Group Members:-

1. Hamza Liaqat Ali ----- 073605-021

2. Fahad Islam Butt ----- 073605-015
3. M. Bilal Zafar ----- 073605-035
4. Faheem Dilawar ----- 073605-055
 Table of Contents
Executive Summary 1(i)

Introduction 1(ii)

KSE-100 index and Nestle returns 2

Beta Calculation 4

Regression Table to support beta 5

Expected return and Standard Deviation of Nestle 6

CAPM - Nestle 7

Scatter Diagram and SML line 8

Calculating price using Dividend Growth Model 9

Calculating price using Corporate Valuation Model 10

Dividend Yield and Capital Gains Yield 11

Comparison of Expected share price and Actual share price 12

WACC based on Book Value 13

WACC based on Market Value 14

Study any Bond and calculate YTM, CY and CGY 15

1
Nestle
Monthly Stock Price(opg) Stock Price(clg) Dividend(Rs.) Return%(Ќ) %
30/12/2009 1200.01 1,245.96 0 0.04 %
26/11/2009 1200.04 1200.01 0 0.00 %
30/10/2009 1199.97 1200.04 0 0.00 %
30/09/2009 1097.80 1199.97 10 0.10 %
31/08/2009 1100.00 1097.80 0 0.00 %
31/07/2009 1091.98 1100.00 0 0.01 %
30/06/2009 950.25 1091.98 30 0.18 %
29/05/2009 1000.00 950.25 0 -0.05 %
30/04/2009 1175.90 1000.00 0 -0.15 %
31/03/2009 870.00 1175.90 0 0.35 %
27/02/2009 1086.16 870.00 0 -0.20 %
30/01/2009 1333.50 1086.16 0 -0.19 %
31/12/2008 1333.50 1333.50 25 0.02 %
30/11/2008 1342.50 1333.50 0 -0.01 %
31/10/2008 1350.00 1342.50 0 -0.01 %
30/09/2008 1350.00 1350.00 9 0.01 %
29/08/2008 1464.41 1350.00 0 -0.08 %
31/07/2008 1640.00 1464.41 0 -0.11 %
30/06/2008 1282.51 1640.00 7.5 0.28 %
30/05/2008 1500.00 1282.51 0 -0.14 %
30/04/2008 1590.00 1500.00 0 -0.06 %
31/03/2008 1,600.00 1590.00 0 -0.01 %
29/02/2008 1690.90 1,600.00 0 -0.05 %
31/01/2008 1800.00 1690.90 0 -0.06 %
AVERAGE RETURNS (Kavg) -0.0048 %
2
 KSE-100 index
Monthly Stock Price(opg) Stock Price(clg) Return%(Ќ) %
30/12/2009 9206.21 9507.95 0.03 %
26/11/2009 9159.18 9206.21 0.01 %
30/10/2009 9349.68 9159.18 -0.02 %
30/09/2009 8675.67 9349.68 0.08 %
31/08/2009 7720.93 8675.67 0.12 %
31/07/2009 7162.18 7720.93 0.08 %
30/06/2009 7276.61 7162.18 -0.02 %
29/05/2009 7202.10 7276.61 0.01 %
30/04/2009 6860.22 7202.10 0.05 %
31/03/2009 5727.46 6860.22 0.20 %
27/02/2009 5377.42 5727.46 0.07 %
30/01/2009 5865.01 5377.42 -0.08 %
31/12/2008 9187.10 5865.01 -0.36 %
30/11/2008 9182.88 9187.10 0.00 %
31/10/2008 9179.68 9182.88 0.00 %
30/09/2008 9208.26 9179.68 0.00 %
29/08/2008 10583.58 9208.26 -0.13 %
31/07/2008 12289.03 10583.58 -0.14 %
30/06/2008 14232.89 12289.03 -0.14 %
30/05/2008 15122.47 14232.89 -0.06 %
30/04/2008 15125.29 15122.47 0.00 %
31/03/2008 14934.30 15125.29 0.01 %
29/02/2008 14017.01 14934.30 0.07 %
31/01/2008 14077.16 14017.01 0.00 %
AVERAGE RETURNS (Kavg) -0.0097 %
3
 Beta of Nestle

