MN 0458:INVESTMENT AND PERFORMANCE ANALYSIS

Programme Title: Masters of International Business Administration (MAIBA)Module Tutor: JOHN ROBINSON

MIKE RIDLEY

Hand in Date: 13th May 2010Word Count: 3705 (excluding figures, tables, references & appendices)

PREPARED BY:

Aditya Jain09026748

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Table of Contents

PART-1 (B)...................................................................................................................................3

Part-1 (c): CRITICAL EVALUATION OF THE USEFULLNESS OF RETURN ON CAPITAL EMPLOYED (ROCE), ECONOMIC VALUE ADDED (EVA) AND SHARHOLDER VALUE ADDED (SVA)..............................................................................................................................6

PART-2(A): TOP-DOWN ANALYSIS.......................................................................................10

PART-2 (B): CALCULATION OF CURRENT INTRINSIC VALUE OF THE COMPANY......14

PART-2 (c): Valuation Methods – Future Cash Flow (FCF) method and Price to Book value ratio (P/B)........................................................................................................................17

CONSIDERATION OF VODAFONE INTO PORTFOLIO........................................................19

REFERENCES...........................................................................................................................20

APPENDICES............................................................................................................................24

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PART-1 (B)

The performance word in itself is wide and may include a lot of variables into

consideration when evaluating various parameters of a thing.

For convenience, the performance in the below scenario is divided into industry wise

and country wise company performance and then evaluated separately.

1. Performance evaluation on the basis of Industries

SVA (£ million)

2007 Avg'07 2008 Avg'08 2009 Avg'09 2007 Avg'07 2008 Avg'08 2009 Avg'09 2008/09

Airline Lufthansa 13 13 7 7 - na 1577.68 1577.68 1283.45 1283.45 - na 2516.5996Beverage Coco Cola 27.72 28.61 - 1721.5 2981.12 - 5123.8102Beverage Pepsi 29.23 27.02 - 2341.5 2771.68 - 51737.76

Consume Durables P&G 14.5 14.5 15.1 15.1 16.1 16.1 - na 2533.68 2533.68 4256 4256 15611.4698Entertainmnet HMV - na 151.38 151.38 55.44 55.44 - na 101.8 101.8 42.1 42.1 346

Mining Industry Anglo American 28.9 28.9 26.3 26.3 - - 1361.5 1361.5 1007.08 1007.08 - 59939.74Retail Carrefour 16.4 11.9 - 288.6 342.285 - 14162.6145Retail Gome 11.24 12.63 - 2835.7 14786.3 - 228285.36Retail John Lewis 7.99 10.6 -15 -4 -37 968.25Retail M&S 25 19 608.2 254.7 1478.5Retail Sainsbury 8.52 8.19 - -98.57 -169.49 - 1307Retail Sear 9.7 2.7 - -445.5 -885.36 - 1467.54Retail WH Smith 32 42.7 39.4 17.9 25.5 28.086 -79

28.475

15.572

27.815

15.87286

na

23

ROCE (%)

81.92867

na

EVA (£ million)Industry Company

2652.68

2100.491

2031.5

430.5217

On an industry basis, Airline, Consumer durables, Entertainment and Mining industry

have one company each in the above table which leaves us with no data to compare

within the same industry. However, ROCE of Lufthansa fell significantly with P&G

and Anglo American just marginally over par. HMV however has a fall in ROCE but

still remains positive enough compared to others showing efficiency of operations at

HMV. However, Hmv along with Lufthansa and Anglo-American fell in EVA signifying

non-efficiency of the usage of shareholder capital by the companies. P&G on other

hand show a massive increase in its EVA over two years. SVA for all the companies

has been however positive.

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In Beverage industry, comparing Coca cola with Pepsi the ROCE and EVA growth

remain superior with Coca cola however SVA of Pepsi signifies future benefit to an

investor for investing in Pepsi compared to its counterpart.

