FIN 435

Project 2

Submitted to:
Sayba Kamal Athoi
Department of Accounting and Finance
North South University

Submitted by:

Name: ID

Date of Submission: 21st August, 2017

 Table of Content

Title Page No

1. Discussion the Business of SQUARE Pharmaceuticals

Limited
2. Discussion the Business of City Bank

3. Risk factor in investing in the security

4. Possible negative industrial development

5. Possible negative regulation & legal development

6. Risk in forecasting

7. Valuation
8. Conclusion

9. References

Introduction:
SQUARE today symbolizes a name – a state of mind. But its journey to the growth and
prosperity has been no bed of roses. From the inception in 1958, it has today burgeoned into one
of the top line conglomerates in Bangladesh. Square Pharmaceuticals Ltd., the flagship company,
is holding the strong leadership position in the pharmaceutical industry of Bangladesh since 1985
and is now on its way to becoming a high performance global player.

SQUARE Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it

has been continuously in the 1st position among all national and multinational companies since
1985. It was established in 1958, converted into a public limited company in 1991 and listed with
stock exchanges in 1995. The turnover of Square Pharma was Taka 30.28 Billion (US$ 385.22
million) with about 18.64% market share having a growth rate of about 25.36% (April 2014–
March 2015).

SQUARE Pharmaceuticals Limited has extended its range of services towards the highway of
global market. It pioneered exports of medicines from Bangladesh in 1987 and has been
exporting antibiotics and other pharmaceutical products. Present export market covers 36
countries. This extension in business and services has manifested the credibility of Square
Pharmaceuticals Limited.

Year EPS NAV P/E % Dividend

2012 4.65 26.29 51.03 65%
2013 5.48 30.55 32.59 55%
2014 6.46 35.72 41.33 45%
2015 10.46 44.95 24.73 42.5%
2016 14.80 57.08 17.95 50%
City Bank is one of the oldest private Commercial Banks operating in Bangladesh. It is a top
bank among the oldest five Commercial Banks in the country which started their operations in
1983. The Bank started its journey on 27th March 1983 through opening its first branch at B. B.
Avenue Branch in the capital, Dhaka city. It was the visionary entrepreneurship of around 13
local businessmen who braved the immense uncertainties and risks with courage and zeal that
made the establishment & forward march of the bank possible. Those sponsor directors
commenced the journey with only Taka 3.4 crore worth of Capital, which now is a respectable
Taka 2311.78 crore as capital & reserve.

City Bank is among the very few local banks which do not follow the traditional, decentralized,
geographically managed, branch based business or profit model. Instead the bank manages its
business and operation vertically from the head office through 5 distinct Units namely

I. Business Unit
II. Branch Banking
III. Risk Unit
IV. Operations Unit
V. Support

Under a real-time online banking platform, these 5 distinct Units are supported at the back by a
robust service delivery or operations setup and also a smart IT Backbone. Such centralized
business segment based business & operating model ensure specialized treatment and services to
the bank's different customer segments.

The bank currently has total 120 branches which includes 99 online branches, 1 full-fledged
Islamic Banking branch, 1 SME service center and 11 SME/Agri branches spread across the
length & breadth of the country. Besides these traditional delivery points, the bank is also very
active in the alternative delivery area. It currently has 311 ATMs of its own; and ATM sharing
arrangement with partner banks that has more than 1150 ATMs in place; SMS Banking; Internet
Banking and so on. It already started its Customer Call Center operation. 

City Bank prides itself in offering a very personalized and friendly customer service. It has in
place a customized service excellence model called CRP that focuses on ensuring happy
customers through setting benchmarks for the bank's employees' attitude, behavior, readiness
level, accuracy and timelines of service quality.

City Bank is one of the largest corporate banks in the country with a current business model that
heavily encourages and supports the growth of the bank in Retail and SME Banking. The bank is
very much on its way to opening many independent SME centers across the country within a
short time. The bank is also very active in the workers' foreign remittance business. It has strong
tie-ups with major exchange companies in the Middle East, Europe, Far East & USA, from
where thousands of individual remittances come to the country every month for disbursements
through the bank's large network of 99 online branches and SME service centers. 