Returns
Nestle KSE - 100 index
0.04 % 0.03 %
0.00 % 0.01 %
0.00 % -0.02 %
0.10 % 0.08 %
0.00 % 0.12 %
0.01 % 0.08 %
0.18 % -0.02 %
-0.05 % 0.01 %
-0.15 % 0.05 %
0.35 % 0.20 %
-0.20 % 0.07 %
-0.19 % -0.08 %
0.02 % -0.36 %
-0.01 % 0.00 %
-0.01 % 0.00 %
0.01 % 0.00 %
-0.08 % -0.13 %
-0.11 % -0.14 %
0.28 % -0.14 %
-0.14 % -0.06 %
-0.06 % 0.00 %
-0.01 % 0.01 %
-0.05 % 0.07 %
-0.06 % 0.00 %

y = -0.003 + 0.198x
ß(B) = 0.20

The Beta is lesser than 1, this means that the stocks are very less risky.
This means that the asset does follow the market trends but very slowly
4
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.1644665734
R Square 0.0270492538
Adjusted R Square -0.0171757802
Standard Error 0.1324074189
Observations 24

ANOVA
df SS MS F Significance F
Regression 1 0.010722887577 0.010722888 0.611627655 0.4425120813
Residual 22 0.385697940467 0.017531725
Total 23 0.396420828044

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.0028805052 0.027139351188 -0.106137584 0.916435056 -0.0591640744 0.05340306408 -0.059164074 0.05340306408
X Variable 1 0.1980937416 0.25329533894 0.782066272 0.442512081 -0.3272086377 0.72339612078 -0.327208638 0.72339612078

BETA
5
 2
Expected Rate of Return (Kavg) = Σk / n
Expected Rate of Return of Nestle = -0.00481

Standard Deviation σ = √[Σ(k-kavg)2]/(n-1)

Standard Deviation of Nestle = 13.10%

The Expected Rate of Return of Nestle is -0.00481

The Standard Deviation of Nestle is 13.10%

k kavg k-kavg (k-kavg)2

0.0383 -0.0048089 0.0431 0.0019
0.0000 -0.0048089 0.0048 0.0000
0.0001 -0.0048089 0.0049 0.0000
0.1022 -0.0048089 0.1070 0.0114
-0.0020 -0.0048089 0.0028 0.0000
0.0073 -0.0048089 0.0122 0.0001
0.1807 -0.0048089 0.1855 0.0344
-0.0498 -0.0048089 -0.0449 0.0020
-0.1496 -0.0048089 -0.1448 0.0210
0.3516 -0.0048089 0.3564 0.1270
-0.1990 -0.0048089 -0.1942 0.0377
-0.1855 -0.0048089 -0.1807 0.0326
0.0187 -0.0048089 0.0236 0.0006
-0.0067 -0.0048089 -0.0019 0.0000
-0.0056 -0.0048089 -0.0007 0.0000
0.0067 -0.0048089 0.0115 0.0001
-0.0781 -0.0048089 -0.0733 0.0054
-0.1071 -0.0048089 -0.1023 0.0105
0.2846 -0.0048089 0.2894 0.0838
-0.1450 -0.0048089 -0.1402 0.0197
-0.0566 -0.0048089 -0.0518 0.0027
-0.0063 -0.0048089 -0.0014 0.0000
-0.0538 -0.0048089 -0.0489 0.0024
-0.0606 -0.0048089 -0.0558 0.0031
Σ(k-kavg)2 = $0.40
2
[Σ(k-kavg) ]/(n-1) = $0.02
2
Standard Deviation σ = √[Σ(k-kavg) ]/(n-1) = $0.131
6
 3
Required Return of Nestle
CAPM = kRF + (RPm) ßB

20 Year treasury bond (kRF) % = 13

Risk Premium (RPm) % = 8
Beta - Nestle (ßN) = 0.2

Required Return of Nestle (K) = 14.6 %

4
Comparison of Expected and Required Returns

The expected return(return that is expected) is -0.0048% which is lower than the
Required return (return that the stock holders should be getting in the market) which
is 14.6%, which means that the stocks are overvalued thus we do not invest in these
stocks. At a situation like this it is preferred to sell the stocks.