With retail industry having a fair balance of 7 companies WH smith turns out to be

the company with maximum ROCE growth, and John Lewis and M&S closely

following. Gome records massive Eva growth which also leads to the increase in the

average industry performance. Sva of each company is positive with an exception of

WH smith.

Finally, the industries in the above scenario cannot be compared because of the lack

of information and difference in no. of companies in specific industries which brings

changes in the average industry performance. However, HMV manages its capital

most efficiently whereas Gome provides the shareholders with maximum returns and

indicating good use of shareholder capital.

2. Performance evaluation on the basis of countries

2007 avg'07 2008 avg'08 2009 avg'09 2007 avg'07 2008 avg'08 2009 avg'09CHINA Gome 11.24 11.24 12.63 12.63 2835.7 2835.7 14786.3 14786.3 228285.36

FRANCE Carrefour 16.4 16.4 11.9 11.9 288.6 288.6 342.285 342.285 14162.6145GERMANY Lufthansa 13 13 7 7 1577.68 1577.68 1283.45 1283.45 2516.5996

UK HMV 151.38 55.44 101.8 42.1 346UK John Lewis 7.99 10.6 -15 -4 -37 968.25UK M&S 25 19 608.2 254.7 1478.5UK Sainsbury 8.52 8.19 -98.57 -169.49 1307UK WH Smith 32 42.7 39.4 17.9 25.5 28.086 -79US Anglo American 28.9 26.3 1361.5 1007.08 59939.74US Coco Cola 27.72 28.61 - 1721.5 2981.12 5123.8102US P&G 14.5 15.1 16.1 2533.68 4256 15611.4698US Pepsi 29.23 27.02 2341.5 2771.68 51737.76US Sear 9.7 2.7 -445.5 -885.36 1467.54

SVA

71.9715

22.01

47.052

19.946

31.11

16.1

20.26 -31.89 112.402

1681.641244.75 4256

Country CompanyEVAROCE

Again in the above table the comparison between companies of China, Germany

and France will not be appropriate as there are one company each. However,

China’s Gome as pointed earlier is the best performing company on the basis of its

strong and positive EVA and SVA values.

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Comparing the companies of UK with US, on an average UK companies manage

their assets better and have better productivity on the capital employed showcasing

a positive and better average ROCE’s of companies as compared to the companies

of US. However, US companies are in a better position than UK companies as they

have a positive and consistent EVA and SVA on an average which shall create value

for the shareholders and investors.

Finally, it shall be again pointed that the above performance indicators are not

always the correct measure of measuring the performance of a company. However

they provide with a starting point and as a benchmark to compare. Moreover, as

seen above we need other companies to compare with its performance.The critical

evaluation of these performance indicators are further broadened in the next section.

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Part-1 (c): CRITICAL EVALUATION OF THE USEFULLNESS OF RETURN ON CAPITAL EMPLOYED (ROCE), ECONOMIC VALUE

ADDED (EVA) AND SHARHOLDER VALUE ADDED (SVA)

INTRODUCTION

The financial reporting of a firm helps provide benchmark to assess internal and

external performance of a firm to potential investors, creditors and others to make

important business decisions (Ezeagba, 2001). However, the performance indication

can only be meaningful to the user if it bears a true reflection of the relationship that

it intends to measure (Enyi, 2006).

RETURN ON CAPITAL EMPLOYED (ROCE)

Measuring the efficiency of the management in the application or use of the

organization’s funds or resources in a given financial period it analysis the past or

present performance of the firm. Expressed as a percentage on nominal capital it

helps present the investors or analyst weather a company is making reasonable

return on profits which can be compared with other companies in same industry and

used as parameter to see what the rate of return earned is on the capital

(Silberstone and Solomons, 1958). Further as Bishop (1969) points that it acts as a

significant planning tool and as a keystone in a toolset of ratios, a ROCE system can

be a powerful instrument to help control managerial performance.

Though the use of ROCE as a performance indicator is desirable but also is spurious

and capable of providing misleading information. Firstly, the use of capital employed

is as defined by a company’s balance sheet which would be invariably influenced by

the static nature of the value as per that specific date and not for the entire period.

