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Application of CAPM (Capital Asset Pricing Model) in Vietnam stock market - the test on profitability of investment decision based on CAPM
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VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY
THE INTERNATIONAL UNIVERSITY
SCHOOL OF BUSINESS
Advisor: Mr. ROBERT T. CONNOLLY
Student name: TRAN THI THANH THUY (BA070150)
Ho Chi Minh city, Vietnam
2011
APPLICATION OF CAPM (Capital Asset Pricing Model) IN VIETNAM STOCK MARKET
APPROVED BY Advisor APPROVED BY: Committee,
Mr. Robert T. Connolly, MBA Dr. Le VinhTrien, Ph.D., Chair
________________________________
Ms. Le Hong Nhung, MBA
________________________________
Ms. Hoang Thi Anh Ngoc, MBA
________________________________
Mr. Robert T. Connolly, MBA
________________________________
Ms. Le Thi Kim Chi, MBA
THESIS COMMITTEE
(Whichever applies)
ii
ACKNOWLEGEMENT
It is with deep gratitude and appreciation that I acknowledge the professional
guidance of Mr. Robert T. Connolly. His constant encouragement and support help
me to achieve my goal.
My gratitude also goes to Mr. John Harackiewicz and Mr. Hua Chia Yee for their
generous support. Their practical advice and comments help me a lot in improving
this paper. I am also grateful to the faculty of the School of Business Administration
of the International University. Gratitude is also expressed to the members of my
reading and examination committee, Dr. Le VinhTrien, Ms. Le Hong Nhung, Ms.
Hoang Thi Anh Ngoc and Ms. Le Thi Kim Chi.
iii
LIST OF TABLES
Table 1: VN Index annual return 2001 – 2010, calculated from data source................6
Table 2: Country bonds rating........................................................................................7
Table 3: VN Index’s return demonstration..................................................................16
Table 4: Balance sheet of VNM in 2008 and 2009......................................................18
Table 5: Income statement of VNM in 2008 and 2009................................................19
Table 6: FCFE 2009 of VNM......................................................................................20
Table 7: VNM’s FCFE.................................................................................................22
Table 8: Investment decision result of VNM when using CAPM 1............................23
Table 9: Investment decision result of VNM when using CAPM 2............................23
Table 10: Test result.....................................................................................................25
Table 11: Test result for buy stock only.......................................................................26
Table 12: Analyze the sensitivity of cost of equity on the changing of Beta...............27
Table 13: Analyze the sensitivity of cost of equity on the changing of market return 28
Table 14: Analyze the sensitivity of cost of equity on the changing of risk free rate..28
Table 15: Analyze the sensitivity of estimated price on the changing of cost of equity
......................................................................................................................................29
Table16: LIST OF 31 SAMPLE STOCKS..................................................................37
Table 17: TABLE OF RESULT – CAPM 1................................................................39
Table 18: TABLE OF RESULT – CAPM 2................................................................42
Table 19: TABLE OF PROFIT/LOSS.........................................................................45
Table 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM
APPLICATION............................................................................................................47
Table 21: STOCK PRICE CALCULATION BASED ON NEW CAPM
APPLICATION............................................................................................................49
Table 22: TABLE OF BETA AND COST OF EQUITY............................................51
Table 23: TABLE OF FCFE GROWTH RATE’S SENSITIVITY ANALYSIS........52
Table 24: TABLE OF VIETNAM INFLATION RATE.............................................52
iv
Table 25: TABLE OF VIETNAM GDP GROWTH RATE........................................52
v
LIST OF FIGURES
Figure 1: Security Market Line (SML).....................................................................................4
Figure 2: VN Index Time period.............................................................................................13
Figure 3: The sensitivity of cost of equity on the changing of Beta........................................26
Figure 4: The sensitivity of cost of equity on the changing of market return..........................27
Figure 5: The sensitivity of cost of equity on the changing of risk free rate...........................27
Figure 6: The sensitivity of estimated price on the changing of cost of equity.......................28
vi
TABLE OF CONTENTS
LIST OF TABLES......................................................................................................IV
LIST OF FIGURES.....................................................................................................V
CHAPTER 1: INTRODUCTION..............................................................................1
CHAPTER 2: LITERATURE REVIEW..................................................................3
A - CAPITAL ASSET PRICING MODEL (CAPM)......................................................................3
B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE)........................................5
C - CAPM APPLICATION FOR EMERGING MARKET...........................................................7
D - STOCK VALUATION METHOD – THE DISCOUNTED CASH FLOW METHOD.............91 - Dividend Discount Model (DDM):................................................................................................92 - Discounted Free Cash Flow to Equity (Discounted FCFE)..........................................................10
CHAPTER 3: METHODOLOGY...........................................................................11
A - TRADITIONAL CAPM APPLICATION..............................................................................12BETA CALCULATION...................................................................................................................12MARKET RETURN CALCULATION............................................................................................14
B - CAPM APPLICATION FOR EMERGING MARKET..........................................................15
C - FREE CASH FLOW TO EQUITY (FCFE)...........................................................................16
D - INTRINSIC PRICE CALCULATION AND DECISION MAKING......................................22
CHAPTER 4: RESULT............................................................................................24
A - TEST RESULT...................................................................................................................... 24
B - SENSITIVITY ANALYSIS RESULT.....................................................................................26
CHAPTER 5: DISCUSSION / IMPLEMENTATION..........................................29
A – RESULT EXPLANATION....................................................................................................29
vii
B – LIMITATION OF THE TEST...............................................................................................30
C – IMPLEMENTATION IN PRACTICE..................................................................................30
CHAPTER 6: CONCLUSION & RECOMMENDATION...................................32
LIST OF REFERENCES..........................................................................................33
APPENDIX.................................................................................................................34
viii
CHAPTER 1: INTRODUCTION
CAPM – Capital Asset Pricing Model is the most famous model used to estimate
the cost of equity. However, this beautiful and easy-to-apply model has met lots of
criticism (CFA curriculum). The reason is because the assumptions are difficult to
meet and the result is difficult to test. Theoretically, CAPM is proven to be not a
correct measurement, especially in emerging markets like Vietnam. The questions are:
Does CAPM actually work in Vietnam market? Can investors use CAPM as an
effective investment tool? Therefore, the purpose of this paper is to test whether
investors can use CAPM to make profit in the Vietnam stock market.
This paper has no interest in testing the accuracy of CAPM, but testing the
potential profitability of using CAPM in making investment decisions in the Vietnam
stock market, specifically in HOSE – Ho Chi Minh stock exchange. The test was
constructed in 31 random stocks of HOSE, which are listed before 2008 and the time
range of the test is from 2008 to 2010.
The idea is to estimate an intrinsic price of each stock at the end of 2009 based on
cost of equity calculated by CAPM, assuming that present time is the end of 2009.
Then, compare with market price at the end of 2009 and make buy/sell decisions. For
example, if the intrinsic price calculated based on CAPM is higher than the market
price on Dec 2009, a buy decision will be made and vice versa. After that, those
buy/sell decisions will be checked whether they were profitable decisions based on
the historical price data available in 2010.
Again, CAPM – Capital Asset Pricing Model is a standard and available model
built from Markowitz portfolio theory in order to estimate cost of equity, the name
itself demonstrate the objective of CAPM. The main purpose of this paper is to test
the investment profitability when using the cost of equity, calculated by a popular and
world wide accepted model. In other words, this paper do not test whether the value
1
of cost of equity calculated by CAPM is correct or not; instead, this paper want to test
whether the buy/sell decision based on that cost of equity is profitable. The reason
why I do not test the accuracy of CAPM is because cost of equity is an estimated
number and there is no factual one for comparison.
2
CHAPTER 2: LITERATURE REVIEW
A - CAPITAL ASSET PRICING MODEL (CAPM)
For any investment decision, it is very important to estimate the intrinsic value or
the correct price of the investment. By estimating the correct price, investors can see
whether that asset is underpriced or overpriced so that he or she can make a buy or
sell decision.
CAPM – Capital Asset Pricing Model is the most well-known and accepted
pricing model. CAPM is used to estimate cost of equity, also called as investor’s
expected return which is an important component to determine intrinsic price of a
stock or intrinsic value of a firm.
Capital Asset Pricing Model (CAPM) was built from Harry Markowitz’s portfolio
optimization Model.
According to Markowitz’s portfolio optimization Model, when the portfolio is
well diversified, it will eliminate all unsystematic risk (diversifiable risk) and only
systematic risk (undiversified risk) is left. Market return accounts for all risky assets
trading in market, so there is no unsystematic risk such as industry risk, company risk,
etc but only systematic risk, the risk that all market suffers like country risk, interest
rate risk,… (Those are macro factors which affect the whole economy) The line that
shows the relationship between expected return and systematic risk (β) is called
Security Market Line (SML)
3
Figure 1: Security Market Line (SML)
Even when there is no systematic risk, the expected return still equals to Risk free
rate of return (Rf) – the expected rate of return of risk-free asset. SML slopes upward
because of “higher risk, higher return”. In fact, CAPM is the formula of SML, which
is a regression line:
E(R)=R f +β ( RM−R f )
The logic is to estimate expected return based on the return investor can earn
without risk and the equity risk premium, which is the difference between the whole
economy return and that non-risky return. Beta is the slope of the SML, which show
the level of risk. Since SML slopes upward, risk and return has a positive relationship,
“higher risk, higher return”. There is no negative Beta. Indeed, the expected return
itself always contains the risk in it.