5
Portfolio Return and Beta

Expected Return of Nestle = -0.00481 %

Expected Return of shell 0.02 % Formulae
Expected Return of Masood Textiles = 0.27 %

Portfolio Return (KP) = WN KN+ WS KS + WM KM (ΣWiKi)

Portfolio Return (KP) = 0.34(-0.00481)+0.33(0.02)+0.33(0.27)
Portfolio Return (KP) = 0.0941 %

Beta of Nestle = 0.2 %

Beta of Shell = 0.09 %
Beta of Masood Textiles = -0.6 %

Portfolio Beta (βP) = WN βN+ WD βD + WM ΒM (ΣWiβi)

Portfolio Beta (βP) = 0.34(0.2)+0.33(0.09)+0.33(-0.6)
Portfolio Beta (βP) = -0.1003

The return of the portfolio is positive even when one of the stocks had negative returns,
while the beta has a value in negative which shows that the portfolio is very less risky.
Thus the portfolio is beneficial as it gives better returns with less risk.

Required Return of Nestle = 14.6 %

Required Return of Shell = 13 %
Required Return of Masood Textiles = 8.1 %
7
 6

Nestle - Returns Scatter Diagram

0.40

0.30
Nestle

0.20

0.10

0.00
-0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30
-0.10

-0.20

-0.30
KSE - 100 index

These points show the returns of Nestle in comparison with the Market

7
Nestle - Security Market Line (SML)

16

14

12
Required
10 Return
8 Linear
(Required
6 Return)
Expected
4 Return
2

0
-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.3
-2

8
The investor should not invest in such a portfolio as all the stocks are overvalued, which
means that all the stocks should be sold out and have no expectations to give positive
returns in the future.
Recommendations:
We would recommend the investor to invest in stocks that have positive returns so that
the portfolio's returns become positive and give higher returns in the future.
8
 Part 2
Expected Price of Nestlé
9

D1 : D0 (1 + g)

D1
P̂ ₀ using Constant Dividend Growth Model :
Ks - g1

2005 2006 2007 2008 2009 2010 After 2010

Ks=14.6%
g2006 g2007 g2008 g2009 g2010 gn Taking average
D2005 D2006 D2007 D2008 D2009 D2010 Dn of previous growths

2005 2006 2007 2008 2009 2010 after 2010

Dividend (D): 15 5 10 41.5 40 74.47 Constant
Growth (g)(Financial Calculator): - -66.67 100 315 -3.61 86.18 86.18 growth

P̂ ₀ using Constant Dividend Growth Model

P̂ 2009 = D2010
Ks - g2010

74.47
P̂ 2009 =
(0.146 - 0.8618)

P̂ 2009 = -104.037440625873 PKR -104.04 / share

According to this method, the price of one share of Nestle is expected to be PKR -104.04/ share
9
10 Expected Price of Nestlé
FCF1 : FCF0 (1 + g)
WACC using book value P̂ 2009 using Corporate Valuation Model

2006 2007 2008 2009 2010 After 2010

WACC= 5.02% Excluding the outlier
g2007 g2008 g2009 g2010 gn value and taking average of
FCF2006 FCF2007 FCF2008 FCF2009 FCF2010 FCFn remaining growths

2006 2007 2008 2009 2010 After 2010

Free Cash Flow (FCF): -1949925.25 -537272.60 -85504.40 3567120.05 775135.19 constant
Growth (g)[(FCF1/FCF0)-1]: - -72.45% -84.09% -4271.85% -78.27% -78.27% growth

Free Cash Flow (FCF): NOPAT - Operating Capital1 - Operating Capital0

Free Cash Flow (FCF): EBIT (1-Tax%) - (NWC1 + NFA1)
- (NWC0 + NFA0)
Free Cash Flow (FCF)(2006): 1303545.75 - -596803 + 8093101 - -844548 + 5087375 = -1949925.25
Free Cash Flow (FCF)(2007): 1657341.40 - -354699 + 10045611 - -596803 + 8093101 = -537272.60
Free Cash Flow (FCF)(2008): 1447864.60 - 377507 + 10846774 - -354699 + 10045611 = -85504.40
Free Cash Flow (FCF)(2009): 2721067.05 - -1237602 + 11615830 - 377507 + 10846774 = 3567120.05

FCF2010 775135.19 775135.2

Terminal Value (2009) (TV2009): = = = 930646.2
WACC - g2010 0.0502 - (-0.7827) 0.8329

MV2009 = 930646.164005283
Debt = 14160025
Common Stock = -13229378.8359947

Common Stock -13229378.836

P̂ 2009 = = = -0.29171996 = PKR -0.29 / Share
No. of Shares 45349584
10
11 Non-Constant Growth

