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Financial Derivatives - Option Pricing Model report

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This project is designed for the course Derivative Securities (FIN 480) where we are to choose
two different companies, one is overvalued and the other is undervalued, from Dhaka Stock
Exchange (DSEX index) and validate our reasoning of choice with the help of fundamental
analysis additionally supported by technical analysis. We used three models namely Dividend
Discount Model (DDM), Free Cash Flow to the Firm (FCFF) and Relative Valuation (Market
Multiplier Model) in order to reach the conclusion of which stock is overvalued or undervalued.
After the valuation process, we assumed to issue a call option on the undervalued stock as the
underlying and issued a put option on the overvalued stock as the underlying. Then we used
Binomial Model for Option Pricing to calculate the call and put option price. Furthermore, we
used Black Scholes Merton Model to calculate the call and put option price. All the calculations
that have been used in this report are done in excel sheets based on the financial statements of
the company. Majority of the information is collected from Dhaka Stock Exchange,
Bangladesh Bank’s website, company website, different news portal, etc.

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Financial Derivatives - Option Pricing Model report

  1. 1. ………………………………………………………………………………………………...... GROUP PROJECT Name of the students participated on the project: 1. Mehnaz Ahmed Khan (1610168030) 2. Md. Tanzirul Amin (1611676030) 3. Md. Nazmul Alam Anik (1511708030) Course: FIN 480 Semester: Spring 2019 Faculty: Farhana Zahir (FZh) Senior Lecturer, Department of Accounting and Finance. Date of submission: 15/04/2019
  2. 2. Executive summary This project is designed for the course Derivative Securities (FIN 480) where we are to choose two different companies, one is overvalued and the other is undervalued, from Dhaka Stock Exchange (DSEX index) and validate our reasoning of choice with the help of fundamental analysis additionally supported by technical analysis. We used three models namely Dividend Discount Model (DDM), Free Cash Flow to the Firm (FCFF) and Relative Valuation (Market Multiplier Model) in order to reach the conclusion of which stock is overvalued or undervalued. After the valuation process, we assumed to issue a call option on the undervalued stock as the underlying and issued a put option on the overvalued stock as the underlying. Then we used Binomial Model for Option Pricing to calculate the call and put option price. Furthermore, we used Black Scholes Merton Model to calculate the call and put option price. All the calculations that have been used in this report are done in excel sheets based on the financial statements of the company. Majority of the information is collected from Dhaka Stock Exchange, Bangladesh Bank’s website, company website, different news portal, etc.
  3. 3. Table of Contents Introduction..............................................................................................................................1 Company profile of BSRM Steels Limited ............................................................................2 Fundamental analysis (BSRM Steels Limited)..................................................................4 Technical Analysis (BSRM Steels Limited):......................................................................6 Company Profile of APEX Foods Limited ..........................................................................10 Fundamental analysis (Apex Foods Limited) ..................................................................12 Technical analysis (Apex Foods Limited) ........................................................................15 Binomial option pricing model .............................................................................................19 Black Scholes Merton Model ................................................................................................22 Conclusion ..............................................................................................................................26 References...............................................................................................................................27
  4. 4. Page | 1 Introduction For this project, we chose two companies, which are BSRM Steels Limited from Engineering sector and APEX Foods Limited from Food and Allied sector. In the first part, we chose these two companies based on their unusual P/E ratios and after that we did valuation of the company stocks using the three models namely Dividend Discount Model (DDM), Free Cash Flow to the Firm (FCFF) and Market Multiplier Model. We also used fundamental analysis along with technical analysis to support our findings. Additionally, we took stock data of 5 years for our analysis to be more accurate. For each stock, we calculated annualized return, annualized variance and standard deviations. We plotted the price volume chart, did the regression analysis for each stock, distribution of the actual returns using histogram, and calculated the skewness and kurtosis of the two distributions using Excel functions SKEW and KURT. We also prepared a company profile for each stock where relevant information is provided along with a brief company description. In the second part of the project, we took the undervalued stock as an underlying of a call option and overvalued stock as an underlying of a put option. Then we calculated the option price by two period Binomial Option Pricing Model and the Black Scholes Merton Model. All the calculations are done using Microsoft Excel 2016.
  5. 5. Page | 2 Company profile of BSRM Steels Limited BSRM Steels Limited mainly engaged in the production and supply of “Xtreme 500W” (the only EMF (Elongation at Maximum Force) tested and Fatigue ductile rod in Bangladesh) deformed bars of reinforced steel. Xtreme500W also demonstrated superior yield strength and ductility compared to the traditional Grade 60 rebar. This reduced the quantity of steel consumed in any building by 15%. It was incorporated in July 2002, commenced its commercial operation from April 2008. The main purpose of the Company is to manufacture M.S. products by setting up rolling and re-rolling mills and marketing the same. The Company launched ‘BSRM Maxima’ which is the first Rebar of the country designed specifically for the mega projects. The company got listed on Dhaka Stock Exchange in 2009. The paid up capital of the company is 3,417.75 million. The current capacity is 700000 MT. Stock Statistics Market Cap 21,466,888,000 BDT Shareholder’s equity 13,258,559,602 BDT Book value per share 35.27 P/B ratio 1.70 Forward P/E 15.7 EPS 5.21 P/E ratio 11.50 Price to sales 0.39 Price to cash flows -145.29 5 years CAGR earnings growth 8.66 % 5 years CAGR revenue growth 14.30 % Paid up capital 3,759,530,000 BDT