Moreover, it tends to produce an average rather than the total resources employed

leading to larger than life results (Enyi, 2006).

Secondly, the non-inclusion of interest element in the earnings part for determination

of financial performance is inaccurate and therefore unacceptable as the interest

element is the cost of using the borrowing fund which is part and parcel of the firm’s

operating costs.

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Thirdly, as pointed by Bishop (1969), it is inadequate if it used as a sole yardstick for

appraising managerial performance but it takes a strong position if placed in a set of

managerial toolkit which provides an essential aid. Finally, a valuable use of the

ROCE system lies in inter-firm comparisons.

ECONOMIC VALUE ADDED (EVA)

As a measure of economic (not accounting) profit and showing the difference

between the cost of capital and return on that capital is most directly linked to the

creation of shareholder wealth overtime. (Young, 2000; Ferguson, Rentzler and Yu,

2005). Supportively, Tully (1993) point that it provides a measure of wealth creation

that aligns the goal of divisional or plant managers with the goals of the entire

company.

Accoring to Makelainen (1998) and Tully (1993), EVA can encourage management

and employees to understand the cost of equity capital and give an organization

marked competitive advantage along with doing what other performance tools do.

Moreover a lot of companies rely heavily on EVA to evaluate and reward managers

from all functional departments. Further, In comparison to traditional performance

measures, which suffer from inherent defects that may cause dysfunctional decision-

making on the part of managers. EVA is highly accurate because it includes the cost

of debt and equity financing (Young, 2000 and Otley, 1999). Further, acting as a

reliable guide, on basis of its past performance it can be used to enhance future

earnings predictions being highly associated with stock returns and firm values.

(Biddle, Boweii and Wallace 1997; Garvey and Milbourn, 2000; Machuga, Preiffer,

and Verma, 2002 and Abate, Grant and Stewart III, 2004)

Despite Eva’s advantage over traditional measures it has limitations as it does not

control over size differences across divisions, a larger division will tend to have

higher Eva relative to its smaller counterpart (Hansen and Mowen, 1997 and

Horngren, Foster and Datar, 1997). Moreover due to its Short-term orientation it

overemphasizes the need to generate immediate results which may create

disincentive for managers to invest in innovative product or process technologies as

it is might show a current negative EVA even though the true rate of return would be

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positive in long-term for the same (Malelainen, 1998 and Brewer, Chandra and Hock,

1999).

Further, it involves complex adjustments to Net Operating Profit after Tax (NOPAT),

capital employed and cost of capital (Wacc) which requires transparent and credible

calculations because of the different ways of assigning the same (Barbera and

Coyte, 1998 and Young, 2000).

SHAREHOLDER VALUE ADDED (SVA)

Presenting the net present value of expected cash flows discounted by cost of

capital, SVA from a no. of uses helps in setting or reviewing business strategies by

providing forecasts by making a note of past performances and then benchmarking

the future on the basis of assumptions. This also helps in investment and divestment

decisions where it presents present value to be compared with other company’s

performances to the investors (Barbera and Coyte, 1998). According to Rappaport

(1986, p.52) ‘it is a superior method of analysing and understanding how much value

the corporation and each of its business units are creating for shareholders and what

the options are for improving performance’. Further as pointed by Barbera and Coyte

(1998), it is a basis for restructuring and managing corporation so that it creates

value. According to Lazonick and O’Sullivan (2000), apart from proving assistance in

corporate governance it also benefits economy as a whole. It is also helpful in

operational decisions and incentive-compensation schemes and is a powerful tool

which helps in business improvements by setting priorities and through focus on the

key value drivers, determining how to act on them Barbera and Coyte, 1998).

However, the method of SVA is based on the future assumptions, which turn out to

be one negative point for the same. (Neale and McElroy, 2004)

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Own Experience in Using ROCE, EVA and SVA

The usage of ROCE in practice though easy to understand but was time consuming

only to the part of collecting the financial data from the balance sheets. Further, the

ROCE is not only easy to understand but also easy to apply and calculate as it

involves general techniques that we have been studying from so long.