2005 2006 2007 2008 2009

D
Dividend Yeild (DY): = -0.046 0.014 -0.073 0.196 -0.579
P₀

P1 - P₀
Capital Gains Yeild (CGY): = -2.055 -1.393 -2.557 -1.326 0.505
P₀

Constant Growth

after 2009
D
Dividend Yeild (DY): = -0.716
P₀

Capital Gains Yeild (CGY): g = 0.862

Dividends and Prices

2005 2006 2007 2008 2009 after 2009

Dividend (D): 15 5 10 41.5 40 74.47
Price (P): -328.46 346.41 -136.15 212.01 -69.13 -104.04

Price in 2005: -328.46

Price in 2006: 346.41
Price in 2007: -136.15
Price in 2008: 212.01
Price in 2009: -69.13
Price after 2009: -104.04 using expected price calculated through Dividend Growth Model
11
 Implications on investors

if the Dividend yield(DY) is higher than the Capital Gains Yeild(CGY), then the tax will be high. In the previous
years the CGY was less than the DY. but now in 2009 and in the forcasted future, the DY is Lower than the CGY of
Nestle. Thus for investors who want to pay less tax, Nestle is a good option.

12
Comparison of Expected Share Price and Actual Market Price

Nestlé has a market price per share of PKR 1512.02, while the calculated expected price per share of PKR -104.04.
Through this we can analyze that Nestlé's share prices are extremely overvalued and these are not the shares that
one should be investing in.
12
 Part 3
WACC of Nestlé

13 Through book value

Weighted Average Cost of Capital (WACC) : Debt % + Preferred Stock + Common Equity

Wd x Kd% x (1-Tax%) + Wp x Kp% + Wc x Kc

76.18% x 3.12% x (1-35%) + 0x0 + 23.82% x 14.6% CAPM

0.0154592074 + 0 + 0.0347772

WACC = 0.0502364074 = 0.05 x 100 = 5.02%

Workings

Total Debt (6,076,895,000 + 8,083,130,000)

Wd = = = 0.762 x 100 = 76.18%
Total Equity and Liabilities 18,586,980,000

Common Equity @ PKR 10 4,426,955,000

Wc = = = 0.238 x 100 = 23.82%
Total Equity and Liabilities 18,586,980,000

Finance Cost 442,050,000

Kd = = = 0.031 x 100 = 3.12%
Total Liabilities (6,076,895,000 + 8,083,130,000)
13
 WACC of Nestlé

14 Through market value

Weighted Average Cost of Capital (WACC) : Debt % + Preferred Stock + Common Equity

Wd x Kd% x (1-Tax%) + Wp x Kp% + Wc x Kc

17.12% x 3.12% x (1-35%) + 0x0 + 82.88% x 14.6% CAPM

0.0034741616 + 0 + 0.1210048

WACC = 0.1244789616 = 0.1244 x 100 = 12.45%

Workings

Total Debt (6,076,895,000 + 8,083,130,000)

Wd = = = 0.171 x 100 = 17.12%
Total Equity and Liabilities 82,729,503,000

Common Equity @ PKR 1512.02 68,569,478,000

Wc = = = 0.829 x 100 = 82.88%
Total Equity and Liabilities 82,729,503,000

Finance Cost 442,050,000

Kd = = = 0.031 x 100 = 3.12%
Total Liabilities (6,076,895,000 + 8,083,130,000)
14
 Part 4
15
YTM of Bonds issued by PACE
History of Bond:
This bond issued by PACE in 2008. its maturity was 5 years and payments were semiannually. Its coupon rate was
13.79%. Interest was 8.02% and Its F.V was 4997.

0 1 2 3 4 5 6 7 8 9 10 n
i = ??

PV = ?? PMT 344.54 344.54 344.54 344.54 344.54 344.54 344.54 344.54 344.54 344.54 FV = 4997

n = 5 x 2(compounded semianually) = 10
FV = Par Value = 4997
Pmt = 13.79% of Par Value = 689.0863 /2 = 344.54
(compounded semianually)
YTM = Financial Calculator Answer 8.02%

PV = 344.54/(1.08)1 + 344.54/(1.08)2 + 344.54/(1.08)3 + 344.54/(1.08)4 + ….. + 344.54/(1.08)10 + 4997/(1.08)10

PV = 4626.469

PMT 344.54
CY = = = 3.54
P0 97.2898
May 29th, 2010. www.brecorder.com
CGY = YTM - CY = 4.48

This bond is Premium bond as its coupon rate(13.79%) is above its interest rate(8.02%).
15