-May-16
24-May-16
26-May-16
30-May-16
1-Jun-16
5-Jun-16
9-Jun-16

10-Aug-16
14-Aug-16
17-Aug-16
21-Aug-16
23-Aug-16
28-Aug-16
30-Aug-16
Volume Closing Price

From 26th April, price of BSRM was increasing and at 9th May 2016, it was in peak. On that day,
BSRM sales volume was high. But, it went down day by day. From 23 rd June, it was started to
increase at a low rate. But later on its moving downward. As BSRM is overvalued, so we think price
will go down in future. For better assumption, we compare return of BSRM and DSE.

Page | 21
 BSRM Steel
Daily return 0.001197
Daily Standard deviation 0.016199
Annualized Return
Annualized Standard deviation

DSEX
Daily retun 0.000549
Daily Standard deviation 0.000549
Annualized Return
Annualized Standard deviation

Regression Analysis

Regression y = 0.0554x + 0.0005

3.00% R = 0.0383

2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00%
-0.50%
-1.00%
-1.50%

Here, correlation between BSRM & DSE is 0.0383 and beta is 0.0554.

Page | 22
 Return Distribution

Return Distribution
30

25

20
Frequency

15

10

Return

We have calculated the skewness and kurtosis of the return distribution of BSRM-Steel. The
skewness of BSRM-Steel is 0.89 and kurtosis is 2.82.
Skewness measures the degree of asymmetry of a distribution around its mean. Positive skewness
indicates a distribution with an asymmetric tail extending toward more positive values. Negative
skewness indicates a distribution with an asymmetric tail extending toward more negative values.
Kurtosis measures the degree to which a distribution is more or less peaked than a normal
distribution. Positive kurtosis indicates a relatively peaked distribution. Negative kurtosis indicates a
relatively flat distribution. A normal distribution has a kurtosis of 3. Therefore, an investment
characterized by high kurtosis will have "fat tails" (higher frequencies of outcomes) at the extreme
negative and positive ends of the distribution curve. A distribution of returns exhibiting high kurtosis
tends to overestimate the probability of achieving the mean return.
In order to be normal distributed, return distributions should have a skewness close to 0 and
kurtosis close to 3. Based on our data, the skewness of BSRM is 0.89 and kurtosis is 2.82; while the
skewness of BSRM suggested that,an asymmetrical distribution with a long tail to the right (higher
values). On the other hand, Kurtosis suggested that, it is a flatter distribution.

Page | 23
 Binomial
Current Market Price, So 93.4
Exercise Price, X 79.39
Risk Free Rate, rf 4.54%
Time to Maturity, T 2
Probability of going up 20%
Probability of going down 20%
u , (Up factor) 1.20
d, (down factor) 0.8
Risk Neutral Probability of going up, 61%
Risk Neutral Probability of going down, 1 39%

61% 134.50
0.00
20% Up

61% 112.08
0
20% Up
20% Down
93.40 89.66
2.68 0.00
20% Up
20% Down
7.25
39% 74.72

20% Down
19.61
39% 59.78

Page | 24
Option Pricing Using Black Scholes Model
Current Market Price, So 93.40
Exercise Price, X 79.39
Risk Free Rate, rf 4.54%
Time to Maturity, T 2
Annualized Standard Deviation, 26%
Annualized Variance 6.6%
Continuous Risk Free Rate, rc 4.44%
1 1.75
2 1.39
N(d1) 0.96
N(d2) 0.92

Put option price, p=2.27

Page | 25
Reference

MARKET PRICE

In-text: ("Market Price", 2016)

Your Bibliography: Market Price. (2016). Dsebd.org. Retrieved 6 December 2016, from
http://www.dsebd.org/mkt_depth_3.php

STOCK

In-text: ("Stock", 2016)

Your Bibliography: Stock. (2016). Lankabd.com. Retrieved 6 December 2016, from
http://lankabd.com/services/iframes/v1/en/LANKABAFIN/companyStockOverview.html?exchang
eCode=DSE&stockSymbol=LANKABAFIN

Page | 26