The use of EVA in comparison was the most complex as it involved a lot of

calculations along with the justification to those adjustments. However, knowing

about the use of economic model rather than just that of the accounting methods

was helpful. The use of SVA, though a little lengthy, but was comparatively easier

than the EVA method. However the use of assumptions in estimating the SVA

looked vague personally to me because it had to be backed up by superior

justifications. Moreover, the assumptions need not be too optimistic so that the SVA

value could be as true as possible.

CONCLUSION

Finally as Enyi (2006) points, any performance measure which fails to take all costs

(expended or expendable) and all earned revenue into consideration cannot be

suitably employed as a performance indicator. However, it must be noted that no

performance measure is perfect and none of them can predict the exact performance

of an organization.

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PART-2(A): TOP-DOWN ANALYSIS

ECONOMIC ANALYSIS

With the world economy facing heat from global meltdown, the UK economy

registered a record low and contracted to 5.0% in 2009. However, with the efforts

being made from the UK government, GDP grew 0.3% q/q basis in the fourth quarter

of 2009 indicating sustainable growth despite serious economic and financial

obstacles. GDP is forecasted to be 0.8% in 2010 and further 1.7% in 2011. (Archer,

2010; Datamonitor, 2009; Economic Intelligence Unit, 2009)

Source: Archer (2010), IHS Global Insight Source: Archer (2010), IHS Global Insight

Table: Impact of Economic Indicators

MEASURE IMPACT MEASURE IMPACT

GDP Projected growth 1.6%- Positive

impact

NET FOREIGN TRADE Exports 4.5% and imports

4.1%- Positive impact

INFLATION Predicted to decrease from 3% -

Positive impact

CONSUMER SPENDING Up by 1%- Positive impact

INTEREST RATE

Predicted to be low at 0.5% -

Firm’s cost decrease- Positive

INDUSTRIAL

PRODUCTION

Predicted to increase to

2%- Positive Impact

Source: Archer (2010), IHS Global Insight

Inflation as projected should fall back from around May’10 below the Bank of

England’s medium-term target rate of 2.0% by the end of 2010 and remain around

there in most of 2011 and subsequently increase the consumer spending power

currently up by 1% making it favourable for companies in the UK economy which will

on a bigger picture lead to an increase in industrial production from -11.7% to 2.0%

by the end of 2010. The interest rate which is at current record-low level of 0.50% is

expected to stay same until early 2011. However, government’s quantitative easing

program would help to encourage banks to lend money into economy. (Archer, 2010)

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The Net foreign trade is projected to be positive and help economy grow

subsequently. British pound has sunk to a 10-month low of US$1.478(March) from

US$1.635(January). However, as suspected sterling at relatively weak levels would

help support trade and rebalance the economy. Finally, Inventory developments

through strong government spending will be relatively strong in 2010 as part of the

fiscal stimulus to boost eco-government spending. (Datamonitor, 2009; Economic

Intelligence Unit, 2009)

INDUSTRY ANALYSIS

Chart: Communications has been relatively Chart: Growth in telecoms and IT activities are expected to return this year resilient to the global economic downturn

Source: ONS, OEF, LTSB Corporate Markets Source: ONS, OEF, LTSB Corporate Markets Economic Research Economic Research

The UK’s service sector has been consistently growing in importance over the past

decade and it dominates over the other sectors by far (Datamonitor, 2009). Though

the consumer spending on telecoms fell only 1.1% in the recession, compared with a

near 4% fall in consumer spending as a whole, the UK telecom sector has

weathered the recession well, as consumer spending on this area remained

relatively resilient. Moreover, the fall was cushioned by the trend towards greater

outsourcing of activities (Lloyds TSB, 2010)

Finally the UK telecom sector which has one of the lowest revenue leakage rates

globally (KPMG, 2010) though contracted by 1% in 2009 but is forecasted to recover

this year and reach to 3% by 2011, helped by new products and growth in mobile

access and content provision (Lloyds TSB, 2010). Revenues are expected to

increase from growth in mobile access and content provision and availability of 3G

technology. Moreover, the convergence of telecoms and media via content and

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strong underlying demand is also expected to drive investment spending considering

the new opportunities such as UK prepares to host 2012 Olympics (Lloyds TSB,

2010).

