Portfolio Construction and Security

Analysis
FIN 435.7

SUBMITED BY:
Manshaur Rahman 153 0093 630
Mohammad Tahsin Nawaz 162 0376 030
Anoy Sarker 143 0617 630
Mohammad Ali 152 2004 030
S.M. Nazmus Sajid 153 0917 030
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 Letter of Transmittal
August 30th, 2018

Md Sajib Hossain, CFA

Lecturer, Department of Management,
North South University,

Subject: Submission of Portfolio Construction and Security Analysis.

Dear Sir:
It is an immense gratification for us to put forward the report which you requested of us, in order
to enhance our practical knowledge that you taught us in this Investment Theory (FIN 435)
Course.

On the process of preparing this project, we have followed the guidelines that have been taught
to us throughout this course, to prepare a proper of Portfolio Construction and Security Analysis.
This project has further enforced our confidence applying the things we learn in our university
years.

For any cause, you are unable to deduce anything, please do not pause to call us for clarification.
I hope you will forgive any of our mistakes, lacking or inconveniences.
We formally submit this report to you on September 5th, 2018. We acknowledge that we have all
participated and worked for completion of this project.

Sincerely Yours,
Manshaur Rahman
Mohammad Tahsin Nawaz
Mohammad Ali
S.M. Nazmus Sajid
Anoy Sarker

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Contents
Letter of Transmittal

Efficient Portfolio Construction......................................................................................................1

Portfolio Risk and Return............................................................................................................1

Portfolio risk can be separated into two parts:.............................................................................1

Prices............................................................................................................................................2

Return Risk Calculation...............................................................................................................4

Covariance...................................................................................................................................7

Sharpe Ratio and Efficient Frontier.............................................................................................8

Security Analysis.............................................................................................................................9

Assumptions................................................................................................................................9

Projected FCFF..........................................................................................................................11

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 Efficient Portfolio Construction

Portfolio Risk and Return

Risk and return are highly correlated, in investing. Increased risk usually goes hand-in-hand with increased
potential returns on investment. Project-specific risk, industry-specific risk, competitive risk, international risk,
and market risk, are some of the more common risks associated with financial investments.

Gains and losses made from trading group security are referred to as Portfolio return. The return on an
investment is communicated in percentage.
It is considered a random variable that takes
any value within a given range.

Portfolio risk is the possibility that an

investment portfolio may not succeed in
maximizing the shareholder’s wealth.
Various factors contribute to portfolio risk,
and though we can try to minimize them,
we can never be able to fully eliminate
them.

Portfolio risk can be separated into two parts:

If weight of investment of each asset is equal, then weight will be 1/n
N
11
σ P =∑ (1/n)2 σ i2+ ∑ ∑
2
1. σσ ρ
i=1 n n i j ij
N
1 1 1 1
2. ( )
σ P2= ∑ σ i2 + ∑ ∑ σ i σ j ρij
n i=1 n n n
1
N
σ i2 1 σ
3. 2
σP = ∑ ( )
n i=1 n
2
+ ∑ ∑ ij
n n
σ́ n−1 σ ij
4. σ P2 = i + ∑ ∑
n n n( n−1)
2
2 σ́ i n−1
5. σP = + σ́ ij
n n

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 σ́ i2 n−1
Therefore , Risk thas2 parts⟹ Diversiable risk ( )
n (
∧Sustematic risk σ́
n ij )