  6. 6. Page | 3 Composition of shareholdings Particulars Total Holdings In percentage Sponsor shareholders 57,591,975 16.85 % Foreign shareholders 944,268 0.28 % Other shareholders (related parties) 183,458,793 53.68 % Other shareholders (general) 99,779,964 29.19 % Total 341,775,000 100 % Free float: 944,268 + 183,458,793 + 99,779,964 = 284,183,025 Dividend yield 2014 2015 2016 2017 2018 1.63 % 3.09 % 1.24 % 2.97 % 1.67 % Ratio Last years revenue growth 55.19 % Last 5 years revenue growth 10.01 % Last years operating profit growth 70.06 % Last 5 years operating profit growth 9.80 % Last years net profit growth 83.18 % Last 5 years net profit growth 2.96 % ROE 14.78 % ROA 3.52 % Debt to equity 3.19
  7. 7. Page | 4 How and why we selected the company (BSRM Steels Limited) For the project, we had to choose a company, which is undervalued right now. Therefore, we initially looked for DS30 index where usually the undervalued companies right now are placed. Moreover, as a primary indicator we looked on the P/E ratio of BSRM Steels Ltd. Based on the P/E ratio of BSRM of 13.6 we initially chose it as an undervalued company. We have also seen the future prospects of the company, which gave us some sort of basic understanding that the stock price of the company might increase. Fundamental analysis (BSRM Steels Limited) BSRM steels Ltd. is a cash dividend paying company and has been maintaining a dividend payout ratio of 40% over the last 5 years. Its growth in earnings per share (EPS) has been calculated as 13.16% over the same period. And the required rate of return on its stock has been calculated to be 12.72% using the CAPM approach. Since, the growth rate is greater than its required rate of return i.e.; (g>r), we cannot use constant growth rate model. So, we have used here multistage model and then have been used a multiplier model for finding its terminal value. Name Value Weight Re and Rd Equity 22218792750.00 44.58% 18.88% Net Debt 27626490057.00 55.42% 7.77% Total 49845282807.00 100% 12.72% Risk-Free Rate 3.99% Beta 1.2205 Market Return 7.17% Inflation 6.00% Market Risk Premium 3.18% Country Risk Premium 5.00% Required Rate of Return 18.88% Risk free rate 6.44% Average credit spread 4.15% Tax rate 26% Required Rate of Return 7.87% Average of corporate tax rate and BSRMSteels YOY implied tax rate (Risk Free Rate + Credit Spread)*(1-Tax Rate) Calculated Average of DSEX Return Required Rate of Return (Debt) Details T-bill 5 year rate Bangladesh bank Market Return - Risk Free Rate Risk Free Rate + Country Risk Premium + Beta*Market Risk Premium BSRM STEELS Required Rate of Return (Equity) Details 10 years T-bill Rate (Bangladesh Bank, 92 days) WACC
  8. 8. Page | 5 The pro forma financial statements were developed using a sales growth is estimated average of the growth of GDP, Real Estate sector, Per capita consumption of steel, Import of Iron scrap, GDP from construction sector and the sales of BSRM steels. Running regression of these major determining factors with the annual sales of BSRM gave R-square of over 90%. Therefore, based on forecasted discounted values of the cash dividends including the terminal value, we have calculated stock to be undervalued by 58.47% since its intrinsic value is greater than its current market price, we buy the stock. Year Eps Div PV 1 2019 5.90 2.44 2.162 2 2020 6.67 2.76 2.170 3 2021 7.55 3.12 2.178 4 2022 8.54 3.53 2.187 5 2023 9.67 4.00 2.195 Terminal value ending eps * avg PE 5 Price 233.4564714 128.29 Intrinsic value 139.18 Market price 14/4/2019 57.8 -58.47% So the stock is undervalued by 58.47% and we will buy
  9. 9. Page | 6 Market multiplier model BSRM Steels Limited P/E ratio EPS Revenue growth Operating profit growth ROA ROE BSRMLTD 13.91 12.95 40.55% 50.27% 13.47% 20.33% BSRMSTEEL 14.21 5.21 55% 9.58% 11.34% 15% GPHISPAT 18.76 1.97 25.18% 16.57% 2.83% 11.64% RSRMSTEEL 19.3 7.05 2.28% 0.19% 10.68% 15.75% SSSTEEL 14.74 1.2 45.00% 22.0% 13.26% 7.76% Apollo Ispat 18.3 0.5 -0.32% -106.00% 0.16% 0.27% Industry average 16.184 5.68 33.60% 19.72% 10.32% 14.05% Company average 14.21 5.21 55.00% 9.58% 11.34% 14.78% Intrinsic value 84.329 Price on 14/4/2019 59.9 Difference -28.97% The stock is undervalued by 28.97% , so we will buy We also used market multiplier model to calculate the intrinsic value. We took all the steel companies listed on DSE to compare the ratios of BSRM steel with the industry. We found Apollo Ispat is an outlier, therefore, we excluded it. According to market multiplier method, the stock is undervalued by 28.97% and hence we will buy. Technical Analysis (BSRM Steels Limited): RSI: 37.148 Figure: Real time chart of BSRM Steels Limited
  10. 10. Page | 7 Figure: Engineering sector chart Price Volume Chart: The BSRM Steels share price maintained stable price across the range of 80-60 BDT over the year. However, trade volumes increased suddenly before and after the dividend announcement times, which correspondingly caused the share price to increase greatly. However, eventually the price returned to its stable range over time. We can see that the stock is not much traded round the year but is highly in demand of trade during its dividend announcement period. Since, 0 100000 200000 300000 400000 500000 600000 0 10 20 30 40 50 60 70 80 90 1/4/2018 11/4/2018 23-04-2018 8/5/2018 20-05-2018 30-05-2018 11/6/2018 26-06-2018 9/7/2018 19-07-2018 31-07-2018 12/8/2018 28-08-2018 10/9/2018 20-09-2018 2/10/2018 14-10-2018 24-10-2018 5/11/2018 15-11-2018 28-11-2018 10/12/2018 23-12-2018 7/1/2019 17-01-2019 29-01-2019 10/2/2019 20-02-2019 6/3/2019 19-03-2019 1/4/2019 Volume Price Time period 1yr Price Volume chart of BSRM Steels Volume Price
  11. 11. Page | 8 the BSRM Steels has an below average industry P/E ratio so it is an undervalued share, which means it can be highly profitable to invest in this share during the normal periods and gain high profit by selling of during/after the dividend is announced. Kurtosis (distribution or volatility of skew): The kurtosis of BSRM Steels return distribution is 57.6787. The distribution is longer and the tails are flatter. The peak of the return distribution is higher than normal distribution, this means the returns are heavily tailed and there are a lot return outliers. The outliers stretch the horizontal axis so this makes the returns appear in a narrow and high vertical range, and the distribution can be addressed as a leptokurtic distribution. 0 100 200 300 400 500 600 700 800 900 1000 Return % BSRM Steels Return Distribution Frequency Freq. Double BSRM Steels Skewness 2.507766329 Kurtosis 57.67865628 Count 1276 Max 34.89% Min -23.76% Range 0.58653862 Bin 19 Width per Bin 0.030870454