COMPANY ANALYSIS

Vodafone group has been the leading mobile telecom service provider over years

and has a diversified revenue base with penetration into worldwide markets having

equity interests in 27 countries and partner networks in over 40 countries which

enhances operating performance and reduces business risk of the group.

Vodafone British Telecom

Revenue-08-09 (£ mln.) 41017 21390

Revenue-07-08 (£mln.) 35478 20704

Income 08-09 (£mln.) 3078 -83

Income 07-08 (£mln.) 6660 1738

P/E (%) 8.30 7.85

Dividend- 2008 2009

7.517.77

15.8 6.5

Beta Value 0.810 0.826

Compared to 3.3% growth in revenue of British-Telecom (its close competitor in UK-

market), Vodafone grew at 15.6% to £41bln. Moreover as compared British-

Telecom’s loss of 105% loss in net-income to -83 million £, Vodafone fell by 53.7%

but though remained in positive figures. Moreover, Vodafone has maintained stable

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dividend growth policy and maintains beta value 0.810 as compared to BT’s volatile

dividend payout which fell by 59% and paying out dividend’s from losses it suffered

leading to beta value at 0.826. Further Vodafone has a solid marketing and operating

strategies along with a resilient structure based on a diverse portfolio of assets in

both emerging and mature markets the inclusion of Vodafone into the portfolio would

be appropriate and shall bring positive and stable returns to the overall portfolio.

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PART-2 (B): CALCULATION OF CURRENT INTRINSIC VALUE OF THE COMPANY

Cash being the lifeblood of any business, acts as a key skill as it directly impacts the

ability to predict operating decisions which affect revenue, expenses, capital

expenditures and above all, the resulting unlevered free cash flows to the firm. To

determine how much excess cash, a company generates from its operations after

capital expenditures and other expenses, it makes sense to look at the free cash

flow (FCF). Investors these days follow path where occurs little risk of additional

compression of P/E multiples and where the general level of cash flow and free cash

flow are both healthy and stable.

As pointed by Lehman Brothers analyst Tumothy Gerdeman quoted in Chang

(2001), “Looking at free cash flow instead of reported earnings per share is a better

indication of the kind of real value being created by the entity instead of clouding the

underlying cash flow by accounting rules” (Chang, 2001).The intrinsic value of

Vodafone has thus been established using FCF (DCF technique) and Price to Book

Value method-P/BV (Relative valuation technique).

0 0 1 2 3 4

Discounted Cash Flow 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014ETurnover 29350 31104 35478 41017 45891 49883 52471 53521 54591Growth % 6% 14% 16% 12% 9% 5% 2% 2%

EBITA 7072 18353 19089 20771 21517 2791 2938 2997 3057Margin % 24.1% 59.0% 53.8% 50.6% 46.9% 5.6% 5.6% 5.6% 5.6%

Depreciation 3079 3011 3427 4061 4558 4880 5154 5278 5379% Sales 10.5% 9.7% 9.7% 9.9% 9.9% 9.8% 9.8% 9.9% 9.9%

Chg Working Capital 5280 6435 7913 3671 8023 8649 8670 8070 9068% Sales 18.00% 20.70% 22.30% 8.90% 17.50% 17.40% 16.50% 15.10% 16.60%Capex (4481) (3633) (3852) (5204) (5925) (11712) (11339) (5806) (5917)

Multiple Depreciation 1.5 1.2 1.1 1.3 1.3 2.4 2.2 1.1 1.1Cash Tax (2380) (2423) (2245) (1109) (3751) (754) (793) (809) (825)

Rate % PY EBITA -34.26% -12.23% -5.81% -17.43% -27% -27% -27% -27%Free Cashflow 21743 24332 22190 24421 3854 4630 9730 10762