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 Prices
BEXIMC Berger Baraka Olympic
Date DSE Index Renata Heidelberg BATC BATA RKBN LFAR SGBD ISBL IDLC RAKCem City Bank
O Paints Power Ind.
2018 Jun-18 5,405.46 1,296.50 360.60 3456.70 1,137.20 1,801.30 56.40 181.60 26.20 1363.30 23.80 27.10 66.3 224.4 43 33.6
May-18 5,343.87 1,208.90 343.00 3394.60 1,133.80 1,662.40 54.20 166.20 27.30 1254.15 23.50 28.10 67.2 237.3 42.9 33.8
Apr-18 5,739.22 1,261.90 375.90 3410.30 1,141.60 1,916.20 59.00 172.10 31.60 1036.50 25.50 30.50 70.1 264 44.8 34.19
Mar-18 5,597.44 1,233.90 376.40 3435.20 1,184.30 1,906.70 56.90 179.10 24.30 1053.75 27.30 30.30 68.8 275 46.1 37.71
Feb-18 5,804.94 1,261.10 390.50 3608.10 1,171.00 1,704.00 60.30 185.20 25.10 1111.00 31.70 31.70 71.3 259.4 47.6 36.48
Jan-18 6,039.78 1,230.20 408.70 3777.80 1,181.70 1,766.90 60.40 190.10 26.20 1064.85 34.10 33.80 75.7 284.7 51.09 40.48
2017 Dec-17 6,244.52 1,124.20 424.90 3401.60 1,171.80 1,776.20 69.90 195.50 27.00 1031.50 36.60 34.40 85.3 288.3 54.45 50.67
Nov-17 6,306.86 1,093.40 408.80 3300.10 1,155.30 1,936.90 55.60 195.00 27.40 1080.25 33.80 36.00 89.9 285.4 53.55 51.9
Oct-17 6,019.59 1,041.91 407.60 3100.90 1,151.50 1,584.90 59.20 184.30 26.57 1043.80 33.00 34.52 87.7 256.1 51.36 45.81
Sep-17 6,092.84 1,012.96 428.6 2992.80 1,149.50 1,528.60 61.30 187.60 28.10 1050.65 34.50 34.87 86.1 271.7 51.45 43.52
Aug-17 6,006.43 991.57 428.4 3005.30 1,151.60 1,484.90 58.80 194.80 30.29 1038.10 33.00 37.04 86.3 273.7 53.27 41.9
Jul-17 5,860.64 1,135.60 454.60 3020.30 1,211.40 1,533.90 60.60 196.70 32.10 1057.50 35.50 38.87 80.4 287.2 53.73 40
Jun-17 5,656.04 1,157.10 449.00 2829.30 1,131.30 1,505.10 62.90 190.80 32.10 1050.00 32.20 38.00 70.8 278.5 52.36 35.62
May-17 5,403.11 1,098.70 447.30 2790.70 1,132.50 1,545.80 64.60 181.40 31.24 1050.00 31.20 37.91 70.6 268 50.73 31.52
Apr-17 5,475.55 1,104.50 479.50 2547.90 1,129.30 1,490.10 65.30 176.10 32.57 1073.95 32.20 36.52 71.7 277.2 52.27 30.57
Mar-17 5,719.61 1,088.40 517.10 2429.80 1,115.60 1,510.50 71.70 188.90 33.43 1069.50 41.10 39.83 70 287.6 55.73 37.14
Feb-17 5,612.69 1,108.70 552.20 2503.80 1,130.40 1,526.50 82.00 202.20 33.43 1126.00 44.20 44.43 69.6 307.3 58.36 31.52
Jan-17 5,468.34 1,100.90 550.60 2494.40 1,140.10 1,516.00 83.00 203.10 32.10 1156.25 45.10 38.70 66.8 308.9 58.7 31.9
2016 Dec-16 5,036.05 1,085.50 552.30 2483.00 1,142.00 1,550.00 82.10 192.50 24.76 1158.90 29.70 26.70 57 307.9 53.59 25.9
Nov-16 4,801.24 1,091.20 549.50 2538.70 1,172.50 1,540.40 76.40 183.50 23.24 1198.20 30.00 24.35 45.77 295.6 54.2 23.81
Oct-16 4,592.17 1,088.10 544.80 2566.50 1,171.40 1,583.20 73.70 187.80 20.10 1175.50 30.90 24.93 46.55 287.62 48.23 22.19
Sep-16 4,695.18 1,104.20 542.30 2519.10 1,180.30 1,572.90 79.20 183.80 22.19 1159.25 31.00 24.10 48.25 291.62 50.82 23.24
Aug-16 4,526.57 1,099.90 534.90 2446.70 1,180.70 1,544.70 75.60 175.60 21.62 1086.70 29.70 23.85 47.48 287.62 49.26 21.9
Jul-16 4,525.34 1,124.00 550.00 2641.00 1,186.00 1,533.00 69.40 166.00 22.38 1075.15 32.00 23.19 45.77 323.14 49.44 22
Jun-16 4,507.58 1,185.00 522.00 2700.00 1,205.00 1,575.00 79.10 153.00 22.86 1109.60 29.00 24.02 45.54 328.86 52.73 22.86
May-16 4,419.39 1,106.00 537.00 2625.00 1,170.00 1,537.00 81.20 149.00 23.05 1077.90 26.00 24.84 42.51 311.05 53.51 21.81
Apr-16 4,195.69 1,078.00 525.00 2679.00 1,170.00 1,552.00 57.50 140.00 20.87 1025.70 22.00 25.09 42.82 289.24 51.43 20.67