  12. 12. Page | 9 Skewness (measure of asymmetry in the distribution): The skewness for the return distribution of BSRM Steels is 2.5078, which means the return distribution is highly positively skewed. The median will be greater than the mode as there is asymmetry in the return distribution. Thus, the BSRM Steels stocks will provide high returns to the investors. We derived the above scatter plot from the six-month regression analysis of BSRM Steels with DSEX, here the beta is 1.3051, which implies that the stock has positive relationship with the market and the market risk of the stock is high. The investors may need to be rational to invest in this company’s stock as it moves along with market. However, the R-square value is 0.034, which is a very low magnitude and this states that the stock does not necessarily have a good correlation with the market. Thus, this method is not much effective to explain the correlation between BSRM Steels and the market. y = 1.3051x - 0.0002 R² = 0.034 -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 6 months Regression model BSRM Steels vs DSEX BSRM Steels vs DSEX Linear (BSRM Steels vs DSEX)
  13. 13. Page | 10 Company Profile of APEX Foods Limited Apex Foods Limited (AFL) was incorporated on 21.03.1979 under the Companies Act 1913 (Repealed in 1994). AFL is a 100% export oriented value-added shrimp processing Company. It is the single largest processor & exporter of frozen seafood in Bangladesh and is one of the most modern seafood processing plants in Asia, equipped with the latest processing, freezing and storage machinery. Its high quality products are well known in the international seafood market and it has built a blue chip customer base with a regular order flow. AFL has received numerous commendations and trophies for product quality and export turnover from the Government of Bangladesh as well as from abroad. AFL strictly adheres to HACCP (Food Safety System of FDA) based quality assurance program in its production process. In addition, AFL has 2 Star BAP Certification and BRC-Global Standard for Food Safety (Issue 6). The products of the Company are exported to the markets in North America, EU countries, Australia and Russia. Stock Statistics Market Cap 902,120,000 BDT Shareholder’s equity 783,569,959 BDT Book value per share 137.41 P/B ratio 1.52 Forward P/E 1.95 EPS 1.81 P/E ratio 115.84 Price to sales 0.62 Price to cash flows -108.72 5 years CAGR earnings growth -9.57%
  14. 14. Page | 11 5 years CAGR revenue growth -12.95% Paid up capital 57,020,000 BDT For APEX Foods Limited we have chosen 2 year CAGR growth for both revenue and earnings as the company was having a negative Net profit for the fiscal year 2016. 2 years CAGR earnings growth 0.5% 2 years CAGR revenue growth 8.17% Composition of shareholdings Particulars Total Holdings In percentage Sponsors and directors 2,221,450 38.96 Institution 210,392 3.69 General shareholders 3,270,558 57.35 Free float: 210,392 + 3,270,558 = 3,480,950 Dividend yield 2014 2015 2016 2017 2018 1.94% 2% 1.72% 1.36% 0.96% Ratio Last years revenue growth 17.01 % Last 5 years revenue growth -10.28 % Last years operating profit growth 1 %
  15. 15. Page | 12 Last 5 years operating profit growth 37.73 % Last years net profit growth 15.56 % Last 5 years net profit growth -49.54 % ROE 1.32 % ROA 0.55 % Debt to equity 1.39 How and why we selected the company (Apex Foods Limited) For choosing the overvalued company, we have decided to take a company under food and allied industry. We have seen that Apex Foods Ltd has a higher P/E ratio than the other related companies do in the industry. Moreover, we have studied some news regarding the company’s decreasing profitability. Based on the information we chose the company as the overvalued company. Name Value Weight Re and Rd Equity 968267520.00 87.30% 16.77% Debt 140904992.00 12.70% 7.94% Total 1109172512.00 100% 15.65% Risk-Free Rate 3.99% Beta 0.5590 Market Return 7.17% Inflation 6.00% Market Risk Premium 3.18% Country Risk Premium 5.00% Required Rate of Return 16.77% Risk free rate 6.44% Average credit spread 4.15% Tax rate 25% Required Rate of Return 7.94% T-bill 5 year rate Bangladesh bank (Risk Free Rate + Credit Spread)*(1-Tax Rate) Average of DSEX Return Market Return - Risk Free Rate Risk Free Rate + Country Risk Premium + Beta*Market Risk Premium Corporate tax rate Required Rate of Return (Debt) Details Required Rate of Return (Equity) Details 10 years T-bill Rate (Bangladesh Bank, 92 days) Calculated Apex foods WACC
  16. 16. Page | 13 Fundamental analysis (Apex Foods Limited) Based on the pro forma income statement and balance sheet for the next five years we have calculated free cash flow to the firm till 2023. The pro forma financial statements were developed based on the revenue growth model with an annual growth rate of 5.19% for the following five years. We took the average of last two year CAGR (revenue) 8.17% of APEX Foods and the overall export growth 2.20% of Bangladesh. We used this process because the net profit of APEX Foods has been negative for several past years due to the issue to trade sanctions implied by foreign countries on the shrimp export from Bangladesh, however APEX Foods has improved its product quality and started to increase the shrimp exports over the past two years. And from next five years the terminal growth rate is 4.5%. This growth rate is based on average CAGR (revenue) for the last five years. After calculating the enterprise value, we calculated the value of equity by subtracting net debt from enterprise value. We calculate the intrinsic value to be 126.74 per share which is less than current market price per share. Therefore, the stock is overvalued by 27.34% and we will sell. Enterprise value $863,647,993.65 Net debt 140904992 Value of equity $722,743,001.65 No of shares 5702400 WACC 16.08% Terminal growth rate 4.5% Value per share 132.86 Price on 14/4/19 161.4 Overvalued by 21.48% So we will sell the stock
  17. 17. Page | 14 Market Multiplier model Apex foods limited P/E ratio EPS Revenue growth Operating profit growth ROA ROE APEXFOODS 134.77 1.81 17.01% 1% 0.55% 1.32% AMCL (PRAN) 29.99 6.94 6.63% -6.54% 3.88% 9.21% FUWANGFOOD 18.5 3.31 9.34% 16.70% 6.67% 1338% GEMINISEA 152.28 0.7 -41.29% -27.42% 0.52% 5.74% GHAIL 19.94 2.04 22.54% 25.28% 5.35% 10.30% FINEFOODS 587.88 0.076 -3.42% -88% 0.66% 0.69% Industry average 71.096 2.96 0.02846 0.018034 0.0339 4 2.7291 4 Company 134.77 1.81 0.1701 0.01 0.0055 0.0132 Intrinsic value 128.684 Price 14/04/2019 161.4 Difference 25.42% The stock is overvalued by 25.42%, so we will sell We took similar food companies into the calculation. We identified fine foods as an outlier in the industry hence we excluded the company from our calculation. According to the model, the company is overvalued by 25.42%. Therefore, we will sell the stock.