The logic of CAPM is that: In order to estimate the expected return (cost of
equity) of a single stock, we just have to compare it with SML by calculating a new
Beta - the sensitivity of that stock’s return with the market return. In other words,
market return is used as a benchmark and we adjust stock return – cost of equity of
4
Risk-free rate of return
Expected return
Systematic risk (β)
Security market line (SML)
each stock – according to market return by calculating the sensitivity of stock return
to market return, and this sensitivity is expressed by Beta:
β=Cov(R A , Rm)
σm2 (CFA curriculum, level 1 – 2010)
Then, we apply the CAPM formula: costofequity=ke=R f +β ( RM−Rf )
ke is the cost of equity, the return of the stock that we are looking for.
Rf is the return of risk free assets or it is the interest rate of government bond since
government bond is considered to have no credit risk. In the U.S., 10 year Treasury
bond is used.
RM is the market return. If what we are looking for is stock return then the market
return is the index return. In US market, we use S&P 500’s return, which accounts for
75% of U.S. market capitalization (standardandpoors.com).
Since market return is used as benchmark, the Beta of the market will be 1 and the
stock’s Beta will fluctuate depending on their sensitivity to market return. Different
stock has different Beta because they have different risk relative to market Beta. If a
stock’s Beta is less than one, we say it is a defensive stock and if more than one, it is
an aggressive stock. As a result, an investor will have different expected return over
different stock. In a corporation, equity is owned by stock holders so that expected
return over a stock is also called cost of equity.
Therefore, CAPM is actually very easy to apply. However, when applying CAPM
in Vietnam market, there are many obstacles and many assumptions are required.
B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE)
Assume that current year is 2009. It is now the end of 2009 and we are calculating
the expected return to make investment decisions. The original CAPM formula is:
k A=R f +β A ( RM−R f )
5
If we apply CAPM to HOSE similarly to U.S stock market then we have:
kA: Cost of equity, expected return of stock A (what we are looking for)
Rf: risk free rate – interest rate of Vietnam government 10 year term bond
βA: systematic risk based on stock A return covariance with VN-Index return
RM: VN-Index return in 2009
Reasons why the original CAPM might be expected to fail:
1- CAPM was built from Markowitz portfolio theory so it has a same assumption,
market return must consist of all risky assets of the whole economy, not only stocks
but also real estate, gold, currency, etc. However, there is no published market return
in the real world that can satisfy that assumption. As the result, we take the Index
return as RM. For example, in U.S they use S&P 500 return for calculation. However,
the S&P 500 accounts for only 75% U.S. market capitalization
(standardandpoors.com) so can not fully represent “the Market”. In Vietnam, there is
still no consensus on how much total market capitalization is represented by VN
Index. In my estimation, VN Index is not even 50% of Vietnam market capitalization.
The reason is that stock is just one investment channel along with gold and foreign
currency, which attracts lots of investors’ attention. Besides, the VN Index is just the
Ho Chi Minh stock exchange; there is another HNX Index for Hanoi stock market.
Thus, using the VN Index as a benchmark for Beta calculation may not give the
correct Beta value.
2- VN Index annual return change annually with very high volatility. Moreover,
the VN Index was just established since 2001 so the size of VN Index is small and
does not compose of all industries. Hence, VN Index is not representative of a
diversified economy and the market liquidity is focused on a few high-capitalized
stocks. (Table 1)
Table 1: VN Index annual return 2001 – 2010, calculated from data source
VN Index annual return
6
2010 -2.04%2009 56.78%2008 -65.95%2007 23.30%2006 144.49%2005 28.50%2004 43.38%2003 -8.95%2002 -22.13%2001 13.83%
3- U.S. government bond may not have credit risk but Vietnam government bonds
do have risk. Due to country risk, Vietnam bonds are rated Ba3 by Moody and BB- by
S&P, both ratings are below investment bonds (Table 2). The fact that Vietnam
government may not be able to pay debt is possible. In other words, Vietnam
government bonds are not risk free assets. Besides, the quality and length of data on
bond are not suitable for making long-term assumption. Moreover, it is difficult to
find long term Vietnam bond actively traded in market.
Table 2: Country bonds rating
As a result, cost of equity will change every year with high volatility, if we use
that cost of equity to discount long term cash flows, it could yield undesired result.
7
C - CAPM APPLICATION FOR EMERGING MARKET
The formula used is still the standard formula of CAPM but the numbers applied
are different to solve problem stated above
k A=R f +β A ( RM−R f )
Beta: VN Index is not diversified enough to be a correct benchmark. Therefore,
Beta should be calculated relative to global index (CFA curriculum, level 2- 2010). In
this paper I use S&P Global 1200
Market return: Global index return. This is a good benchmark in term of market
diversification and market capitalization
Risk free rate: Since the Vietnam government bond is not a risk free asset and
with the unavailability of information, we should use the bond rate of developed
country and then adjust it with inflation difference between the two countries (CFA
curriculum, level 2 - 2010). In this paper I use the U.S. 10 year bond.
As a result, by using this method of application, cost of equity should have lower
volatility and would be presumed to give more correct cost of equity for discounting
long term cash flows.
There might be a concern that using global index is inappropriate since it may not
be composed of Vietnam capitalization. However, many published models looking at
emerging markets use a global index in calculation. The first reason is that Global
index composes of all industries that Vietnam listed companies are operating. The
second reason is because of the effect of globalization and that S&P 1200 consist of
all big markets that have big effects on the world economy and world market price.
For example, the financial crisis in the U.S. in 2008 affected the whole world
economy. U.S. stock market went down, Global index also went down, VN Index
certainly also went down and reached the bottom even though many companies’
performance was growing and they had good financial report. There was no place to
8
hide in stock market at that time. The third reason is that there is no conflict with
other components of CAPM formula. If RM is Global index return then my Beta is
calculated relative to Global Index and my Rf is US bonds rate adjust with Vietnam
inflation.
In summary, the application of CAPM for emerging market logically should
perform better than the traditional application of CAPM, which is used for developed
market. However, we need to do the test to see which one actually works better.
D - STOCK VALUATION METHOD – THE DISCOUNTED CASH FLOW METHOD
When we know that CAPM is used to calculate cost of equity - k e, it is also
important to know what valuation methods use ke to estimate stock price. In order to
value intrinsic price of stock, we might use 2 types of discounted cash flow method,
the dividend discount model (DDM) and Discounted Free cash flow to Equity
(Discounted FCFE)
The general idea is to discount future cash flow to present time, the general
formula is: PV=∑t=1
∞ [ CFt
(1+r )t ] . PV is the present value of expected cash flow. The
difference is the type of Cash Flow that we use.
1 - Dividend Discount Model (DDM):
In DDM, dividend per share is the cash flow and cost of equity is used as the
discount rate. Then, when we discount future dividends per share to expected return,
we will have the price per share, which is:
V 0=∑t=1
∞
[ ¿t
(1+ke )t ]
9
This dividend technique is used to estimate the intrinsic price of a stock. However,
this technique is not appropriate to such young and primitive market like Vietnam.
In Vietnam, dividend data is difficult to measure under some reasons below:
-There are high rate of return investment alternatives available so that
limited dividend is paid out
-Most of listed companies are in supernormal growth period that they do
not pay out dividend
-The assumption of relatively constant growth for the long term is
inappropriate due to spontaneous dividend payment policy without long term
strategic plan
- The data of dividend per share is unavailable and difficult to calculate
2 - Discounted Free Cash Flow to Equity (Discounted FCFE)
FCFE is a measure of how much cash can be paid to the equity shareholders of
the company after all expenses, reinvestment and debt repayment.
In this method, we calculate the present value of future FCFE. Then, that
discounted FCFE will be divided by the number of shares outstanding to get the price
of stock.
FCFE is cash flow available to shareholders. Thus, the appropriate discount rate is
cost of equity
PV of FCFE=∑t=1
∞ [ FCFE t
(1+ke )t ]Price per sh are= PV of FCFE
Number of sha res outstanding
Advantages of the discounted FCFE method:
10
- Whether the company decision is to pay out cash for equity in form of
dividend or to keep cash for reinvestment, FCFE is not affected.
- Growth rate of FCFE is more stable and easier to estimate than dividend
per share.
- FCFE can easily be computed based on financial statement.
As the result, based on advantages and disadvantages of 2 methods, this paper
uses the Discounted FCFE for valuation.
11
CHAPTER 3: METHODOLOGY
The objective of this paper is to test whether investors might make profitable
investment decisions by applying CAPM in valuation.
The research is constructed on a portfolio of 31 stocks trading in HOSE (Ho Chi
Minh stock exchange). Those stocks are chosen randomly. Stocks must be listed
before 2008 because the examined time period is from 2008 to 2010.
In order to construct the test, we assume that time 0, present time, is the end of
2009. The investor makes buy/sell decisions and holds the investment for one year.
Transactions will be closed at the end of 2010. The idea is to calculate the how much
the stock price should be at time 0 and then compare with current price to make a
buy/sell decision. After that, we will see whether those buy/sell decisions are
profitable when the investor closes transactions at the end of 2010.