Growth % 10% -84% 20% 110% 11%Discount Factor 1.00 0.90 0.82 0.74 0.67 Term Value

Discounted Free Cashflow 24421 3488 3792 7212 7218 86619

Enterprise Value 132751Net Funds / (Debt) (37420)Minority Intrestes 2

Equity Value 95333WACC 10.50% CAGR Sales 7.41%

Terminal Growth 2% CAGR EBITA -38.06%No. Shares 52641.19

Value Per Share 181.099327

FREE CASH FLOW METHOD

(In £ millions)

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As shown in the figure above, free cash flow available (£ 22190 mln. for FY’09)

represents strong intrinsic value of common equity plus the market value of debt.

However, avoiding too much optimism it is assumed that the growth rate will fall

down because the value of the various mergers and acquisitions deals that have

occurred in recent times from the part of Vodafone group still needs to be realized

which takes time. Nevertheless, the value of the share after deducting net debts

gives price (181) which is still more than the current stock price (145.7) of Vodafone

which points out that the share value is being undervalued and providing appropriate

weightage in the portfolio will yield further positive results.

Total Assets 152699Total Liabilities 67922

No. Of Outstanding shares 333

Book value per share 254.59

Market price of Share 145.27

Price Book Value Ratio 0.57

Price to Book Value Ratio

Fig.1 Fig. 2 Source: www.ft.com

Risk free rate of return (RF) 3.83Expected Market return (Km) 16.196Beta value 0.809Rate of return (ks) 13.834

RATE OF RETURN

Fig.3

Moreover, calculation of price to book value (P/BV) ratio above in fig.1 (i.e. 0.57)

supports the undervalued nature of the Vodafone stock as it already has high return

on equity at 9.57 for the current financial period. Further the recent acquisitions

would have increased the book value, result of which P/B would have gone down. It

also shows the true earnings though it has been calculated on book value.

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Furthermore, as per the FT data shown in fig.2, it is again supported by the

calculation of FCFE and P/BV, showing the undervalued stock price by the red line

currently near 145 and green line showing the future expected value that can be

reached at 200. Finally, the growth in free cash flow rate which comes out to be 10% is

less than the rate of return (ks) which is calculated at 13.83 again shows the difference

because of the book values of the assets yet to be realised.

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PART-2 (c): Valuation Methods – Future Cash Flow (FCF) method and Price to Book value ratio (P/B)

FUTURE CASH FLOW EQUITY (FCFE)

Out of all the DCF techniques available, FCFE being the most simple and

transparent is a true metric for actual cash generation. The lead advantage of using

FCFE over others is that it has the entire company cash and valuation chain

(revenues, margins, working capital and capital expenditures) in one comprehensive

formula and most importantly it accounts for capital as uses of cash and adds back

non-cash expenses (D&A) to net income to get a clear picture of how much actual

cash the business generated. It also is independent of financing and therefore not

affected by capital structure (Copeland, Koller & Murrin, 2000). Moreover, he points

that, our management reports might be weaker, misleading and less powerful if we

keep cash flows and unit volumes out of the calculation criterion of the intrinsic value

of a company. According to Christy (2006), various academic researches on

company valuation have concluded that a company’s stock price is determined by

the stock market’s assessment of the company’s expected cash flows and not by the

company’s historical or expected GAAP earnings. Further, Penman and Sougiannis

(1997), advocates that maximizing FCF maximizes company’s options and

opportunities whereas maximizing GAAP earnings can maximize trouble.

With specific regards to the Vodafone apart from other advantages that FCFE has

over others, the rationale for using includes factors such as: it also had moderate

debt levels and While Vodafone has had a history of extraordinary growth, its growth

is moderating because it is becoming a much larger company with lots of mergers

and acquisitions, value of which is still to be realized.

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PRICE TO BOOK VALUE (P/BV)

Comparing company’s current market share price to book value per share, a price to

book ratio is a useful measure to get a quick impression of what the market thinks

about the key value drivers of a firm: growth, profitability, and risk and attempts to

represent the investment that common shareholders have made in the company, on

a per-share basis (Schreiner, 2007).