  18. 18. Page | 15 Technical analysis (Apex Foods Limited) RSI: 34.438 Figure: Real time chart of APEX Foods Limited Figure: Food and Allied Sector Chart
  19. 19. Page | 16 Price Volume Chart: We can see a positive relation between the price and volume of the APEX Foods share, as the company gives regular dividends to its common shareholders, so the share is more traded during the June-July periods and prices are also higher during those periods. The shares are also traded in high volumes during the beginning of the year this maybe because of the January effect anticipation or due to recent political stability after the national election. However, as the APEX Foods stock has an above average industry P/E ratio and determined as an overvalued share, so the trading amount is decreasing gradually which correspondingly causes the price to decrease. 0 50000 100000 150000 200000 250000 300000 350000 400000 0 50 100 150 200 250 300 1/4/2018 11/4/2018 23-04-2018 8/5/2018 20-05-2018 30-05-2018 11/6/2018 26-06-2018 9/7/2018 19-07-2018 31-07-2018 12/8/2018 28-08-2018 10/9/2018 20-09-2018 2/10/2018 14-10-2018 24-10-2018 5/11/2018 15-11-2018 28-11-2018 10/12/2018 23-12-2018 7/1/2019 17-01-2019 29-01-2019 10/2/2019 20-02-2019 6/3/2019 19-03-2019 1/4/2019 Volume Price Time period 1yr Price Volume chart of APEX Foods Volume Price
  20. 20. Page | 17 Kurtosis (distribution or volatility of skewness): The kurtosis of the return distribution of APEX Foods is 2.6394 which is very close to the kurtosis of 3 in normal distribution. Since the kurtosis is below 3 so this distribution is platykurtic as the distribution is shorter, peak is smaller and the tails are thinner compared to normal distribution. There are very few outliers present in the return distribution. Skewness (measure of asymmetry in the distribution): The skewness of APEX Foods return distribution is 0.9398 which is very close to 1, that means the return distribution of the company 0 50 100 150 200 250 300 350 Return % APEX Foods Return Distribution Frequency Freq. Double APEX Foods Skewness 0.939820279 Kurtosis 2.639375844 Count 1276 Max 10.00% Min -8.73% Range 0.187322462 Bin 19 Width per Bin 0.009859077
  21. 21. Page | 18 is almost fairly positively skewed. However the amount of return is lower due to the platykurtic curve so the amount of possible positive return for the investors is not much high. The six months regression analysis of APEX Foods with DSEX generates a beta of 1.1788, this implies that the stock has positive relationship with the market and the market risk of this stock is also very high. Here, the R-square (0.0583) is also very low, so this means that the stock necessarily may have little or no correlation with the market. Thus, this method is not much effective to explain the correlation between APEX Foods and the market. y = 1.1788x + 0.0016 R² = 0.0583 -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 6 months Regression model APEX Foods vs DSEX APEX Foods vs DSEX Linear (APEX Foods vs DSEX)
  22. 22. Page | 19 Binomial option pricing model According to our analysis, the stock of BSRM Steels Limited is undervalued and the stock of APEX Foods Limited is overvalued. We know undervalued stocks are suitable as an underlying for a call option and overvalued stocks are preferred as an underlying for a put option. We are going to price a call option and a put option whose underlying asset is the stock of BSRM Steels Limited and APEX Foods Limited respectively by using Binomial option pricing model. The pricing follows all the assumptions of the model. A two period call option pricing with the tree diagram is shown below: A/ Call option (stock of BSRM Steels Limited): Stock price (So) 59.1 Upward 20 % Downward 20 % Exercise price (X) 67.965 Risk free rate, rf 3.99 % Risk neutral probability of stock price going up 59.98 % Risk neutral probability of stock price going down 40.03 % Formulas Risk neutral probability of stock price going up, 𝜋 𝑢 = 1+𝑟 𝑓−𝑑 𝑢−𝑑 Risk neutral probability of stock price going down, 𝜋 𝑑 = 1 - 𝜋 𝑢
  23. 23. Page | 20 A/ Put option (stock of APEX Foods Limited): Stock price (So) 169.8 Upward 20 % Downward 20 % Exercise price (X) 144.33 Risk free rate, rf 3.99 % Risk neutral probability of stock price going up 59.98 % Risk neutral probability of stock price going down 40.03 %
  24. 24. Page | 21 Formulas Risk neutral probability of stock price going up, 𝜋 𝑢 = 1+𝑟 𝑓−𝑑 𝑢−𝑑 Risk neutral probability of stock price going down, 𝜋 𝑑 = 1 - 𝜋 𝑢
  25. 25. Page | 22 Black Scholes Merton Model This is a continuous option-pricing model. This is actually the model that is used to price options all over the world. However, people actually don’t use it for the purpose of pricing options, but to measure the implied volatility by taking the trading price of options. Here we will calculate the price for call and put option using the Black Scholes Merton Model where the risk free rate and the return on the company’s stock are compounded continuously. Black Scholes Merton Option Pricing Model BSRM (Call option) APEX (Put option) So (Price of the underlying) = 59.1 So (Price of the underlying) X (Exercise price) = 67.965 X (Exercise price) T (Time to expiration) = 2 T (Time to expiration) = 2 Annualized std. deviation, σ (Volatility) = 0.354 Annualized std. deviation, σ (Volatility) = 0.4193 σ2 = 0.125316 σ2 = 0.17581249 Risk free rate, Rf = 3.99 % Risk free rate, Rf = 3.99 % Continuously compounded risk free rate, rc = 0.03912 Continuously compounded risk free rate, rc = 0.03912 d1 = 0.12745 d1 = 0.70252 d2 = -0.5806 d2 = -0.1361 N(d1) = 0.5507 N(d1) = 0.7589 N(d2) = 0.2808 N(d2) = 0.4459 Option price, co = 14.90043873 Option price, po = 33.00485569
  26. 26. Page | 23 Formulas 1. Call option price 𝐶 𝑜 = 𝑆 𝑜 𝑁(𝑑1) − 𝑋𝑒−𝑟𝑐 𝑇 𝑁(𝑑2) 2. Put option price 𝑃𝑜 = 𝑋𝑒−𝑟𝑐 𝑇 (1 − 𝑁(𝑑2)) − 𝑆 𝑜(1 − 𝑁(𝑑1)) 3. d1 = ln( 𝑆 𝑜 𝑋 )+[𝑟𝑐+( 𝜎2 2 )] 𝑋 𝑇 𝜎 √𝑇 4. d2 = 𝑑1 − 𝜎√𝑇 5. N(d1) = NORMSDIST (d1 ) 6. N(d2) = NORMSDIST (d2 ) Comparing Black Scholes Price with Intrinsic Value of stocks using What if analysis: Comparing Black Scholes to the intrinsic value of BSRM Steels Stock price Call price Intrinsic value 14.90044 0 30 1.632289 0 35 3.006761 0 40 4.824651 0 45 7.036301 0 50 9.582671 0 55 12.40821 0 60 15.46628 0 65 18.72005 0 70 22.1414 2.035 75 25.70902 7.035 80 29.4066 12.035 85 33.22131 17.035 90 37.14268 22.035 95 41.16179 27.035 100 45.27079 32.035 105 49.46252 37.035 110 53.73036 42.035 115 58.0681 47.035 120 62.46991 52.035 125 66.93029 57.035 130 71.44409 62.035 135 76.00647 67.035 140 80.61296 72.035
  27. 27. Page | 24
  28. 28. Page | 25 Comparing Black Scholes to the intrinsic value of APEX Foods Stock price Put price Intrinsic value 33.004856 0 70 71.588635 74.33 75 68.517477 69.33 80 65.631108 64.33 85 62.915914 59.33 90 60.358357 54.33 95 57.945412 49.33 100 55.664841 44.33 105 53.505342 39.33 110 51.456616 34.33 115 49.509369 29.33 120 47.655276 24.33 125 45.886921 19.33 130 44.197722 14.33 135 42.58185 9.33 140 41.034149 4.33 145 39.550056 0 150 38.125533 0 155 36.756992 0 160 35.441242 0 165 34.17543 0 170 32.956998 0 175 31.783639 0 180 30.653259 0
  29. 29. Page | 26 Conclusion The capital market in Bangladesh does not have any derivative securities. The purpose of this project is to make the students familiar with how options can be issued and priced using different models. On that process of issuing options, the valuation of the underlying asset plays a very important role. How to make certain assumptions on the valuation process, justifying those assumptions and realizing the impact of such assumptions on pricing of derivative securities such as options was something we contemplated upon while preparing the project, which allowed us a different perspective altogether. Finally, we would like to conclude with a fact that this project was enormously helpful both for our academic and hopefully for our practical work life. We would like to thank our course instructor to provide us with such an opportunity to work on this project.