The current senior management leaders of the bank consist of mostly people form the
multinational banks with superior management skills and knowledge in their respective
"specialized" areas. The newly launched logo and the pay-off line of the bank are just one initial
step towards reaching that point.

Year EPS NAV P/E % Dividend

2012 1.26 28.4 22.3 10%
2013 0.71 26.7 18.5 20%
2014 2.05 27.7 8.6 20%
2015 4.1 29.01 5 22%
2016 5.72 28.09 6.1 24%

Risk factor in investing in the security:

The risk factor we are considering to invest in the security is systematic and unsystematic risk.
The systematic refers to the fact that risks to these stock traits cannot be diversified away. Risk is
an integral part of investing. Generally, the investor take greater risk to achieve greater return,
but additional risk sometimes does not lead to greater return. The investor who do not bear risk
have a small chance to earnings higher return. On the other hand, higher return is associated with
higher risk of price fluctuations.

Risk of capital loses: When a company not performing well or when the company perception is
negative the share price may fall or below the price that you are already paid. So, in this case
chance to lose the capital

Volatility risk: Share price may be very volatile and it can be fluctuating in the shorter period. It
can be applying for individual’s stock or market itself.

Market risk: There is a chance that when entire market will decline, and this can be affected the
price or value of the securities. It can be happening when the interest rate changes.

Sector specific risk: This is the situation when the entire sector will be affected by any uncertain
situation.

Stock specific risk: It is a similar too sector specific risk, this is the risk that when an investor
will experience that share price will decline due to negative news flow or poor sentiment of the
company.

Time risk: This is the risk that you buy a share in a wrong time. All sector not follow the same
rule but proper business understanding may arise this situation.

Exchange rate risk: This is the risk that investments in a foreign currency lose value when
converted to your local currency, due to movements in the exchange rates between the two
currencies.

The possible negative industrial development:

Industry development is not an easy task and not always profitable because there are some
negative impact of industry development occurs.

1. Loss of fertile agricultural land for industrial development requires a wide area, both to
establish the industry itself and for other infrastructure, such as housing, and offices.
2. Industry can cause pollution, especially in the form of air pollution, water, soil and sound
pollution. Industrial waste that is not processing first will harm the health and livelihood
of farmers in surrounding areas.
3. Emergence of lifestyle who prefer foreign-made because of the demands of mere
prestige.
4. Occurrence of increased urbanization in the cities.
5. The emergence of consumerism in public behavior and extravagant lifestyle.

Possible negative regulatory and legal developments:

Regulation plays important role for the industry development, Different types of regulations
generate various impacts on innovation, and even a single specific regulation can influence
innovation in various ways differentiating between innovation input, i.e. research and
development, and output, e.g. Incremental or radical innovations, often depending on how it is
implemented.

 Low Competition and unsecure Regulation

 Antitrust Regulation
 Mismanagement of merger and acquisition
 Price upregulation

Possible negative company development

Company development is a good for the economy but this development has a positive impact and
has a negative impact of the economy. The possible negative impact is discussed below.

 Health challenges
 Increase in income inequality
 Increase pollution
Risks in the Forecasts

The main concepts in risk and models to forecast risk are discussed, especially volatility, value-
at-risk and expected shortfall. The focus is both on risk in basic assets such as stocks and foreign
exchange, but also calculations of risk in bonds and options.

CFOs have had to deal with a variety of uncertainties and risks. From the traditional operational,
financial, credit and market risks to strategic risks, the list goes on. Yet despite having
knowledge of these risks and how they can derail the company from its successful course, very
few CFOs and their team’s factor risk management into their financial forecasts, budgets and
plans.

Valuation:
In the valuation of equity, we used two-stages dividend discount model (DDM), comprises two
parts assumes that dividend will go through two stages of growth and first stages dividend goes
by a constant rate then second stage go through a different rate for the reminder of the company
life.