In comparison to PE, even firms with negative earnings, which cannot be valued

using PE ratios, can be evaluated using price-book value ratios. Moreover, P/B

multiple might be more useful than P/E when analyzing companies with erratic

earnings pattern because book value per share is more stable than EPS. Further,

O’Shaughnessy (2005) found a significant correlation between price-to-book value

ratios and stock price performance with positive future growth in earnings.

Supportively, since book value per share is more stable than EPS, P/B multiple

maybe more useful than P/E when analyzing companies with erratic earnings

pattern.

It is also one of the efficient models for determining the appropriate cost of capital of

a firm in the hedge funds and private equity industry (Gitman and Joehnk, 2008).

Further Bodie et al (2009) state that P/BV is not affected by inflation as it is valued at

the book value whereas P/E is volatile to the same.

According to Reilly and Brown (2003), the P/BV ratios are quite approachable if the

companies accounting measures are consistent every year. Further they point that

though calculated on book value but when discounted at present value it shows the

true earnings of the company. Suozzo, Cooper, Sutherland & Deng (2001) suggest

to view the P/B multiple together with return on common equity as it might not be

sufficient enough reflect a firm’s earnings power at times.

CONSIDERATION OF VODAFONE INTO PORTFOLIO

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The financial analyst’s task is to analyze and forecast the forthcoming changes due

to the future changes. The current value of the Vodafone stock which is currently

undervalued at 145, when introduced into the portfolio increases the average beta of the

portfolio 0.886 from 0.511 (Appendix-III). Further, the inclusion of Vodafone group into

the portfolio leads to an overall Holding Period Return (HPR) of 53.59% (Appendix-I).

Due to market fluctuations resulting from the global economic depression and the

loss in selling of Cadbury and low performance of Boots there exists realised loss of

£10000million and unrealized gain is £3886237 million. However, The Jenson’s

Alpha is 38.81 (Appendix- IV) is positive and thus implies that it is gaining positive

and excess returns. Moreover it’s acquisitions and merger deals in the past is

currently realising value and would be on a strong positive foothold in the future the

inclusion of Vodafone is suggested.

Finally, the inclusion of Vodafone into the portfolio brings a diversification in the portfolio and

one shall always recall portfolio theory asserting that diversification in various

industries is important (Levy, 2002).

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APPENDICES

Appendix-I: Holding Period Return

HPR = ( Dividends + Realised Gain + Unrealised Gain )Initial investment + ( Weighted New Funds - Weighted Withdrawn Funds)

( £295.58 + -£10,000.00 + 3,886,237.00£ )

( £7,234,053.00 + )

£3,876,532.58£7,234,053.00

HPR = 53.59%

£0.00

HPR of 5 years

Page | 24

Appendix-II: Realised and Unrealised Gain (Loss)

EPIC NAME Date of update Current Volume Start of Year

Valuation

Curr Value (£) Realised Gain

Annual Unrealised

Gain / (Loss)SSE Scottish & Southern Energy PLC 30-Apr-10 400 £371,800.00 £449,200.00 £77,400.00

NG.L National Grid Co PLC 30-Apr-10 700 £401,828.00 £458,150.00 £56,322.00UU. United Utilities Group PLC 30-Apr-10 500 £321,750.00 £286,250.00 (£35,500.00)

BATS British American Tobacco PLC 30-Apr-10 1,300 £1,235,650.00 £2,841,150.00 £1,605,500.00VOD.L Vodafone Group PLC 30-Apr-10 2,000 £541,500.00 £290,540.00 -£10,000.00 (£250,960.00)

RB Reckitt Benckiser Group PLC 30-Apr-10 300 £506,400.00 £1,020,900.00 £514,500.00TRG TR European Growth Trust 30-Apr-10 5,000 £1,295,000.00 £1,695,000.00 £400,000.00BP. BP PLC 30-Apr-10 1,000 £530,000.00 £575,500.00 £45,500.00