  30. 30. Page | 27 References Display Company Information. (2019). Retrieved from https://www.dsebd.org/displayCompany.php?name=BSRMSTEEL Display Company Information. (2019). Retrieved from https://www.dsebd.org/displayCompany.php?name=APEXFOODS Desk, S. (2019). Food industry in Bangladesh. Retrieved from https://www.thedailystar.net/food-industry-in-bangladesh-6622 Share Market Analysis Portal For Dhaka Stock Exchange-Bangladesh. (2019). Retrieved from https://stockbangladesh.com/dse/stock/apexfoods/apex-foods- limited/trade/details TA Chart : Bsrm Steels Limited (BSRMSTEEL). (2019). Retrieved from https://stockbangladesh.com/dse/stock/bsrmsteel/bsrm-steels-limited/chart/technical- analysis?fbclid=IwAR3OFHY3C933UZMNO87ij7yGg2VkHkrmhCV05KlFVMWO XC2-JwXBrajbmE4 Yeahia, M. (2019). Apex Foods Limited - Shareholding Details. Retrieved from https://www.apexfoods.com/investors-info/shareholding-details
  31. 31. Appendix Date Price Change 19-Mar 5,491.90 -0.039 19-Feb 5,711.82 -0.019 19-Jan 5,821.01 0.081 18-Dec 5,385.64 0.020 18-Nov 5,281.25 -0.001 18-Oct 5,284.12 -0.016 18-Sep 5,368.95 -0.041 18-Aug 5,600.64 0.056 18-Jul 5,302.63 -0.019 18-Jun 5,405.46 0.012 18-May 5,343.87 -0.069 18-Apr 5,739.22 0.025 18-Mar 5,597.44 -0.036 18-Feb 5,804.94 -0.039 18-Jan 6,039.78 -0.033 17-Dec 6,244.52 -0.010 17-Nov 6,306.86 0.048 17-Oct 6,019.59 -0.012 17-Sep 6,092.84 0.014 17-Aug 6,006.43 0.025 17-Jul 5,860.64 0.036 17-Jun 5,656.04 0.047 17-May 5,403.11 -0.013 17-Apr 5,475.55 -0.043 17-Mar 5,719.61 0.019 17-Feb 5,612.69 0.026 17-Jan 5,468.34 0.086 16-Dec 5,036.05 0.049 16-Nov 4,801.24 0.046 16-Oct 4,592.17 -0.022 16-Sep 4,695.18 0.037 16-Aug 4,526.57 0.000 16-Jul 4,525.34 0.004 16-Jun 4,507.58 0.020 16-May 4,419.39 0.053 16-Apr 4,195.69 -0.037 16-Mar 4,357.53 -0.034 16-Feb 4,511.96 -0.006 16-Jan 4,540.89 -0.014 15-Dec 4,604.91 0.005 15-Nov 4,580.99 0.004 15-Oct 4,564.48 -0.059 15-Sep 4,852.08 0.017 15-Aug 4,768.66 -0.005 15-Jul 4,792.30 0.046 15-Jun 4,583.10 -0.001 15-May 4,586.95 0.133 15-Apr 4,047.28 -0.107 15-Mar 4,530.48 -0.049 15-Feb 4,763.21 0.008 15-Jan 4,724.04 -0.029 14-Dec 4,864.96 0.020 14-Nov 4,769.42 -0.078 14-Oct 5,173.23 0.019 14-Sep 5,074.30 0.115 14-Aug 4,549.51 0.028 14-Jul 4,427.15 -0.012 14-Jun 4,480.52 0.011 14-May 4,430.47 -0.030 14-Apr 4,566.85 0.017 14-Mar 4,491.98 -0.054 14-Feb 4,749.86 -0.001 14-Jan 4,753.17 0.114 13-Dec 4,266.55 0.008 13-Nov 4,230.72 0.066 13-Oct 3,967.72 0.008 13-Sep 3,937.68 -0.046 13-Aug 4,127.48 0.047 13-Jul 3,940.80 -0.040 13-Jun 4,104.64 0.058 13-May 3,878.07 Average monthly return 0.006 Average annualized return 7.2% Variance 0.00205 Standard deviation 0.04527 Annual standard deviation 0.15682 Beta 1
  32. 32. BSRM Steels Income statement 2018 2019E 2020E 2021E 2022E 2023E Revenue 58,372,407,184 66869238919 76602890463 87753396363 100526997436 115159955425 Cost of sales (52,911,534,499) -60613468121 -69436514220 -79543864696 -91122466068 -104386477247 Gross profit 5,460,872,685 6255770798 7166376244 8209531666 9404531368 10773478178 Selling and distribution costs (1,344,485,740) -1540192404 -1764386614 -2021215087 -2315428146 -2652467585 Administrative costs (442,821,958) -442821958 -442821958 -442821958 -442821958 -442821958 Other operating income 19,569,215 22417758 25680943 29419124 33701444 38607110 Profit from operating activities/EBIT 3,693,134,202 4295174194 4984848614 5774913745 6679982709 7716795745 Finance costs (2,705,588,387) -3099420514 -3550579818 -4067410984 -4659473370 -5337717820 Finance income 1,462,311,066 1675168676 1919010365 2198346252 2518342962 2884919182 Profit before WPPF and Welfare Fund 2449856881 2870922356 3353279161 3905849014 4538852300 5263997106 Contribution to WPPF and Welfare fund (161,299,331) -184778460 -211675269 -242487244 -277784286 -318219252 Profit on bargain purchase - Share of profit/(loss) of associate (Net of tax) 281,267,990 322210053 369111744 422840561 484390277 554899322 Profit before income tax 2,569,825,540 3008353949 3510715637 4086202332 4745458291 5500677177 Income tax expenses: (610,873,085) -752088487 -877678909 -1021550583 -1186364573 -1375169294 Current tax (624,830,108) -752088487 -877678909 -1021550583 -1186364573 -1375169294 Deferred tax 13,957,023 0 0 0 0 0 Depreciation -548958402 -628866142 -720405451 -825269447 -945397706 Profit after tax 1,958,952,455 2,256,265,462 2,633,036,728 3,064,651,749 3,559,093,719 4,125,507,882 Other comprehensive income: Acturial (loss)/ gain on defined benefit plans (3,392,066) 0 0 0 0 0 Total comprehensive income 1,955,560,389 2,256,265,462 2,633,036,728 3,064,651,749 3,559,093,719 4,125,507,882 Dividends 433011347 505319431 588152859 683043725 791747139 Retained Earnings 1823254115 2127717296 2476498890 2876049994 3333760743 Depreciation 479204248 548958402 628866142 720405451 825269447 945397706 Number of shares 375952500 375952500 375952500 375952500 375952500 375952500 BSRM Steels Balance sheet 2018 2019E 2020E 2021E 2022E 2023E