The purpose of this test is to answer the questions below:
1) Is CAPM an effective tool with high successful rate?
2) Between 2 methods of CAPM applications, the traditional application for
developed market and the application recommended for emerging market, which one
has a higher success rate?
The sensitivity analysis is also constructed in order to give a better view on the
effects of each component RM, Rf, on cost of equity and the effect of cost of equity on
price estimation.
All the computations are constructed in Excel worksheet. The following provides
explanation and method of computation. Since it is too much to show all calculations
of 31 stocks, one single stock is chosen for demonstration and I choose VNM
12
The result of the test and further discussion on CAPM implementation in the
Vietnam stock market will be mentioned in chapter 4 and 5
A - TRADITIONAL CAPM APPLICATION
k A=R f +β A ( RM−R f )
kA: Cost of equity, expected return of stock A
Rf: risk free rate – interest rate of Vietnam government 10 year term bond
βA: systematic risk based on stock A return covariance with VN-Index return
RM: VN-Index annual return 2009
According to Duetche Bank’s research, the risk free rate of Vietnam in 2009 is
10.4%. I use this number because there is no data on Vietnam long term bond rate in
2009. Beta and market return are not available so we need to calculate them from
available daily price data.
BETA CALCULATION
Now we know that Beta is computed based on covariance with VN-index, the
problem left is which period of time we should choose to compute beta. I divide VN-
Index time line in 3 periods. (Figure 2)
Period 1 is from the date VN index is establish to 2005, this is the start up period
and market movement is unstable. Period 2 is from 2005 to 2007, this period has an
abnormal return that only happens once in 60 years (Hua Chia Yee, CFA). Thus, I
choose the period from October 2008 to December 2009, where market movement is
in a cycle. The purpose of this is to minimize Beta error (Hua Chia Yee, CFA)
Beta is calculated by dividing the covariance of stock A return (RA) and VN Index
return (RM) by the variance of VN Index return (σ m2)
β=Cov(R A , Rm)
σm2 (CFA curriculum)
13
Figure 2: VN Index Time period
The source we have is daily price of VN Index and other 31 stocks, which are
available and can be downloaded from internet (www.cophieu68.com). In order to
have Beta value of individual stocks, these following steps need to be taken.
Step 1: From source data, extract weekly end price, the closing price of final
transaction day in a week from October 10, 2008 to December 25, 2009. Friday is
usually the final transaction day of a week.
Step 2: Calculate weekly return. For an individual stock, there are 63 weekly
returns from 10 Oct 2008 to 25 Dec 2009.
14
Period 1: start up Period 2: abnormal returnInvestigate time trend Oct
2008 – Dec 2009
Weekly return= ending price of week 2−ending price of week 1ending price of week 1
Step 3: Calculate individual stock’s Beta. After having weekly return of VN
Index and other 31 stocks, Beta of an individual stock is calculated by dividing
covariance between VN Index weekly return and Stock A’s weekly return to variance
of VN Index weekly return.
β=Cov(R A ,Rm)
σm2 (CFA curriculum, level 1-2010, portfolio management)
The result of those calculations is showed in Appendix (Table 21)
The reason why I do not use daily data for Beta calculation is because it is not
necessary to do so. In order to minimize Beta error, 25 weekly returns is
recommended (CFA curriculum, level 1-2010) and my period is 63 weeks already.
Besides, by skillfully taking only beginning and ending price of the week, I can
eliminate error and inconsistency of raw price data.
MARKET RETURN CALCULATION
Next component in CAPM formula is market return. From VN-Index price data
sources, we have closing price of each transaction day. What is needed is VN Index
return of 2009
Step 1: Calculate daily return.
Daily return=Closing price∈day 2−Closing price∈day 1Closing price∈day1
Step 2: Plus 1 to daily return, then we got table 3
15
Table 3: VN Index’s return demonstration
CODE DATEClosing
priceDaily
return(1 + daily
return)VN INDEX 12/31/2009 494.8 -0.0012 0.9988VN INDEX 12/30/2009 495.4 0.0227 1.0227VN INDEX 12/29/2009 484.4 -0.0166 0.9834VN INDEX 12/28/2009 492.6 -0.0050 0.9950VN INDEX 12/25/2009 495.1 0.0334 1.0334VN INDEX 12/24/2009 479.1 0.0176 1.0176VN INDEX 12/23/2009 470.8 0.0120 1.0120VN INDEX 1/6/2009 314 0.0067 1.0067
…. .… …. …. ….VN INDEX 1/2/2009 313.3 -0.0073 0.9927
Step 3: Calculate 2009 return.
VN Index 2009 return = [the product of (1 + daily return)] - 1 = (0.9988 x 1.0227
x… x 0.9927) – 1 = 0.5678
As the result, we have RM = VN Index 2009 return = 0.5678 = 56.78%
Since we have all three component of CAPM, just apply CAPM formula we will
have cost of equity of each stock. The result of cost of equity from those computations
are showed in Appendix (Table 21)
B - CAPM APPLICATION FOR EMERGING MARKET
k A=R f +β A ( RM−R f )
Risk-free rate (Rf) = 10-year U.S government bond yield + (VN inflation – U.S.
Inflation)
10 year U.S. bond yield in 2009 is taken from federalreserve.com, which equals to
3.26%.VN inflation and U.S. inflation in 2009 are retrieved from IMF’s website
16
(International Monetary Fund), which equal to 6.717% and -0.4% respectively.
Hence, Rf = 3.26 + [6.717-(-0.4)] = 10.38%
Market return (RM) is a global index return instead of VN Index return and I
choose S&P Global 1200. S&P Global 1200 captures approximately 70% of world’s
market capitalization. This index is a composite of seven headline indices: S&P
500(United States), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60
(Canada), S&P/ASX All Australian 50, S&P Asia 50, and S&P Latin America 40.
Daily price data of S&P Global 1200 is available on standardandpoors.com.
Apply the computation similar to VN Index return calculation we have S&P Global
1200’s 2009 return is 27.8%
Beta (β) is computed similarly to Beta calculation of traditional CAPM
application, but instead of VN Index return, we use S&P Global 1200.
Since we have all three components, cost of equity will be easily calculated and
the table of result is showed in Appendix (Table 22)
C - FREE CASH FLOW TO EQUITY (FCFE)
Step 1: Calculate FCFE in 2009
The Free cash flow to equity in 2009 is computed based on financial statement.
The FCFE formula that I used is:
FCFE = Net Income + NCC– FCInv – WCInv + Net borrowing
(CFA curriculum, level 2 – 2010)
NCC: Non-cash charges like depreciation expense, deferred tax are not real cash
outflows. Thus, they should be added back.
FCInv: Fixed capital investment is the difference of total value of fixed assets in
2009 comparing to 2008. This is a cash outflow but is not deducted in Net Income so
we have to deduct it from Net Income.
17
WCInv: Working Capital Investment is the change of Working capital. This is a
cash outflow so it needs to be subtracted from Net Income. The formula of WCInv I
used is:
WCInv = change in Account Receivable + change in Inventory – Change in
Account Payable
Net borrowing: since FCFE is cash available to equity (shareholders) only, we
have to adjust for cash flow to debt holders.
Net borrowing = New debt – Debt repayment
= Change in long term liability + change in Note payable
The Future FCFE is estimated based on inflation rate, GDP growth rate and
historical FCFE
VNM stock is taken as an example to show details of those calculations. VNM’s
financial statements in 2008 and 2009 can be found in table 4 and 5, and calculation
result is in table 6.
Table 4: Balance sheet of VNM in 2008 and 2009
Column1 2009 2008
Current Assets 5,069,157 3,187,605
Cash and Cash Equivalents 426,135 338,654
Short term financial investment 2,314,253 374,002
Short term Account Receivables 728,634 646,385
Inventory 1,311,765 1,775,342
Other Current Assets 288,370 53,222
Non-current Assets 3,412,879 2,779,354
Long term Account Receivable 8,822 475
Fixed assets 2,524,964 1,936,923
Real Estate Investment 27,489 27,489
Long term Financial Investments 602,479 570,657
Other long term assets 249,125 243,810
TOTAL ASSETS 8,482,036 5,966,959
18
Liabilities 1,808,931 1,154,432
Short term Liabilities 1,552,606 972,502
Long term Liabilities 256,325 181,930
Owners equity 6,637,739 4,761,913
Expenditures and Other Funds 182,265 96,198
TOTAL DEBT & EQUITY 8,482,036 5,966,959Source: www.cophieu68.com
Table 5: Income statement of VNM in 2008 and 2009
Column1 2009 2008
Gross Sale Revenues 10,820,142 8,380,563
Deduction revenues 206,371 171,581
Net Sales 10,613,771 8,208,982
Cost of goods sold 6,735,062 5,610,969
Gross profit 3,878,709 2,598,013
Financial activities Revenues 439,936 264,810
Financial Expenses 184,828 197,621
Selling Expenses 1,245,476 1,052,308
Managing Expenses 292,942 297,804
Net Profit from Operating activities 2,595,399 1,315,090
Other incomes 143,031 130,173
Other Expenses 7,072 0
Other profits 135,959 130,173
Total profit before tax 2,731,358 1,371,313
Corporate Income Tax Expenses 355,291 119,771
Profit after Corporate Income Tax 2,375,692 1,250,120
EBITDA 1,000,000 1,000,000
EPS 13,531 7,113
P/E 6.1 23.3
Last Price of Quarter 83 166
VOLUME 351,228,150 175,297,500
Book value 18.9 27.2Source: www.cophieu68.com
19
Table 6: FCFE 2009 of VNM
Net Income 2,375,692
Non cash charge 7,072
Fixed Capital Investment 588,041
Change in Account Receivables 82,249
Change in Inventory -463,577
Change in current liability 580,104
Working Capital Investment -961,432
Change in long-term debt 74,395
Note payable 0
Net borrowing 74,395
FCFE 2,830,550
Notes:
Net Income 2009 is the number of “Profit after corporate Income tax” taken from
Table 5
Non cash charge 2009 is other expense from Table 5
Fixed Capital Investment 2009: 2,524,964 - 1,936,923 = 588,041
Working Capital Investment2009: 82,249 + (-463,577) – 580,104 = -961,432
Net borrowing: 74,395 + 0 = 74,395
FCFE 2009: 2,375,692 + 7,072 – 588,041 – (-198,776) +74,395 = 2,830,550
Step 2: Estimate FCFE from 2010 to 2020
We assume that the company will exist and keep growing forever.