TLW Tullow Oil 30-Apr-10 2,000 £352,000.00 £2,294,000.00 £1,942,000.00BHY Boot (Henry) PLC 30-Apr-10 2,000 £972,000.00 £193,200.00 (£778,800.00)

MRW Morrison(Wm) Supermarkets PLC 30-Apr-10 3,500 £706,125.00 £1,016,400.00 £310,275.00£7,234,053.00 £11,120,290.00 -£10,000.00 3,886,237.00£

Page | 25

Appendix-III: Beta Value

EPIC NAME Date of update Current price Beta WaccCurrent volume Value weight weighted BetaSSE Scottish & Southern Energy PLC 30-Apr-10 1123 0.78 400 449,200.00£ 0.040395357 0.031508378

NG.L National Grid Co PLC 30-Apr-10 654.5 0.84 700 458,150.00£ 0.041200206 0.034608173UU. United Utilities Group PLC 30-Apr-10 572.5 0.79 500 286,250.00£ 0.025741698 0.020335942

BATS British American Tobacco PLC 30-Apr-10 2185.5 0.84 1300 2,841,150.00£ 0.255497033 0.214617508VOD.L Vodafone Group Plc 30-Apr-10 145.27 0.809 2000 290,540.00£ 0.026127486 0.021137136

RB Reckitt Benckiser Group PLC 30-Apr-10 3403 0.61 300 1,020,900.00£ 0.091806811 0.056002155TRG TR European Growth Trust 30-Apr-10 339 0.87 - 5000 1,695,000.00£ 0.152426824 0.132611337BP. BP PLC 30-Apr-10 575.5 0.99 1000 575,500.00£ 0.051753178 0.051235646

TLW Tullow Oil 30-Apr-10 1147 1.2 2000 2,294,000.00£ 0.206293294 0.247551953BHY Boot (Henry) PLC 30-Apr-10 96.5 0.54 2000 193,000.00£ 0.017355975 0.009372226

MRW Morrison(Wm) Supermarkets PLC 30-Apr-10 290.4 0.74 3500 1,016,400.00£ 0.091402138 0.06763758211,120,090.00£ 1 0.886618036

EPIC NAME Date of Update Last Price Beta volume Value weight Weighted BetaSSE Scottish & Southern Energy PLC 15-Apr-05 929.5 0.57 400 371800 0.051395808 0.029295611

NG.L National Grid Co PLC 15-Apr-05 574.04 0.6 700 401828 0.055546732 0.033328039UU. United Utilities Group PLC 15-Apr-05 643.5 0.5 500 321750 0.044477142 0.022238571

BATS British American Tobacco PLC 15-Apr-05 950.5 0.38 1300 1235650 0.170810195 0.064907874CBRY Cadbury PLC 15-Apr-05 541.5 0.62 1000 541500 0.074854304 0.046409668

RB Reckitt Benckiser Group PLC 15-Apr-05 1688 0.45 300 506400 0.070002252 0.031501013TRG TR European Growth Trust 15-Apr-05 259 0.7 5000 1295000 0.179014447 0.125310113BP. BP PLC 15-Apr-05 530 1.06 1000 530000 0.0732646 0.077660476

TLW Tullow Oil 15-Apr-05 176 0.45 2000 352000 0.048658753 0.021896439BHY Boot (Henry) PLC 15-Apr-05 486 0.01 2000 972000 0.134364512 0.001343645

MRW Morrison(Wm) Supermarkets PLC 15-Apr-05 201.75 0.59 3500 706125 0.097611256 0.0575906417234053 1 0.51148209

Page | 26

Appendix-IV: Jensen’s Alpha

Jensen's Alpha = ( Total Portfolio Return - Risk Free Rate ) - [Portfolio Beta x ( Market Return - Risk Free Rate)]

53.59% - 3.8% - 0.9 x 16.20% - 3.8%

49.76% - 0.9 x 12.40%Jensen's Alpha = 38.81%

Page | 27