ASSETS Non-current assets 15,576,744,606 17,840,064,746 20,432,839,355 23,403,024,639 26,805,557,427 30,703,371,290 Property, plant and equipment 17,668,362,090 20240212506 23186427820 26561501510 30427859261 34857013594 Capital work in progress Accumulated depreciation (3,743,335,312) (4,292,293,714) (4,921,159,856) (5,641,565,307) (6,466,834,754) (7,412,232,460) Intangible assets 25,484,116 29193646.86 33443146.18 38311213.13 43887887.91 50276317.26 Investment in subsidiary investment in associate 1,626,233,712 1862952307 2134128245 2444777223 2800645032 3208313839 Current assets 40,002,278,335 45,630,406,404 52,432,365,939 60,263,501,309 69,273,621,892 79,634,343,687 Short term investment 319,833,530 366389288.4 419721818 480817562.3 550806554 630983316.2 Inventories 16,753,099,378 19191721894 21985316325 25185553260 28851624585 33051338306 Trade and other receivables 9,911,646,856 11354410648 13007186701 14900544917 17069505031 19554184334 Current account with related companies 7,374,991,691 8448513693 9678300209 11087097488 12700962776 14549746282 Advances, deposits and prepayments 4,623,327,397 5296310350 6067254363 6950418891 7962139028 9121127646 Cash and cash equivalents 1,019,379,483 973,060,531 1,274,586,523 1,659,069,192 2,138,583,918 2,726,963,802 Total Assets 55,579,022,941 63,470,471,151 72,865,205,294 83,666,525,948 96,079,179,319 110,337,714,977 EQUITY AND LIABILITIES Shareholders equity 13,258,559,602 15,461,300,011 18,023,742,563 20,998,246,391 24,444,792,151 28,432,091,433 Share capital 3,759,525,000 3,759,525,000 3,759,525,000 3,759,525,000 3,759,525,000 3,759,525,000 Retained earnings 6,892,000,691 8,715,254,806 10,842,972,102 13,319,470,992 16,195,520,986 19,529,281,730 Revaluation reserve 2,607,033,911 2986520205 3421245461 3919250399 4489746165 5143284704 Non currents liabilities 5,376,120,480 6,134,573,327 7,003,428,443 7,998,756,255 9,138,966,441 10,445,148,438 Long term borrowings- non current portion 4,072,406,248 4,665,195,758 5,344,273,173 6,122,198,773 7,013,361,144 8,034,243,311 Retirement benefit obligations - Gratuity 165,623,229 165,623,229 165,623,229 165,623,229 165,623,229 165,623,229 Deferred tax liability 1,138,091,003 1303754340 1493532041 1710934253 1959982068 2245281898 Current liabilities 36,944,342,859 41,874,597,813 47,838,034,288 54,669,523,302 62,495,420,727 71,460,475,106 Trade payable 9,030,450,761 10344945474 11850781283 13575810271 15551938738 17815717344 Short term borrowings 23,882,556,282 27358960150 31341397950 35903529230 41129735605 47116681486 Current portion of long term borrowings 690,907,010 791477140.5 906686507.6 1038666035 1189856827 1363055325 Current account with related companies 275,429,270 0 0 0 0 0 Liabilities for expenses 887,392,682 1016563752 1164537282 1334050205 1528237847 1750691922 Current tax liabilities 1,109,937,984 1271503298 1456586458 1668610779 1911497885 2189740237 Provision for WPPF and Welfare Fund 161,299,331 184778460 211675269 242487244 277784286 318219252 Other liabilities 906,369,539 906,369,539 906,369,539 906,369,539 906,369,539 906,369,539 Total Liabilities 42,320,463,339 48,009,171,140 54,841,462,731 62,668,279,557 71,634,387,168 81,905,623,544 Total Equity and Liabilities 55,579,022,941 63,470,471,151 72,865,205,294 83,666,525,948 96,079,179,319 110,337,714,977 EFN 0 0 0 0 0 0 BSRM Steels ProForma Income statement BSRM Steels ProForma Balance sheet
  33. 33. APEX Foods Income Statement 30-Jun-18 2019E 2020E 2021E 2022E 2023E Revenue 1922167738 2021832499 2126664897 2236932874 2352918267 2474917525 Cost of goods sold -1712436974 -1801227155 -1894621124 -1992857588 -2096187631 -2204875357 Gross profit 209730764 220605344 232043773 244075286 256730636 270042168 Operating expenses: Administrative & selling overhead -107315995 -107315995 -107315995 -107315995 -107315995 -107315995 Operating profit/EBIT 102414769 113289349 124727778 136759291 149414641 162726173 Financial expenses -85778333 -90225956 -94904189 -99824989 -105000933 -110445252 Other income 19080109 20069416 21110019 22204578 23355889 24566897 Profit before PPF & WF 35716545 43132809 50933608 59138880 67769597 76847818 Provision for contribution to PPF & WF -1785827 -1878422 -1975819 -2078266 -2186024 -2299370 Profit before tax 33930718 41254387 48957789 57060615 65583573 74548448 Tax expenses: -23623002 -10313597 -12239447 -14265154 -16395893 -18637112 Current tax -23403275 -10313597 -12239447 -14265154 -16395893 -18637112 Deferred tax (expenses)/income -219727 0 0 0 0 0 Depreciation -24259063 -25516900 -26839956 -28231613 -29695427 Net profit/loss after tax 10307716 30940790 36718342 42795461 49187680 55911336 Other comprehensive income: Fair valuation surplus/(deficit) of investments128345170 134999891 141999661 149362371 157106838 165252857 Fair valuation surplus/(deficit) during the year142605744 149999879 157777401 165958189 174563153 183614285 Less: Deferred tax -14260574 0 0 0 0 0 Total