FCFE 2010-2020 is estimated based on FCFE 2009 and expected growth rate
My expectation of FCFE growth rate in period 2010 – 2020 is 20% per year. The
reasons are:
20
- The usually FCFE growth rate used for analysis in emerging market is
from 10% to 30% and I take 20% in the middle. The reasons are because 30%
is too high for Vietnam and 10% is too low due to high inflation rate
(Appendix – Table 23) and high bank rate of 14% - 20%.
- Vietnam use 2020 as time marker for economic goals. From 2011 to
2020 GDP growth rate per year is 6.5%-7% in average. In 2020, Vietnam goal
is to become an industrial economy. Thus, I take 2020 as the turning point.
- Due to the characteristic of emerging market, FCFE growth rate of each
company goes wildly. In period of 2006-2009, the range of average growth
rate of 31 sample stocks is enormously huge, fluctuate from -1,989% to
1,097% (Table 20). Hence, the historical growth rate can not be used for
estimation. Also, re-evaluation of FCFE is required at the end of every year,
after closing transaction.
As the result, FCFE 2010 = FCFE 2009 + |FCFE2009|x0.2 = 2,830,550 x 1.2 = 3,396,660
FCFE 2011 = FCFE 2010 + |FCFE2010|x0.2 = 4,075,992 and so on (Table 7)
Step 3: Estimate FCFE from 2021 to infinity and discount those cash flows to 2020
From 2021 to infinity, I expect the growth rate of FCFE is 5% per year.
In order to discount FCFE from 2021 to infinity back to 2020, I use formula:
FCFE 2020 part 2=FCFE 2020 part 1×(1+0.05)
(ke−0.05)=59,710,641.06
ke is cost of equity calculated above.
FCFE 2020 part 1 = FCFE 2019 + |FCFE2019|x0.2 = 21,031,223.44
21
Table 7: VNM’s FCFE
VNM
2010 3,396,660.00
2011 4,075,992.00
2012 4,891,190.40
2013 5,869,428.48
2014 7,043,314.18
2015 8,451,977.01
2016 10,142,372.41
2017 12,170,846.90
2018 14,605,016.28
2019 17,526,019.53
2020 80,741,864.49
2020 - part 1 21,031,223.44
2020 - part 2 59,710,641.06
Step 4: Plus FCFE 2020 part 1 and FCFE part 2 to get FCFE 2020
FCFE 2020 = 21,031,223.44 + 59,710,641.06 = 80,741,864.50
Step 5: Calculate value of FCFEs at 2009
PV of FCFE=∑t=1
∞ [ FCFE t
(1+ke )t ]Then we have PV of FCFE of VNM will equal to 14,285,829.19 (Table 8). ke is the cost of equity, which equals 41.98% by CAPM 1 and 17.52% by CAPM 2
22
D - INTRINSIC PRICE CALCULATION AND DECISION MAKING
Table 8: Investment decision result of VNM when using CAPM 1
No.COD
E
Price at 31
Dec 2009
Price at 31 Dec
2010
BUY/SELL
CAPM 1 - TRADITIONAL CAPM APPLICATION
DISCOUNTED FCFE
Cost of equity
(%)
Calculated price Decision Result
1 VNM 71.7 86 B 14,285,829.19 41.98 40.67 S LOSS
From table 5, we have VNM number of shares at the end of 2009 is 351,228,150.
By dividing 14,285,829.19 to 351,228,150, we got the intrinsic price equals to 40.67.
Compare 40.67 with the price at 31 Dec 2009 we make the decision is “S”
meaning sell decision.
However, the actual price at 31 Dec 2010, the time of closing transaction, is 86.
Hence, to make profit, investor should make buy decision. This is presented as letter
“B” in column “BUY/SELL”
As the result, if investor uses traditional CAPM application, he or she will have a
loss because of the mismatch between column “BUY/SELL” and column “Decision”.
In contrast, investor will have a gain if he/she uses CAPM application for
emerging market (CAPM 2), which is showed below:
Table 9: Investment decision result of VNM when using CAPM 2
No. CODE
Price at 31
Dec 2009
Price at 31 Dec
2010
BUY/SELL
CAMP 2 - CAPM APPLICATION FOR EMERGING MARKET
DISCOUNTED FCFE
Cost of equity
(%)
Calculated price Decision Result
1 VNM 71.7 86 B 65,218,670.55 17.52 113.99 B GAIN
23
This process is applied similarly to the other 30 stocks. In both cases of CAPM 1
and CAPM 2, the “GAIN” result is counted as successful result. The result
comparison between CAPM 1 and CAPM 2 is showed in next chapter.
24
CHAPTER 4: RESULT
A - TEST RESULT
With the assumption that short – selling is allowed in Vietnam, the table of result is:
Table 10: Test result
CAPM 1 - TRADITIONAL
CAPM APPLICATIONCAPM 2- NEW CAPM
APPLICATION
Number of trials 31 stocks 31 stocksNumber of success
(Number of “GAIN” counted)23 20
Successful rate 74.19% 64.52%Successful rate of the whole market with 95% confidence
intervalFrom 58.79% to 89.56% From 47.68% to 81.36%
PROFITABILITY 12.89% 7.62%
Although CAPM 2 logically should perform better than CAPM 1, the result is
quite surprising. Traditional CAPM application actually works better then new one,
with 74.19% successful rate compare to 64.52%. The result is for a random sample of
31 stocks. By applying statistical analysis on confidence interval of population
proportion, 95% that the successful rate of CAPM 1 in the whole HOSE’s stock
population is from 59% to 90% and of CAPM 2 is from 48% to 81%. The formula
applied is: p̂ ± zα /2 √ pqn
(Complete business statistics)
Which is shown in the test result is that CAPM 2 is an effective tool, 74.19%
successful rate is a very high number in investment world. However, this result is for
1 time testing only. To ensure 99% that the successful rate of CAPM 1 is 75%, the
minimum number of testing times is:
25
n=zα /2
2 pq
B2 =¿¿
Hence, in order to have 99% confidence that CAPM 1 will give 75% successful
rate, the test should be conducted in at least 3 years. Therefore, 2 more year of testing
is recommended.
PROFIT/LOSS and PROFITABILITY are calculated with the assumption that the
capital is distributed equally to 31 stocks. Details can be found in Appendix- Table 19
– Table of PROFIT/LOSS
We can only achieve 12.89% return only if short selling is available. Since stock
price fluctuation is too high, more than 10%, maintaining short sell in one whole year
is not possible. Moreover, short selling has never been allowed in Vietnam stock
market. Thus, if we only consider stocks that have buy decision only, then the result
will be as table 11
When the total value of 31 stocks went down -10%, 4.72% of return can be earned
instead of 12.89%, which means 14.72% higher than portfolio performance instead of
22.89% and 5.76% higher than index performance instead of 14.93% (VN Index
return in 2010 is -2.04% from table 1)
Table 11: Test result for buy stock only
CAPM 1 - TRADITIONAL
CAPM APPLICATIONCAPM 2- NEW CAPM
APPLICATION
Number of BUY stocks 10 out of 31 stocks 19 out of 31 stocksNumber of success
(Number of “GAIN” counted)6 out of 10 9 out of 19
Successful rate 60.00% 47.37%
PROFITABILITY 4.72% -1.82%
26
The purpose of table 11 is to show that not all the chances available in the
market can fully be taken because of some other constraints. In this case, the
constraint is legal issue. The result of table 11 can be helpful in further research about
short selling issue in Vietnam market.
B - SENSITIVITY ANALYSIS RESULT
VNM data is taken as sample. This analysis help us have a good imagination on
how each components is related and their effects on final result
Among Beta, risk free rate, and market return, Beta has biggest effect on intrinsic
price. 0.1 changes in Beta will cause up to 4.64% change in cost of equity which
equal to nearly 10 unit difference in intrinsic price, in the case of VNM. 10 unit
differences in intrinsic price is a huge number and that can change the whole result
from buy to sell and vice versa.