This procedure has many variations, and it doesn't work for companies that don't pay out
dividends. The principle behind the model is the net present value (NPV) of the cash flows. To
get a growth number, one option is to take the return on equity (ROE) and multiply it by the
retention ratio (which is the opposite of the payout ratio).

SQUARE Pharmaceuticals Limited

Year 1 2 3 4 5
Dividend 5.59% 6.24% 6.97% 7.78% 8.70%
The above dividend for high growth period, this dividend is up to 10 year. In our calculated
dividend shows that dividends are increasing by every year at a steady rate. In dividend discount
model, we find out 5.59% in year 1 and 6.24% in year and this rule will follow reminder of year.

Growth period Value

0 - 581.04৳
1 - 572.49৳
2 - 564.02৳
3 - 555.62৳
4 - 547.31৳
5 - 539.07৳
6 - 530.92৳
7 - 522.84৳
8 - 514.83৳
9 - 506.90৳
10 - 499.05৳

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an
investment opportunity. DCF analysis uses future free cash flow projections and discounts them
to arrive at a present value estimate, which is used to evaluate the potential for investment. If the
value arrived at through DCF analysis is higher than the current cost of the investment, the
opportunity may be a good one.

Estimate value of growth

Value of Asset in place 39.17
Value of stable growth 159.68
Value of extraordinary growth -539.07
Value of the stock -340.23

The BETA of the stock is 0.55 so it the volatility, or systematic risk of a security or a portfolio in
comparison to the market. Beta is less than 1 indicate that the stock is less risky in the market.
The return on equity (ROE) IS 24.25% in the stock. ROE is a percentage return of a net income
which count to share equity. It is also indicating the profitability changes over the period.
City Bank

Year 1 2 3 4 5
Dividend 1.42% 1.55% 1.70% 1.86% 2.03%

In our dividend calculation, the dividend is increasing at a stable rate, if we analyze the situation
the company paid dividend every year. In the calculation of growth rate, we take current year
dividend divided by last year dividend minus one. It measures that the financial performance
going well in the company.

Growth period Value

0 - 290.06৳
1 - 280.68৳
2 - 271.60৳
3 - 262.83৳
4 - 254.35৳
5 - 246.15৳
6 - 238.23৳
7 - 230.56৳
8 - 223.16৳
9 - 216.00৳
10 - 209.08৳

Estimate the value of growth

Value of Asset in place 9.88
Value of stable growth 35.71
Value of extraordinary growth -246.15
Value of the stock -200.57
In the estimate of value of growth, we consider value of the asset which is 9.88 million and when
it a stable growth it will be 35.71. The value of stock will be -200.57.

The beta of the company is 0.59 which measure the systematic risk of the security, generally beta
is less than 1 is measure riskiness of the company. The current dividend also indicates that the
profitability.

ROE is a percentage return of a net income which count to share equity. It is also indicating the
profitability changes over the period. The return on equity is 16% in the year of 2016.

Conclusion:

In the equity valuation, we are considering the dividend discount model in our equity valuation,
first we pick two stock in the market which pays higher dividend to its shareholders. In
SQUARE Pharmaceuticals Limited, the company is well renowned in the pharmaceuticals
industry. City Bank is another company which is renewed in their sector. The main reason to
choose the company is higher P/E ratio and highest amount of dividend they are paid in the last
few years.
The dividend discount model we are using to the valuation of the two companies, the dividend
discount model also valuation techniques that value a company by projecting cash flow and
using the net present value. Then the beta calculation shows the systematic risk of the both
securities and the both company beta is 0.55 in SQUARE Pharmaceuticals Limited and 0.59 in
City Bank which measure the riskiness to invest in these stocks.

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an
investment opportunity. DCF analysis uses future free cash flow projections and discounts them
to arrive at a present value estimate, which is used to evaluate the potential for investment. If the
value arrived at through DCF analysis is higher than the current cost of the investment, the
opportunity may be a good one.