comprehensive income 266998056 315940560 336495404 358116021 380857670 404778478 Dividends 11404800 34233920 40626395 47350322 54422886 61862163 Retained Earnings -3293130 -3908053 -4554861 -5235206 -5950827 Depreciation 23063230 24259063 25516900 26839956 28231613 29695427 Number of shares 5702400 5702400 5702400 5702400 5702400 5702400 APEX Foods Balance sheet 30-Jun-18 2019E 2020E 2021E 2022E 2023E Assets Non current assets 518562581 498127856 523955880 551123091 579698928 609756427 Property, plant & equipment 103204859 108556050.5 114184702.2 120105200.7 126332678.1 132883051.3 Accumulated depreciation -47322293 -49775963 -52356856 -55071569 -57927040 Investments 409943370 431199011.3 453556761.7 477073765.7 501810130.7 527829081 Immovable properties (at cost) - Security deposits 5414352 5695087.176 5990378.524 6300980.785 6627687.831 6971334.7 Current assets 1353620387 1443761447 1490809872 1539853591 1590996062 1644346106 Inventories 880408407 926057749.6 974074019.2 1024579941 1077704605 1133583793 Trade receivables 24577415 25851758.62 27192177.2 28602096.73 30085120.86 31645040.08 Advance, deposits and prepayments 45804763 48179748.63 50677877.72 53305535.27 56069437.37 58976648.31 Other receivables 183263253 192765487.4 202760414.4 213273580.2 224331855.8 235963504.9 Short term investments 212153262 223153448.8 234723997.4 246894481.1 259696006.6 273161293.8 Cash and cash equivalents 7413287 27753254 1381386 -26802044 -56890964 -88984174 Total assets 1872182968 1941889304 2014765751 2090976682 2170694990 2254102533 Equity and liabilities Shareholders equity 783569959 797295323.9 811288177.2 825562388.3 840132545.5 855013993.7 Share capital 57024000 57024000 57024000 57024000 57024000 57024000 Share premium 209088000 209088000 209088000 209088000 209088000 209088000 Reserve and surplus 189233610 185940480 182032427 177477566 172242360 166291533 Fair valuation surplus 328224349 345242843.6 363143750.4 381972822.6 401778185.8 422610460.8 Non current liabilities 41133736 43266528 45509905.67 47869602.89 50351650.86 52962393.49 Deferred tax liabilities 38752739 40762075.85 42875597.2 45098705.03 47437081.43 49896703.08 Long term loan 2380997 2504452.145 2634308.463 2770897.856 2914569.434 3065690.411 Current liabilities 1047479273 1101327452 1157967668 1217544691 1280210794 1346126146 Working capital loan (secured) 762783215 802333669.1 843934821.7 887693002 933720052.2 982133613.7 Long term loan - current maturity 593836 624626.509 657013.5118 691079.7867 726912.4045 764602.9503 Short term loan 145343446 152879531.2 160806363.8 169144204.2 177914363.2 187139256.7 Trade payables 64708622 68063776.3 71592895.99 75305001.2 79209579.77 83316611.47 Other payables 22923522 24112110.96 25362328.47 26677370.01 28060596.69 29515543.94 Current tax liability 42181245 44368350.54 46668857.91 49088647.03 51633902.67 54311130.3 Other liabilities 8945387 8945387 8945387 8945387 8945387 8945387 Total liabilities 1088613009 1144593980 1203477574 1265414294 1330562445 1399088539 Total Equity and Liabilities 1872182968 1941889304 2014765751 2090976682 2170694990 2254102533 EFN 0 0 0 0 0 0 APEX Foods ProForma Balance sheet APEX Foods ProForma Income Statement
  34. 34. BSRM Steels Financial Ratios 2014 2015 2016 2017 2018 Current Ratio 1.01 1.06 1.15 1.03 1.08 Quick Ratio 0.40 0.57 0.69 0.61 0.63 Cash (Coverage) Ratio 0.03 0.03 0.01 0.02 0.03 Inventory Turnover 3.17 4.06 2.66 2.51 3.16 Total Asset Turnover 1.42 1.31 0.92 0.82 1.05 Fixed Asset Turnover 4.51 3.34 3.22 2.92 3.75 CapEx to Operating Cashflow Ratio -17.25 9.65 0.47 0.19 -0.05 Cash EPS (Operating Cashflow/share) -8.76 16.87 2.69 4.33 -0.41 Price to Cashflow ratio -10.47 5.75 34.86 18.15 -145.29 Account Receivable Turnover 12.97 14.38 8.00 6.02 5.89 Average Collection Period (Days) 28.15 25.39 45.60 60.63 61.98 Average Payment Period (Days) 0.54 0.44 0.38 29.46 62.29 Gross Profit Margin 7.28% 13.52% 17.61% 9.65% 9.36% Operating Profit Margin 4.91% 10.08% 13.77% 5.77% 6.33% Net Profit Margin 2.82% 6.44% 7.84% 2.84% 3.36% Basic Earning Power (BEP ratio) 0.07 0.13 0.13 0.05 0.07 Return On Asset (ROA) 4.00% 8.42% 7.22% 2.34% 3.52% Return On Equity (ROE) 14.49% 22.93% 23.14% 9.22% 14.78% Net Asset Value per share(NAV) 21.93 26.57 30.69 33.94 35.27 Retention ratio 0.53 0.51 0.84 0.25 0.81 Dividend Payout Ratio 0.47 0.49 0.16 0.75 0.19 Number of shares 341775000 341775000 341775000 341775000 375952500 Market price per share 91.8 97 93.9 78.5 59.9 Dividend Per Share 1.5 3.0 1.2 2.3 1.0 EBITDA margin to Sales 4.98% 10.18% 14.64% 9.97% 7.15% Book Value Per Share 21.93 26.57 30.69 33.94 35.27 Earnings Per Share (EPS) 3.18 6.09 7.10 3.13 5.21 Debt-to-Asset Ratio 0.72 0.63 0.69 0.75 0.76 Debt-to-Equity Ratio 2.62 1.72 2.20 2.95 3.19 Equity multiplier 3.62 2.72 3.20 3.95 4.19 Times Interest Earned Ratio (times) 3.89 4.84 11.61 4.28 1.37 P/E Ratio 28.88 15.92 13.22 25.09 11.50 P/B Ratio 4.19 3.65 3.06 2.31 1.70 P/S Ratio 0.81 1.03 