Table 12: Analyze the sensitivity of cost of equity on the changing of Beta
Beta VNM Cost of equity (%)
41.98
0.1 15.040.2 19.680.3 24.310.4 28.950.5 33.590.6 38.230.7 42.870.8 47.500.9 52.141 56.78 SLOPE 46.38
1.1 61.42 For every 0.1 change in Beta, cost of equity change1.2 66.06 4.64%
1.3 70.69
27
0 0.5 1 1.5 2 2.50.00
20.00
40.00
60.00
80.00
100.00
120.00
Figure 3: The sensitivity of cost of equity on the changing of Beta
1.4 75.331.5 79.971.6 84.611.7 89.251.8 93.891.9 98.522 103.16
Table 13: Analyze the sensitivity of cost of equity on the changing of market return
RmCost of equity
41.985 6.72
10 10.1315 13.5320 16.9425 20.3430 23.7535 27.1540 30.5645 33.9650 37.37 SLOPE 0.6855 40.77 For every unit change in market
return, cost of equity change60 44.18 0.68%
Table 14: Analyze the sensitivity of cost of equity on the changing of risk free rate
RFR Cost of equity
41.981 38.982 39.303 39.624 39.945 40.266 40.587 40.908 41.229 41.54
28
0 10 20 30 40 50 60 700.005.00
10.0015.0020.0025.0030.0035.0040.0045.0050.00
0 5 10 15 20 2534.00
36.00
38.00
40.00
42.00
44.00
46.00
Figure 4: The sensitivity of cost of equity on the changing of market return
Figure 5: The sensitivity of cost of equity on the changing of risk free rate
10 41.8611 42.1712 42.4913 42.8114 43.1315 43.45 SLOPE 0.3216 43.77 For every unit change in market return,
cost of equity change17 44.09 0.32 %18 44.4119 44.73
Table 15: Analyze the sensitivity of estimated price on the changing of cost of equity
Figure 6: The sensitivity of estimated price on the changing of cost of equity
In average, when 1% change in cost of equity will cause
- 31.6 change in price. The sensitivity of intrinsic price
on the changing of cost of equity (figure 6) is a
parabolic line. If the cost of equity is low, the effect will
be more serious. High cost of equity may not have as
much impact as low cost of equity but ke change about
5% for 0.1 change in Beta of different stock and more
than 7% for more than 10% change in RM every year.
In summary, if analyzing in the same year then Beta has high effect on cost of
equity, 0.1 change in Beta cause 4.64% change in cost of equity, and 4.64% change in
cost of equity cause huge different in intrinsic price. If in different year then market
return have biggest impact on intrinsic price. 1% change in RM cause 0.68% change in
cost of equity but every year, RM changes more than 10% (Table 1) which cause more
than 7% change in cost of equity and certainly intrinsic price will be affected heavily.
29
Cost of equity
Estimated price
41.98 40.676 3,513.37
10 595.8715 250.6220 145.0625 96.9730 70.6535 54.5540 43.9245 36.5050 31.0855 26.9960 23.81
Therefore, re-valuation every year is necessary. The risk free rate (R f) does not have
much impact since it does not change much every year (less than 1% every year).
30
CHAPTER 5: DISCUSSION / IMPLEMENTATION
A – RESULT EXPLANATION
Possible reasons why CAPM 1 perform better than CAPM 2
1. Traditional CAPM application might be used in many funds in Vietnam with
high capitalization
2. The accuracy of CAPM can not be tested. Although CAPM has limitations and
logically it will not give the correct result, no one can know for sure what the correct
result is. To get cost of equity the input numbers are based mostly on analysts’
personal expectation and judgments. In other words, cost of equity is no more than an
estimated number and there is no factual one for comparison since it deals with future
matters. Besides, there is no better pricing model has been developed.
3. Vietnam market is inefficient. Market price does not fully reflect market
information. Therefore, even if CAPM 2 gives the correct price of stock, the market
will not move accordingly so investors will suffer loss.
Based on the result of this paper’ test, CAPM is still a very promising valuation
tool.
There might be a concern that beside CAPM, there is another variable that affect
the result, which is the FCFE. It is true that FCFE does have effect on the result.
However, the effect of FCFE is minimized because:
- The FCFE 2009 (at time 0) is real and calculated based on real performance
(financial statement) by a standardized method. Thus, only the growth rate is the
concern.
- I assume that all 31 sample stocks have the same FCFE grow rate. By that, I
ignore the different growth rates caused by micro factors, and only focus on the
31
growth rate caused by macro factors. In other words, I minimize the effect of FCFE
growth rate by keeping the constant growth for all 31 stocks and only cost of equity is
counted.
- In order to test the effect of FCFE growth rate, a sensitivity analysis is
constructed (Appendix, table 23). The result shows that, when g fluctuates from 15 to
30%, the growth rate range usually used in emerging markets, the successful rate of
CAPM 1 has very small volatility of 1 success, from 74-77%
B – LIMITATION OF THE TEST
The result might not be reliable in different years since the test is constructed in 1
year price only. In order to increase the reliability of the test result 5 to 20 years of
testing is recommended, 3 years of testing at a minimum.
The portfolio of 31 stocks is chosen randomly without careful research. When
implementing, we can take only stocks that have Buy decision or more analysis of
individual stock valuation should be taken for better portfolio performance.
The FCFE’s growth rate should be tailored to specific stock and industry.
Different company has different characteristics that there should be different
estimation on FCFE’s growth rate. By considering micro factors on FCFE growth
rate, we may have better result, higher successful rate.
C – IMPLEMENTATION IN PRACTICE
For implementation, revaluation is needed at the end of holding period, after
closing all transactions and before doing new series of transactions. The reason is
because CAPM components and FCFE change every year with high volatility.
Implementation of this paper need to be flexible and adjustments should be made
to match investors’ strategy and investment objectives. Adjustments also depend on
analyst’s trading styles. Specifically, 1 year holding can be suitable for mutual fund
but it is not suitable for hedge fund. 12% return might be able to meet objectives of
32
middle age investors but might not be a desired number of young investors. The
adjustments can be made on the following factors:
The time line: The time line is the time period for Beta calculation, the time of
opening and closing transaction. The adjustments in time line is the most important
because they has to match investment strategy and investment style of analyst. The
time of T-bond, risk free rate… are also needed to be adjusted to tailor analyst’s
judgment.
FCFE growth rate: This growth rate is varied based on company characteristics
and analyst judgment.
Capital distribution: In order to meet required return of aggressive investors,
more money should be put in high return stocks, stocks that have big difference
between intrinsic price and current price. Capital distribution is varied by analyst
judgment.
33
CHAPTER 6: CONCLUSION & RECOMMENDATION
CAPM is a promising fundamental analysis tool to earn profit in Vietnam stock
market. The test results show that using a CAPM model can have a positive impact on
Buy/Sell decisions.
Although the CAPM application for emerging markets should theoretically work
better than the traditional CAPM application, the result shows the contradiction.
Therefore, CAPM 1 is recommended for application in Vietnam stock market.
There are 3 possible explanations for the better performance of traditional CAPM
application, which are the popularity of traditional CAPM, the inability of testing
CAPM accuracy and the inefficiency of Vietnam market. Further research on those
possible reasons should be constructed for better conclusion.
Investor’s suitability has to be taken into account to make suitable adjustments for
better implementation.
In order to increase the reliability of this paper result, more testing on different
years is recommended. Since there might be other models or other buy/sell signals
(technical analysis) that can perform better than CAPM, comparison between them is
also recommended. My recommendation is that fundamental analysis give a picture of
what will happen in future and technical analysis tell us when it will happens by
buy/sell signals. Thus, by combining those two, we can eliminate the limitation of two
analysis styles and achieve even higher return.
34
LIST OF REFERENCES
1. (2009). Cost of Equity in Asia. Hong Kong: Duetsche Bank.
2. (2009). Complete Business Statistics, 7th edition. In J. S. Amir D.Aczel, Complete Business Statistics (pp. 235-245). McGraw Hill.
