BWFF2043

Advance Financial Management

First Semester 2019/2020 (A191)

Group: E

Case Study

Prepared For:
Dr. Badru Bazeet Olayemi

Prepared By:
Name No. Matric
Ainina Nursyazwina bt Shahidin 264415
Fitri binti Lamini 264751
Nurul Najwa binti Azizan 264792
Erica Wee Yenn Fenn 264837

Date of Submission:

1
 11 November 2019

1. Value per share of the company’s stock

Growth, g = [1 - (DPS/EPS)] x ROE

= [1 - (*1.08/4.32)] x 0.25
= 0.1875 or 18.75%
*54000/50000 = 1.08

Value per share = [1.08 (1 = 0.1875) ] / (0.20 - 0.1875)

= RM 102.6

2. Estimated stock price

Since Setara Corporation has a write off last year, then the EPS of industry need
to recalculate.

EPS of industry = (0.82+ 1.32+ 2.34) / 3

= 1.49

Industry payout ratio = 0.41 / 1.49

= 0. 2752

b = 1 - 0.2752

= 0.7248

g = ROE X b

= 0.13 X 0.7248

= 0.0942

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 D1 = RM 1.08 (1.1875) = RM 1.2825
D2 = RM 1.2825 (1.1875) = RM 1.5230
D3 = RM 1.5230 (1.1875) = RM 1.8086
D4 = RM 1.8086 (1.1875) =RM 2.1477
D5 = RM 2.1477 (1.1875) = RM 2.5504
D6 = RM 2.5504 (1.0942) = RM 2.7906
P5 = RM 2.7906 / (0.1167 - 0.0942) = RM 124.0288

1.2825 1.5230 1.8086 2.1477 2.5504 124.0288

VCS0 = (1+0.1167)1 + (1+0.1167)2 + (1+0.1167)3 + (1+0.1167)4 + (1+0.1167)5 + (1+0.1167)5

= RM 77.9416

3. Industry and Shazz price earnings ratio

Industry average price earnings ratio = RM 25.43 / RM 0.56

= 45.4107

Shazz price earnings ratio = RM 77.9416 / RM 4.32

= 18.042

Industry average price earnings ratio is extremely higher than Shazz price earnings
ratio because there was a big difference between industry average EPS and Shazz
EPS. Even though Shazz has a higher stock price, they still cannot get high price
earning because their EPS is too high compared to average industry’s EPS.

4. Percentage of the stock’s value that is attributable to growth opportunities

Total of shares outstanding = 2 x 50,000 units

= 100,000 units

Total earnings = 100,000 x RM 4.32

= RM 432,000

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 Value of stock = RM 432,000 / 0.1167
= RM 2,701,799.486

Today’s value of stock = RM 77.9416 x 100,000

= RM 7,794,160

Percentage of the stock’s value that is not attributable to growth opportunities

= RM 2,701,799.486 / RM 7,794,160
= 0.3466

Percentage of the stock’s value that is attributable to growth opportunities

= 1 - 0.3466
= 0.6534

5. Future return on equity

Growth rate = ROE X b

0.09422 = ROE X 0.7248
ROE = 0.09422/0.7248
= 0.1302 @ 13.02%

Growth rate and return on equity have a positive relationship where if growth rate
decrease, return on equity also decrease and vice versa. Therefore, when the
growth rate slows in five years, return on equity also will be declined.

4
Scenario:
In 500 words, explain the statement below:

“Market value of a company should be equalled with its book value.” Do you agree with
the statement?

In business, we must know each asset’s book value and market value. Book value
and market value are two ways to value an asset. An asset’s book value can differ from
its market value. Market value is the value of an asset as currently priced in the market
place. In comparison, book value refers to the value of an asset as reported on the
company’s balance sheet. However, some assets are reported at market value on the
balance sheet. Market value is what an asset would sell for in the current market while
book value is the amount you paid for an asset minus depreciation. The question is either
market value of a company should be equalled with its book value?

Although both values are important in business, knowing the difference between
book value and market value is necessary for decision making and record keeping. Keep
in mind that the market value of the asset could change for better or worse during its
useful life. Like the stock market, where the value of stock is always changing the market
value of your asset and business could be higher than what you paid one day and lower
the next. Some asset might have a higher market value than book value, meaning it would
sell for more than what you paid for it minus depreciation. When your company has a
higher market value than book value it typically means your business is profitable and will
continued to grow. This situation shows that the investors have a commitment in the
company, which is a good performance for the company. In the case of many assets, its
book value is higher than market value. This means your asset would sell for less than
the price you originally paid for it minus depreciation. The book value of the company
might also be higher than its market value. The amount of money you put into your
company may outweigh its worth in the current market.

For our opinion, we disagree with the statement that market value of a company
should be equalled with its book value. It is because if the both valued is equalled, so that
the company can’t earn any gain by selling the assets. Other than that, if the market value

5
and book value are equalled, the market sees no compelling reason to believe the
company's assets are better or worse than what is stated on the balance sheet. So that it
will difficult for the market makes the decision if they can't see either their assets are
better or worse during its useful life because the market doesn't believe that the company
is worth the value on its books. However, there are enough not assets to generate future
profits and cash flows. Besides, the market also can’t guarantee that the price will rise in
the future if the value of market value and book value are equalled. The conclusion is,
we have made explanation why we disagree with market value should be equalled to
book value.