1.04 0.71 0.39 M/B Ratio 4.19 3.65 3.06 2.31 1.70 MARKET Value RATIO BSRM Steels Financial Ratios LIQUIDITY RATIO ASSET MANAGEMENT RATIOS PROFITABILITY RATIO DEBT MANAGEMENT RATIO Depreciation 24608523 30278614 269533886 1,579,172,204 479,204,248 CapEx 173597358 597819687 1978301629 7623695689 3362314104 EBITDA 1917442373 3288210161 4532138206 3750794939 4172338450 Number of shares 341775000 341775000 341775000 341775000 375952500 Market price per share 91.8 97 93.9 78.5 59.9 Market Capitalization 31374945000 33152175000 32092672500 26829337500 22519554750 Total Book value 7495091260 9080618705 10487744649 11601302603 13258559602 Dividends 512662500 1025325000 398737500 797475000 375952500 5yr Compound Annual Growth Rate (2014-2018):CAGR(Revenue) 8.66% CAGR(EBIT) 14.30% Sustainable Growth Rate 7.65% 11.64% 19.34% 2.34% 11.94%
  35. 35. APEX Foods Financial Ratios 2014 2015 2016 2017 2018 Current Ratio 1.27 1.31 1.34 1.27 1.29 Quick Ratio 0.49 0.49 0.60 0.46 0.45 Cash (Coverage) Ratio 0.23 0.00 0.01 0.01 0.01 Inventory Turnover 4.37 2.79 2.80 1.65 1.95 Total Asset Turnover 2.27 1.55 1.31 0.93 1.03 Fixed Asset Turnover 10.32 8.32 5.65 4.26 3.71 CapEx to Operating Cashflow Ratio 1.98 -2.07 21.05 -20.18 -0.83 Cash EPS (Operating Cashflow/share) 19.66 -6.64 23.39 -25.57 -1.93 Price to Cashflow ratio 5.25 -15.07 4.98 -5.76 -108.72 Account Receivable Turnover 128.54 #DIV/0! 52.61 26.34 78.21 Average Collection Period (Days) 2.84 0.00 6.94 13.86 4.67 Average Payment Period (Days) 6.61 8.91 5.50 26.37 13.79 Gross Profit Margin 7.75% 7.89% 9.43% 11.92% 10.91% Operating Profit Margin 3.52% 1.75% 3.74% 6.17% 5.33% Net Profit Margin 0.44% 3.08% -0.65% 0.54% 0.54% Basic Earning Power (BEP ratio) 0.08 0.03 0.05 0.06 0.05 Return On Asset (ROA) 1.01% 4.77% -0.86% 0.51% 0.55% Return On Equity (ROE) 3.03% 13.63% -2.14% 1.36% 1.32% Net Asset Value per share(NAV) 98.56 109.16 108.61 115.10 137.41 Retention ratio 0.33 0.87 1.86 -0.28 -0.11 Dividend Payout Ratio 0.67 0.13 -0.86 1.28 1.11 Number of shares 5702400 5702400 5702400 5702400 5702400 Market price per share 103.2 100.1 116.4 147.4 209.4 EBITDA margin to Sales 4.54% 3.04% 5.22% 7.72% 6.53% Book Value Per Share 98.56 109.16 108.61 115.10 137.41 Earnings Per Share (EPS) 2.99 14.88 -2.32 1.56 1.81 Debt-to-Asset Ratio 0.67 0.65 0.60 0.63 0.58 Debt-to-Equity Ratio 2.01 1.86 1.50 1.68 1.39 Equity multiplier 3.01 2.86 2.50 2.68 2.39 Times Interest Earned Ratio (times) 1.30 0.47 0.79 1.05 1.19 P/E Ratio 34.53 6.73 -50.18 94.24 115.84 P/B Ratio 1.05 0.92 1.07 1.28 1.52 P/S Ratio 0.15 0.21 0.33 0.51 0.62 M/B Ratio 1.05 0.92 1.07 1.28 1.52 DEBT MANAGEMENT RATIO MARKET Value RATIO APEX Foods Financial Ratios LIQUIDITY RATIO ASSET MANAGEMENT RATIOS PROFITABILITY RATIO Depreciation 38959773 35284955 30048979 25450642 23063230 CapEx 56502539 18338490 6336897 7223398 13190515 EBITDA 174409130 83524785 106134727 126855866 125477999 Number of shares 5702400 5702400 5702400 5702400 5702400 Market price per share 103.2 100.1 116.4 147.4 209.4 Market Capitalization 588487680 570810240 663759360 840533760 1194082560 Total Book value 562051615 622483325 619359418 656321873 783569959 Dividends 11404800 11404800 11404800 11404800 11404800 Compound Annual Growth Rate (2014-2018): CAGR(Revenue) last 2yr 8.17% CAGR(EBIT) last 2yr 0.50% Sustainable Growth Rate 1.00% 11.80% -3.98% -0.38% -0.14% BSRM Steels APEX Foods Intercept(Alpha) -0.000135808 0.000680875 Slope(Beta) 1.220458695 0.558950575 R Square 0.132751359 0.019848283 BSRM Steels APEX Foods Avg Daily retun 0.01% 0.08% Daily variance 0.05% 0.07% Daily Standard deviation 2.24% 2.65% Annualized Return 3.07% 19.98% Annualized variance 12.53% 17.58% Annualized Standard deviation 35.40% 41.93%

This project is designed for the course Derivative Securities (FIN 480) where we are to choose two different companies, one is overvalued and the other is undervalued, from Dhaka Stock Exchange (DSEX index) and validate our reasoning of choice with the help of fundamental analysis additionally supported by technical analysis. We used three models namely Dividend Discount Model (DDM), Free Cash Flow to the Firm (FCFF) and Relative Valuation (Market Multiplier Model) in order to reach the conclusion of which stock is overvalued or undervalued. After the valuation process, we assumed to issue a call option on the undervalued stock as the underlying and issued a put option on the overvalued stock as the underlying. Then we used Binomial Model for Option Pricing to calculate the call and put option price. Furthermore, we used Black Scholes Merton Model to calculate the call and put option price. All the calculations that have been used in this report are done in excel sheets based on the financial statements of the company. Majority of the information is collected from Dhaka Stock Exchange, Bangladesh Bank’s website, company website, different news portal, etc.

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