3. Board of Governors of the Federal Reserve System. (n.d.). Retrieved May 10, 2011, from Federal Reserve Web site: http://www.federalreserve.gov
4. CFAinstitute. (2010). CFA program curriculum. New York: Pearson Custom publishing.
5. Data and Statistic. (n.d.). Retrieved April 20, 2011, from International Monetary Fund Web site: http://www.imf.org
6. Indices. (n.d.). Retrieved May 10, 2011, from Standard and Poor's Web site: http://www.standardandpoors.com/indices/sp-global-1200/en/ap/?indexId=SPGCMP1200USDFF--P-RGLL--
7. Stocks' data source. (n.d.). Retrieved April 15, 2011, from Co phieu 68 Web site: http://www.cophieu68.com/export.php
8. Listed Securities. (n.d.). Retrieved April 5, 2011, from Ho Chi Minh Stock Exchange Web site: http://www.hsx.vn
35
APPENDIX
LIST OF 31 SAMPLE STOCKS
TABLE OF RESULT OF CAPM 1 – TRADITIONAL CAPM APPLICATION
TABLE OF RESULT OF CAPM 2 – NEW CAPM APPLICATION
TABLE OF PROFIT/LOSS
TABLE OF STOCK PRICE CALCULATION USING CAPM 1
TABLE OF STOCK PRICE CALCULATION USING CAPM 2
TABLE OF BETA AND COST OF EQUITY
TABLE OF FCFE GROWTH RATE SENSITIVITY ANALYSIS
TABLE OF VIETNAM INFLATION RATE
TABLE OF VIETNAM GDP GROWTH RATE
Table16: LIST OF 31 SAMPLE STOCKS
(List of 31 stocks taken as sample and their listing date)
NO.SYMBOL
CODE LISTED ORGANIZATION LISTING DATE
1 ABT BENTRE AQUAPRODUCT IMPORT AND EXPORT JOINT STOCK COMPANY 6-Dec-2006
2 AGF Angiang Fisheries Import & Export Joint Stock Company 26-Apr-2002
3 BBC BIBICA CORPORATION 17-Dec-2001
4 DHA HOA AN JOINT STOCK COMPANY 4-Dec-2004
5 DHG HAU GIANG PHARMACEUTICAL JOINT STOCK COMPANY 12-Jan-2006
6 DIC DIC INVESTMENT AND TRADING JOINT STOCK COMPANY 22-Nov-2006
7 DTT Do Thanh Technology Corporation 12-Jun-2006
8 FMC Sao Ta Foods Joint Stock Company 20-Oct-2006
9 FPT FPT Corporation 21-Nov-2006
36
10 GIL BinhThanh Import Export Production and Trade Joint Stock Company 28-Dec-2001
11 GMD Gemadept Corporation 3-Aug-2002
12 HAP Hapaco Group Joint Stock Company 8-Feb-2000
13 HAS Ha Noi P&T Construction & Installation Joint Stock Company 18-Dec-2002
14 HPG HoaPhat Group Joint Stock Company 31-Oct-2007
15 KDC Kinh Do Corporation 18-Nov-2005
16 KHA Khanh Hoi Import Export Joint Stock Company 14-Aug-2002
17 PAC Dry Cell and Storage Battery Joint Stock Company 11-Sep-2006
18 PVD Petrovietnam Drilling and Well Services Joint Stock Company 15-Nov-2006
19 SAM Sacom Development and Investment Corporation 18-Jul-2000
20 SAV Savimex Corporation 26-Apr-2002
21 SCD Chuong Duong Beverages Joint Stock Company 11-Dec-2006
22 SFC SaiGon Fuel Company 16-Jun-2004
23 SSC Southern Seed Corporation 29-Dec-2004
24 TAC Tuong An Vegetable Oil Joint Stock Company 12-Jun-2006
25 TCR Taicera Enterprise Company 26-Dec-2006
26 TMS Transforwarding Warehousing Joint Stock Corporation 8-Feb-2000
27 TNA Thien Nam Trading Import Export Corporation 5-Apr-2005
28 TRI SaiGon Beverages Joint Stock Company 21-Dec-2001
29 TS4 Seafood Joint Stock Company No4 7-Jan-2002
30 VNM Viet Nam Dairy Products Joint Stock Company 28-Dec-2005
31 VTB Viettronics Tan Binh Joint Stock Company 12-Aug-2006
Source: Ho Chi Minh Stock Exchangewww.hsx.vn
37
Table 17: TABLE OF RESULT – CAPM 1
No. CODENumber of
shares at the end 2009
Price at 31 Dec
2009
Price at 31 Dec 2010
PRICE CHANGE
BUY/ SELL
CAPM 1 - ORIGINAL CAMP
DISCOUNTED FCFE
Cost of equity (%)
Calculated price
Decision
price difference with 2009
price
Result
1 VNM 351,228,150 71.7 86 14.30 B 14,285,829.19 41.98 40.67 S 31.03 LOSS
2 ABT 8,099,999 40.2 38.4 1.80 S 205,803.16 45.07 25.41 S 14.79 GAIN
3 AGF 12,859,288 32.7 22.8 9.90 S (3,761.83) 52.23 (0.29) S 32.99 GAIN
4 BBC 15,371,192 28 21.7 6.30 S 59,804.87 64.05 3.89 S 24.11 GAIN
5 DHG 26,653,842 116 112.7 3.30 S 2,391,507.62 39.59 89.72 S 26.28 GAIN
6 DTT 5,200,000 11.6 8.8 2.80 S 2,559.68 48.41 0.49 S 11.11 GAIN
7 FMC 7,200,000 13.4 12.9 0.50 S 913,074.22 56.90 126.82 B 113.42 LOSS
8 FPT 142,649,197 58.1 63.5 5.40 B 11,259,180.65 54.27 78.93 B 20.83 GAIN
9 GIL 9,839,818 28.3 23 5.30 S 420,155.33 50.51 42.70 B 14.40 LOSS
10 GMD 48,212,500 60.9 33.2 27.70 S 1,276,316.27 79.09 26.47 S 34.43 GAIN
11 HAP 18,496,208 18 12.7 5.30 S (17,788.89) 69.05 (0.96) S 18.96 GAIN
12 HAS 8,000,000 13.1 9.1 4.00 S 10,485.55 54.60 1.31 S 11.79 GAIN
13 KDC 78,513,073 48.6 51 2.40 B 4,537,218.09 53.70 57.79 B 9.19 GAIN
14 KHA 14,120,300 21.6 16.5 5.10 S 331,205.96 54.56 23.46 B 1.86 LOSS
38
15 PAC 20,176,362 65.5 54 11.50 S 520,018.63 46.43 25.77 S 39.73 GAIN
16 SAM 64,199,216 26.8 18.2 8.60 S (94,383.76) 69.83 (1.47) S 28.27 GAIN
17 SAV 9,660,230 40.3 33.2 7.10 S 29,349.47 44.44 3.04 S 37.26 GAIN
18 SSC 9,999,020 36 25 11.00 S 238,116.64 49.78 23.81 S 12.19 GAIN
19 TRI 27,548,360 9.5 6 3.50 S (127,817.28) 47.05 (4.64) S 14.14 GAIN
20 TS4 8,470,350 36.6 21.6 15.00 S 44,568.37 71.86 5.26 S 31.34 GAIN
21 TMS 10,102,626 27 28.4 1.40 B 406,203.78 36.35 40.21 B 13.21 GAIN
22 TNA 8,000,000 16.8 26.8 10.00 B 271,994.14 48.08 34.00 B 17.20 GAIN
23 DHA 10,040,937 29.1 21.8 7.30 S 77,144.00 52.51 7.68 S 21.42 GAIN
24 SFC 8,109,000 34.5 28.9 5.60 S 550,683.16 32.27 67.91 B 33.41 LOSS
25 DIC 8,200,000 15.6 18.4 2.80 B (22,441.90) 52.78 (2.74) S 18.34 LOSS
26 HPG 196,363,998 35.7 38.7 3.00 B 6,624,158.63 62.93 33.73 S 1.97 LOSS
27 PVD 26,617,000 65.3 50.9 14.40 S 84,929.14 51.17 3.19 S 62.11 GAIN
28 SCD 8,477,640 22.3 27.5 5.20 B 239,356.58 46.15 28.23 B 5.93 GAIN
29 TAC 18,980,200 22 25.5 3.50 B 145,033.56 80.59 7.64 S 14.36 LOSS
30 TCR 37,007,997 8.3 8.9 0.60 B 317,234.99 46.90 8.57 B 0.27 GAIN
31 VTB 11,022,660 13.4 13.1 0.30 S (18,514.53) 40.10 (1.68) S 15.08 GAINSUM 1066.9 959.2 204.9 794.94 731.38 NO. OF SUCCESS 23SUCCESSFUL RATE 74.19%PROFIT 124.70PROFITABILITY 12.89%PORFITABILITY OF BUY STOCKS 4.72%
39
NOTE: _ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010
_ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010, taken from www.cophieu68.com
_'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010
_ the calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology
_ 'Decision' is what investor make based on 'Calculated price'
_ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price
_ 'NO. OF SUCCESS' is number of Gain result counted
_ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31
_ ‘Profitability’, ‘Profitability of buy stocks’ are taken from Table 19
40
41
Table 18: TABLE OF RESULT – CAPM 2
No. CODENumber of
shares at the end 2009
Price at 31 Dec
2009
Price at 31 Dec 2010
PRICE CHANGE
BUY/ SELL
CAMP 2 - NEW VERSION OF CAPM FOR EMERGING MARKET
DISCOUNTED FCFE
Cost of equity
(%)
Calculated price Decision
Price difference Result
1 VNM 351,228,150 71.7 86 14.30 B 65,218,670.55 17.52 185.69 B 113.99 GAIN
2 ABT 8,099,999 40.2 38.4 1.80 S 1,360,052.31 15.31 167.91 B 127.71 LOSS
3 AGF 12,859,288 32.7 22.8 9.90 S (7,837.97) 16.25 (0.61) S 33.31 GAIN
4 BBC 15,371,192 28 21.7 6.30 S 271,534.89 24.77 17.67 S 10.33 GAIN
5 DHG 26,653,842 116 112.7 3.30 S 9,949,670.55 17.52 373.29 B 257.29 LOSS
6 DTT 5,200,000 11.6 8.8 2.80 S 15,790.99 16.79 3.04 S 8.56 GAIN
7 FMC 7,200,000 13.4 12.9 0.50 S 5,012,938.07 20.31 696.24 B 682.84 LOSS
8 FPT 142,649,197 58.1 63.5 5.40 B 45,723,094.77 23.08 320.53 B 262.43 GAIN
9 GIL 9,839,818 28.3 23 5.30 S 2,049,031.85 19.69 208.24 B 179.94 LOSS
10 GMD 48,212,500 60.9 33.2 27.70 S 8,128,082.07 24.05 168.59 B 107.69 LOSS
11 HAP 18,496,208 18 12.7 5.30 S (40,468.45) 20.10 (2.19) S 20.19 GAIN
12 HAS 8,000,000 13.1 9.1 4.00 S 70,499.39 17.64 8.81 S 4.29 GAIN
13 KDC 78,513,073 48.6 51 2.40 B 22,365,613.18 20.57 284.86 B 236.26 GAIN
14 KHA 14,120,300 21.6 16.5 5.10 S 1,924,135.66 19.06 136.27 B 114.67 LOSS
15 PAC 20,176,362 65.5 54 11.50 S 3,168,265.34 16.35 157.03 B 91.53 LOSS
16 SAM 64,199,216 26.8 18.2 8.60 S (197,122.95) 23.64 (3.07) S 29.87 GAIN
17 SAV 9,660,230 40.3 33.2 7.10 S 129,543.82 18.70 13.41 S 26.89 GAIN
18 SSC 9,999,020 36 25 11.00 S 1,189,718.44 19.21 118.98 B 82.98 LOSS
42
19 TRI 27,548,360 9.5 6 3.50 S (217,876.46) 20.24 (7.91) S 17.41 GAIN
20 TS4 8,470,350 36.6 21.6 15.00 S 254,581.63 23.80 30.06 S 6.54 GAIN
21 TMS 10,102,626 27 28.4 1.40 B 1,683,724.48 16.33 166.66 B 139.66 GAIN
22 TNA 8,000,000 16.8 26.8 10.00 B 1,375,313.53 18.56 171.91 B 155.11 GAIN
23 DHA 10,040,937 29.1 21.8 7.30 S 365,430.96 20.64 36.39 B 7.29 LOSS
24 SFC 8,109,000 34.5 28.9 5.60 S 2,156,039.34 15.19 265.88 B 231.38 LOSS
25 DIC 8,200,000 15.6 18.4 2.80 B (39,896.19) 21.71 (4.87) S 20.47 LOSS
26 HPG 196,363,998 35.7 38.7 3.00 B 35,599,302.81 22.23 181.29 B 145.59 GAIN
27 PVD 26,617,000 65.3 50.9 14.40 S 278,933.97 24.77 10.48 S 54.82 GAIN
28 SCD 8,477,640 22.3 27.5 5.20 B 1,222,899.27 17.85 144.25 B 121.95 GAIN
29 TAC 18,980,200 22 25.5 3.50 B 901,978.83 24.72 47.52 B 25.52 GAIN
30 TCR 37,007,997 8.3 8.9 0.60 B 2,931,596.13 13.35 79.22 B 70.92 GAIN
31 VTB 11,022,660 13.4 13.1 0.30 S (33,534.22) 15.03 (3.04) S 16.44 GAINSUM
1066.9 959.2 204.9 3,972.54 3403.89
NO. OF SUCCESS 20SUCCESSFUL RATE 64.52%PROFITABILITY 7.62%PORFITABILITY OF BUY STOCKS -1.82%
NOTE: _ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010
_ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010and taken from cophieu68.com
_'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010
43
_ Calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology
_ 'Decision' is what investor make based on 'Calculated price'
_ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price
_ 'NO. OF SUCCESS' is number of Gain result counted
_ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31
_ ‘Profitability’, ‘Profitability of buy stocks’ are taken from Table 19
44
Table 19: TABLE OF PROFIT/LOSS
NO. CODEPrice at 31 Dec 2009
Price at 31 Dec 2010
CAPM 1 CAPM 2
Amount of money
Number of shares can buy
within 1,000 thousand VND
Amout of profit/loss
Amount of money
Number of shares can buy within
1,000 thousands VND
Amount of profit/loss
1 VNM 71.7 86 1,000 13.9470 (199.4421) 1,000 13.9470 199.4421
2 ABT 40.2 38.4 1,000 24.8756 44.7761 1,000 24.8756 (44.7761)
3 AGF 32.7 22.8 1,000 30.5810 302.7523 1,000 30.5810 302.7523
4 BBC 28 21.7 1,000 35.7143 225.0000 1,000 35.7143 225.0000
5 DHG 116 112.7 1,000 8.6207 28.4483 1,000 8.6207 (28.4483)
6 DTT 11.6 8.8 1,000 86.2069 241.3793 1,000 86.2069 241.3793
7 FMC 13.4 12.9 1,000 74.6269 (37.3134) 1,000 74.6269 (37.3134)
8 FPT 58.1 63.5 1,000 17.2117 92.9432 1,000 17.2117 92.9432
9 GIL 28.3 23 1,000 35.3357 (187.2792) 1,000 35.3357 (187.2792)
10 GMD 60.9 33.2 1,000 16.4204 454.8440 1,000 16.4204 (454.8440)
11 HAP 18 12.7 1,000 55.5556 294.4444 1,000 55.5556 294.4444
12 HAS 13.1 9.1 1,000 76.3359 305.3435 1,000 76.3359 305.3435
13 KDC 48.6 51 1,000 20.5761 49.3827 1,000 20.5761 49.3827
14 KHA 21.6 16.5 1,000 46.2963 (236.1111) 1,000 46.2963 (236.1111)
15 PAC 65.5 54 1,000 15.2672 175.5725 1,000 15.2672 (175.5725)
16 SAM 26.8 18.2 1,000 37.3134 320.8955 1,000 37.3134 320.8955
17 SAV 40.3 33.2 1,000 24.8139 176.1787 1,000 24.8139 176.1787
45
18 SSC 36 25 1,000 27.7778 305.5556 1,000 27.7778 (305.5556)
19 TRI 9.5 6 1,000 105.2632 368.4211 1,000 105.2632 368.4211
20 TS4 36.6 21.6 1,000 27.3224 409.8361 1,000 27.3224 409.8361
21 TMS 27 28.4 1,000 37.0370 51.8519 1,000 37.0370 51.8519
22 TNA 16.8 26.8 1,000 59.5238 595.2381 1,000 59.5238 595.2381
23 DHA 29.1 21.8 1,000 34.3643 250.8591 1,000 34.3643 (250.8591)
24 SFC 34.5 28.9 1,000 28.9855 (162.3188) 1,000 28.9855 (162.3188)
25 DIC 15.6 18.4 1,000 64.1026 (179.4872) 1,000 64.1026 (179.4872)
26 HPG 35.7 38.7 1,000 28.0112 (84.0336) 1,000 28.0112 84.0336
27 PVD 65.3 50.9 1,000 15.3139 220.5207 1,000 15.3139 220.5207
28 SCD 22.3 27.5 1,000 44.8430 233.1839 1,000 44.8430 233.1839
29 TAC 22 25.5 1,000 45.4545 (159.0909) 1,000 45.4545 159.0909
30 TCR 8.3 8.9 1,000 120.4819 72.2892 1,000 120.4819 72.2892
31 VTB 13.4 13.1 1,000 74.6269 22.3881 1,000 74.6269 22.3881 TOTAL 31,000 1,332.8066 3,997.0277 1,332.8066 2,362.0498
PROFITABILITY
12.8936% 7.6195%
TOTAL OF BUY STOCK 10,000 484.9180 471.8663 19,000 699.6567 (345.6226)PROFITABILITY OF BUY STOCK 4.7187% -1.8191%
46
Table 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM APPLICATION
CODECost of
equity _ CAPM1
No. of shares
Price at 31 Dec 2009
FCFE 2009
Average growth rate of
FCFE 2006-2009
DISCOUNTED FCFE
CALCULATED PRICE
1 VNM 41.98 351,228,150 71.7 2,830,550 -626.43% 14,285,829.19 40.67
2 ABT 45.07 8,099,999 40.2 45,546 44.20% 205,803.16 25.41
3 AGF 52.23 12,859,288 32.7 -3,394 -14.51% (3,761.83) (0.29)
