National College of Business Administration & Economics

Final Project: Finding Weighted Average Cost Of Capital Undervalued or Overvalued stocks. Submitted To : Mr Jamal Nasir

Submitted by : Salman Nisar Bhatti Syed Sajjad Tariq M.Ahmed momin Atif Moeen Hassan Haider Yasir Altaf

Content to Project
What is finance? What is Equity? What is debt? What is cost of debt? What is cost of Equity? What is value? What is E/V? What is D/V? What is undervalued? What is overvalued? How to determine stocks are Under valued ?

What is undervalue stock for the investor? How to determine stocks are over valued ? What is undervalue stock for the investor? Reasons Why A Stock Can Be Undervalued? Reasons the Stock Market is Overvalued? Dividend Growth Model. Weighted Average Cost Of Capital.

What is finance ?
Art of managing money is called finance .

What is Equity ?
Ownership interest in a corporation in the form of common stock or preferred stock.

What is Debt ?

An amount owed to a person or organization for funds borrowed.

Stocks :
Stocks are a share of the ownership of a company.
Common Stock: A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Preferred Stock :A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock.

Dividend : A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property.

(1) Regular Dividend. (3) Stock-Dividend. (5) Bond Dividends.

(2) Interim Dividend. (4) Scrip Dividend. (6) Property Dividend.

Dividend Growth model

An approach that assumes dividends grow at a constant rate in perpetuity. The value of the stock equals next year's dividends divided by the difference between the required rate of return and the assumed constant growth rate in dividends. Formula = Price = Dividend*(1+g) / Rate-growth

Selection of Companies
Oil & Gas Development (ODGC) Uilever Muslim Commercial Bank Step _ 1 finding price by DGM and telling that stock is undervalued or overvalued.

Undervalued : Rate below than its worth . Overvalued: Rate higher than its worth .

How to determine stocks are Under valued ?

The stock is considered to be undervalued stock if it is being sold at a price below its assumed intrinsic value. A stock is not considered undervalued if it is being sold at low price but if the stock is compared with the stock of similar kinds and its price is found to be cheaper then those stocks it will be considered as an undervalued stock. An investor should use the fundamental value concept in order to determine the right intrinsic of the stocks value. If the price earning ratio of the stock is low then it is just a simple indication for an investor that the stock is undervalued. This is not the only factor for determining the undervalued stocks rather it is just one of the technique that will help an investor to buy that particular stock. Those companies which are giving consistent performances since past few years but the prices of their stocks are low indicate that the stock of the company is undervalued. If the stock is trading at low volumes is also one of the other indications for an investor that the stock is undervalued. An investor can also calculate the high net profit margins of a particular stock in order to see that whether the stock is undervalued or not. One of the easiest methods which can be brought into action to evaluate the undervalued stocks is the screener software program which helps them to tell top stocks which they should buy.

How to determine stocks are over valued ?

The stock is considered to be overvalued stock if the current price of the particular stock is higher than the intrinsic value of that particular stock in the stock market. There are many ways from which an investor can determine that the stock has been overvalued. Price earning ratio of the stock is the first thing which help in determining the overvalued stock. If currently the price earning ratio of a stock exceeds the price earning ratio of that stock in the past it is considered to be overvalued stock . Other things which help an investor in determining the overvalued stocks can be listed as: a) dividend ratio of the stock b) projected earnings of the stock c)Intrinsic value of the stock d) last but not the least cash of the company flows also help in determining if the stock is overvalued. Some of the techniques which are used to know if the stocks are overvalued can be as: a) the current price earning ratio which is available on every internet site is a clear indicator that if the stock is overvalued or not because it will tell an investor that how much money an investor is paying for every rupee he is earning with respect to that particular stock.

What is undervalue stock for the investor?

Undervalued stocks convey the meaning that an investor should buy at a low price and sell at high price in stock market. An investors investment is considered to be successful if he is able to identify the undervalued stock and buys them at that rate and after sometime when the right time comes and the price of that particular stock becomes high he should sell that stock in order to earn high profits. Undervalued stocks prove to be a boon for investors portfolio The investors who are the beginners in the stock market investment should try to add these undervalued stocks to their portfolio so that they can play safe and are able to earn suitable profits in beginning.

What is undervalue stock for the investor? Overvalued stocks are curse for investor portfolio.

Dividend Growth Model Unilever

Price =? Dividend =100 Rate = 16 % Growth dividend = 7.5 % Formula = P=D*(1+g) / R - g P=100 * (1+0.075) / 0.16 -0.075 P=1264.7 Answer : It is over valued

Supporting my answer why it is overvalued ?