4 BBC 64.05 15,371,192 28 22,201 156.67% 59,804.87 3.89
5 DHG 39.59 26,653,842 116 431,736 36.06% 2,391,507.62 89.72
6 DTT 48.41 5,200,000 11.6 632 -1771.83% 2,559.68 0.49
7 FMC 56.90 7,200,000 13.4 286,434 104.19% 913,074.22 126.82
8 FPT 54.27 142,649,197 58.1 3,296,460 96.36% 11,259,180.65 78.93
9 GIL 50.51 9,839,818 28.3 110,622 -217.61% 420,155.33 42.70
10 GMD 79.09 48,212,500 60.9 630,778 1097.20% 1,276,316.27 26.47
11 HAP 69.05 18,496,208 18 -19,797 47.30% (17,788.89) (0.96)
12 HAS 54.60 8,000,000 13.1 3,098 -94.05% 10,485.55 1.31
13 KDC 53.70 78,513,073 48.6 1,307,935 475.97% 4,537,218.09 57.79
14 KHA 54.56 14,120,300 21.6 97,742 161.76% 331,205.96 23.46
15 PAC 46.43 20,176,362 65.5 120,498 203.16% 520,018.63 25.77
16 SAM 69.83 64,199,216 26.8 -105,969 -935.22% (94,383.76) (1.47)
17 SAV 44.44 9,660,230 40.3 6,356 35.62% 29,349.47 3.04
47
18 SSC 49.78 9,999,020 36 61,325 72.29% 238,116.64 23.81
19 TRI 47.05 27,548,360 9.5 -107,005 -152.70% (127,817.28) (4.64)
20 TS4 71.86 8,470,350 36.6 19,382 -0.02% 44,568.37 5.26
21 TMS 36.35 10,102,626 27 63,874 -163.61% 406,203.78 40.21
22 TNA 48.08 8,000,000 16.8 66,484 288.59% 271,994.14 34.00
23 DHA 52.51 10,040,937 29.1 21,520 759.55% 77,144.00 7.68
24 SFC 32.27 8,109,000 34.5 71,091 748.05% 550,683.16 67.91
25 DIC 52.78 8,200,000 15.6 -20,404 83.05% (22,441.90) (2.74)
26 HPG 62.93 196,363,998 35.7 2,398,760 -1989.35% 6,624,158.63 33.73
27 PVD 51.17 26,617,000 65.3 22,797 -16.76% 84,929.14 3.19
28 SCD 46.15 8,477,640 22.3 54,946 129.35% 239,356.58 28.23
29 TAC 80.59 18,980,200 22 73,478 126.18% 145,033.56 7.64
30 TCR 46.90 37,007,997 8.3 74,661 79.70% 317,234.99 8.57
31 VTB 40.10 11,022,660 13.4 -13,879 -104.37% (18,514.53) (1.68)
48
Table 21: STOCK PRICE CALCULATION BASED ON NEW CAPM APPLICATION
CODECost of
equity _ CAPM 2
No. of shares at the end of
2009
Price at 31 Dec 2009 FCFE 2009
Average growth rate of FCFE 2006-2009
DISCOUNTED FCFE
CALCULATED PRICE
1 VNM 17.52 351,228,150 71.7 2,830,550 -626.43% 65,218,670.55 185.69
2 ABT 15.31 8,099,999 40.2 45,546 44.20% 1,360,052.31 167.91
3 AGF 16.25 12,859,288 32.7 -3,394 -14.51% (7,837.97) (0.61)
4 BBC 24.77 15,371,192 28 22,201 156.67% 271,534.89 17.67
5 DHG 17.52 26,653,842 116 431,736 36.06% 9,949,670.55 373.29
6 DTT 16.79 5,200,000 11.6 632 -1771.83% 15,790.99 3.04
7 FMC 20.31 7,200,000 13.4 286,434 104.19% 5,012,938.07 696.24
8 FPT 23.08 142,649,197 58.1 3,296,460 96.36% 45,723,094.77 320.53
9 GIL 19.69 9,839,818 28.3 110,622 -217.61% 2,049,031.85 208.24
10 GMD 24.05 48,212,500 60.9 630,778 1097.20% 8,128,082.07 168.59
11 HAP 20.10 18,496,208 18 -19,797 47.30% (40,468.45) (2.19)
12 HAS 17.64 8,000,000 13.1 3,098 -94.05% 70,499.39 8.81
13 KDC 20.57 78,513,073 48.6 1,307,935 475.97% 22,365,613.18 284.86
14 KHA 19.06 14,120,300 21.6 97,742 161.76% 1,924,135.66 136.27
15 PAC 16.35 20,176,362 65.5 120,498 203.16% 3,168,265.34 157.03
16 SAM 23.64 64,199,216 26.8 -105,969 -935.22% (197,122.95) (3.07)
17 SAV 18.70 9,660,230 40.3 6,356 35.62% 129,543.82 13.41
49
18 SSC 19.21 9,999,020 36 61,325 72.29% 1,189,718.44 118.98
19 TRI 20.24 27,548,360 9.5 -107,005 -152.70% (217,876.46) (7.91)
20 TS4 23.80 8,470,350 36.6 19,382 -0.02% 254,581.63 30.06
21 TMS 16.33 10,102,626 27 63,874 -163.61% 1,683,724.48 166.66
22 TNA 18.56 8,000,000 16.8 66,484 288.59% 1,375,313.53 171.91
23 DHA 20.64 10,040,937 29.1 21,520 759.55% 365,430.96 36.39
24 SFC 15.19 8,109,000 34.5 71,091 748.05% 2,156,039.34 265.88
25 DIC 21.71 8,200,000 15.6 -20,404 83.05% (39,896.19) (4.87)
26 HPG 22.23 196,363,998 35.7 2,398,760 -1989.35% 35,599,302.81 181.29
27 PVD 24.77 26,617,000 65.3 22,797 -16.76% 278,933.97 10.48
28 SCD 17.85 8,477,640 22.3 54,946 129.35% 1,222,899.27 144.25
29 TAC 24.72 18,980,200 22 73,478 126.18% 901,978.83 47.52
30 TCR 13.35 37,007,997 8.3 74,661 79.70% 2,931,596.13 79.22
31 VTB 15.03 11,022,660 13.4 -13,879 -104.37% (33,534.22) (3.04)
50
Table 22: TABLE OF BETA AND COST OF EQUITY
NO. CODECAPM 1 CAPM 2
Beta (β) Cost of equity (%) Beta (β) Cost of equity (%)
1 VNM 0.68 41.98 0.41 12.63
2 ABT 0.75 45.07 0.28 11.94
3 AGF 0.90 52.23 0.34 12.23
4 BBC 1.16 64.05 0.83 14.92
5 DHG 0.63 39.59 0.41 12.63
6 DTT 0.82 48.41 0.37 12.40
7 FMC 1.00 56.90 0.57 13.51
8 FPT 0.95 54.27 0.73 14.39
9 GIL 0.86 50.51 0.53 13.32
10 GMD 1.48 79.09 0.79 14.70
11 HAP 1.26 69.05 0.56 13.45
12 HAS 0.95 54.60 0.42 12.67
13 KDC 0.93 53.70 0.58 13.59
14 KHA 0.95 54.56 0.50 13.12
15 PAC 0.78 46.43 0.34 12.26
16 SAM 1.28 69.83 0.76 14.57
17 SAV 0.73 44.44 0.48 13.01
18 SSC 0.85 49.78 0.51 13.16
19 TRI 0.79 47.05 0.57 13.49
20 TS4 1.33 71.86 0.77 14.61
21 TMS 0.56 36.35 0.34 12.26
22 TNA 0.81 48.08 0.47 12.96
23 DHA 0.91 52.51 0.59 13.62
24 SFC 0.47 32.27 0.28 11.90
25 DIC 0.91 52.78 0.65 13.96
26 HPG 1.13 62.93 0.68 14.12
27 PVD 0.88 51.17 0.83 14.92
28 SCD 0.77 46.15 0.43 12.74
29 TAC 1.51 80.59 0.82 14.91
30 TCR 0.79 46.90 0.17 11.32
31 VTB 0.64 40.10 0.27 11.85
51
Table 23: TABLE OF FCFE GROWTH RATE’S SENSITIVITY ANALYSIS
FCFE growth rate 2010 – 2020 (%)
RESULT (successful rate)
CAPM 1 CAPM 2
10 61.29% 67.74%
15 74.19% 67.74%
20 74.19% 64.52%
25 77.42% 61.29%
30 74.19% 54.84%
Table 244: TABLE OF VIETNAM INFLATION RATE
Year Inflation rate (consumer prices)
Rank Percent Change
Date of Information
2003 3.90% 91.00 2002 est.2004 3.10% 115.00 -20.51% 2003 est.2005 9.50% 189.00 206.45% 2004 est.2006 8.30% 175.00 -12.63% 2005 est.2007 7.50% 166.00 -9.64% 2006 est.2008 8.30% 175.00 10.67% 2007 est.2009 24.40% 211.00 193.98% 2008 est.2010 7.00% 167.00 -71.31% 2009 est.2011 11.80% 205.00 68.57% 2010 est.
Source: CIA World Factbook
Table 255: TABLE OF VIETNAM GDP GROWTH RATE
YearGDP - real growth
rate RankPercent Change
Date of Information
2003 6.00% 22.00 2002 est.2004 7.20% 23.00 20.00% 2003 est.2005 7.70% 27.00 6.94% 2004 est.2006 8.50% 23.00 10.39% 2005 est.2007 8.20% 29.00 -3.53% 2006 est.2008 8.50% 28.00 3.66% 2007 est.2009 6.20% 55.00 -27.06% 2008 est.2010 5.30% 26.00 -14.52% 2009 est.2011 6.80% 32.00 28.30% 2010 est.
52
Average 7.16%
Definition: This entry gives GDP growth on an annual basis adjusted for inflation and expressed as a percent.
Source: CIA World Factbook
53