Price earning ratio of the Unilever is the first thing which help in determining that its overvalued stock. If currently the price earning ratio of a stock exceeds the price earning ratio of that stock in the past it is considered to be overvalued stock. Currently the price earning ratio of unilever exceeds the price earning ratio of unilever in the past it is considered to be overvalued stock. Unilever stock is over valued because it has been checked by following methods : a) Dividend ratio of the stock b) projected earnings of the stock c) Intrinsic value of stock Unilever cash flows also helped me in determining stock is overvalued. The current price earning ratio of unilever which is available on every internet site is a clear indicator that if the stock is overvalued or not because it will tell us that how much money an investor is paying for every rupee he is earning with respect to that particular stock.

Dividend Growth Model Oil & Gas Develop ( ODGC) :

Price =? Dividend =5.5 Rate = 16 % Growth dividend = 3.7 % Formula = P=D*(1+g) / R - g P=5.5 * (1+0.037) / 0.16 -0.037 P=46.34 Answer : It is under valued

Supporting my answer why it is under undervalue ?

This stock is considered to be undervalued stock because it is being sold at a price below its assumed intrinsic value. The price earning ratio of the stock is low it is just a simple indication that the stock is undervalued. ODGC which is giving consistent performances since past few years but the prices of their stocks is low indicate that the stock of the company is undervalued. ODGC stock is trading at low volumes shows that the stock is undervalued. By calculating the high net profit margins of a ODGC stock in order to see that whether the stock is undervalued or not , but it was . By easiest methods screener software program which can be brought into action to evaluate the undervalued stocks .

Dividend Growth Model Muslim Commercial Bank (MCB):

Price =? Dividend =8.5 Rate = 16 % Growth dividend = 4.7% Formula = P=D*(1+g) / R - g P=8.5 * (1+0.04) / 0.16 -0.04 P=75 Answer : It is under valued Answer : It is under valued

 This stock is considered to be undervalued stock because it is being sold at a price below its assumed intrinsic value. The price earning ratio of the stock is low it is just a simple indication that the stock is undervalued. MCB which is giving consistent performances since past few years but the prices of their stocks is low indicate that the stock of the company is undervalued. MCB stock is trading at low volumes shows that the stock is undervalued. By calculating the high net profit margins of a MCB stock in order to see that whether the stock is undervalued or not , but it was . By easiest methods screener software program which can be brought into action to evaluate the undervalued stocks .

Supporting my answer why it is under undervalue

Weighted Average Cost of Capital An average representing the expected return on all of a company's securities. Each source of capital, such as stocks, bonds, and other debt, is assigned a required rate of return, and then these required rates of return are weighted in proportion to the share each source of capital contributes to the company's capital structure. The resulting rate is what the firm would use as a minimum for evaluating a capita project or investment.

Company Unilever
Data: 1)Price = 1710 , 2)Dividend = 100, 3)No. of Shares = 593,162. 4)Cost of Debt =15% , 5)Debt= 176,716,800

Solution Step -1 Rate = ? (Use zero growth model) Step -2 Growth (g) =? Cost of Equity (Re) =? (Using SML or constant dividend model ) Cost of Debt (Rd) =? Equity (E) =?

Debt (D) =? Value (V) =? Find E/V =? Find D/V=? Step -3 Find WACC =?

Zero Growth Model

Price = 1710 Dividend = 100 Rate =? Solution: Formula used: P=D/R Placing values: R= 100/1710 R = 0.058 R = 5.8 %

Finding Growth ( g ) =?
= Present dividend - Previous dividend * 100 Previous dividend 110 - 93 * 100 = 7.5 % 93 g = 7.5%

Cost of Equity =? (Finding with the help of Constant Growth model) Cost of equity = Re = D1/P + g
To solve this equation or to find the cost of equity we have to find D1 then we can solve the equation , so finding D1 D1 = D0 ( 1 + g) D1 = 100 ( 1 + 0.075) D1 = 100 ( 1.075 ) D1 = 107.5 As we got D1 now we can easily find the cost of equity . So, Re=D1 + g P Re=107.5 + 0.075 1710 Re = 0.0137

Cost of Debt = 15 % ( It was Given )

Equity =? Equity = Number of shares * Price Equity =593,162 * 1,710 Equity =1,014,307,020

Debt = ? We assume that the price traded quoted at 10% of face value ,total face value if 1,767,168,000. Then Debt = 0.01 * 1,767,168,000 Debt =176,716,800

Value =? Value = Equity + Debt Value = 1,014,307,020+176,716,800 Value = 1,191,023,82

Finding E/V =? E/V =1,014,307,020 /1,191,023,820 = 0.8516 E/V = 0.8516 Finding D/V =? D/V =176,716,800/1,191,023,820 = 0.1483 D/V=0.1483

Weighted Average Cost of Capital

WACC =? Formula : ( E/V*Re) + (D/V*Rd) * (1-Tax) =( 0.85*0.13)+(0.148*0.15)*(1-0.35) =(0.1105)+(0.0222)*(0.65) =(0.1105)+(0.01443) =0.12493 =12.4%