Mar-16 4,357.53 1,071.00 501.00 2550.00 1,170.00 1,538.00 66.90 141.00 23.44 955.00 23.00 24.43 40.96 279.24 54.72 20
Feb-16 4,511.96 1,084.00 541.00 2798.00 1,236.00 1,635.00 74.50 181.00 23.85 992.55 24.00 23.69 43.52 271.24 57.75 21.62
Jan-16 4,540.89 1,076.00 550.00 3083.00 1,303.00 1,558.00 71.40 167.00 23.93 972.50 26.00 24.51 48.02 249.14 63.46 21.43
2015 Dec-15 4,604.91 1,072.00 562.00 2950.00 1,318.00 1,609.00 74.60 180.00 24.02 951.80 28.00 25.42 49.34 246.86 57.92 19.43
Nov-15 4,580.99 1,086.00 566.00 2910.00 1,331.00 1,599.00 81.60 149.00 22.86 955.45 28.00 23.93 48.56 237.05 57.06 19.52
Oct-15 4,564.48 1,049.00 604.00 2943.00 1,352.00 1,645.00 83.50 155.00 21.95 1000.55 28.00 24.69 46.16 227.46 57.92 19.24
Sep-15 4,852.08 1,087.00 640.00 2952.00 1,358.00 1,756.00 107.60 166.00 25.09 1078.80 31.00 27.53 50.04 240.16 60.43 19.14
Aug-15 4,768.66 1,050.00 603.00 3067.00 1,305.00 1,714.00 112.50 165.00 25.01 1011.00 30.00 26.53 45.15 219.05 61.21 17.9
Jul-15 4,792.30 1,081.00 635 3020.00 1,323.00 1,882.00 127.00 168.00 27.99 885.50 22.00 25.61 49.73 219.44 67.36 17.43
Jun-15 4,583.10 869.00 570 3045.00 1,260.00 1,629.00 118.10 165.00 26.92 802.25 17.00 24.92 40.65 186.35 64.07 16.38
May-15 4,586.95 777.00 506 2860.00 1,180.00 1,416.00 117.00 164.00 30.06 743.85 18.00 28.30 40.96 174.44 69.52 17.24
Apr-15 4,047.28 746.00 463 3112.00 1,144.00 1,464.00 106.60 151.00 19.01 748.05 16.00 22.85 33.05 167.38 48.74 15.33
Mar-15 4,530.48 834.00 450 3157.00 1,355.00 1,648.00 114.50 182.00 23.26 824.50 20.00 24.92 40.65 176.43 45.37 15.33
Feb-15 4,763.21 828.00 504 3063.00 1,380.00 1,267.00 116.40 181.00 23.19 770.85 24.00 24.84 46.55 179.29 46.93 19.32
Jan-15 4,724.04 723.00 491 2934.00 1,231.00 1,032.00 124.50 166.00 22.25 702.30 24.00 25.84 47.04 185.64 46.84 18.96
2014 Dec-14 4,864.96 713.00 499 2650.00 1,172.00 1,086.00 123.00 175.00 26.21 712.55 23.00 25.30 46.36 180.4 49.96 19.77
Nov-14 4,769.42 703.00 493 2746.00 1,127.00 1,070.00 107.40 173.00 28.16 590.00 25.00 26.45 43.88 171.98 46.41 18.68
Oct-14 5,173.23 741.00 520 2743.00 1,244.00 1,094.00 134.50 185.00 29.81 614.50 27.00 24.64 47.04 154.38 53.68 20.32
Sep-14 5,074.30 697.00 531 2798.00 1,120.00 1,045.00 137.30 181.00 32.33 540.90 25.00 23.00 46.48 145.03 57.49 17.32
Aug-14 4,549.51 670.00 494 2737.00 1,048.00 1,013.00 105.30 150.00 30.03 539.75 23.00 22.09 36.49 130.81 37.32 14.15
Jul-14 4,427.15 657.00 514 2435.00 967.00 1,024.00 85.40 146.00 25.85 509.40 25.00 20.51 29.79 142.62 35.32 14.42
Jun-14 4,480.52 673.00 508 2318.00 973.00 1,098.00 83.30 143.00 23.26 563.70 25.00 19.99 26.38 130.92 38.01 14.33
May-14 4,430.47 636.00 523 2354.00 993.00 1,033.00 78.50 144.00 16.71 573.30 24.00 19.60 27.99 134.8 38.87 15.33
Apr-14 4,566.85 719.00 590 2458.00 1,147.00 1,306.00 67.70 172.00 16.91 620.50 26.00 19.60 32.46 141.27 39.65 16.69
Mar-14 4,491.98 549.00 422 2305.00 880.00 1,105.00 49.70 166.00 18.72 462.80 31.00 19.66 32.52 121.22 41.73 14.21
Feb-14 4,749.86 588.00 447 2299.00 868.00 1,037.00 40.50 165.00 20.23 476.25 32.00 21.69 39.17 131.98 43.38 15.12
2013 Jan-14 4,753.17 474.00 424 1929.00 752.00 900.00 39.90 139.00 22.54 429.30 32.00 23.40 36.54 106.17 45.1 15.95
Dec-13 4,266.55 419.00 381 1603.00 690.00 870.00 33.50 120.00 20.16 438.45 31.00 22.15 31.23 86.48 41.95 15.27
Nov-13 4,230.72 424.00 383 1661.00 724.00 890.00 32.60 124.00 21.67 423.50 32.00 21.56 29.79 90.42 41.09 15.27
Oct-13 3,967.72 414.00 369 1573.00 702.00 798.00 30.90 120.00 18.22 396.35 34.00 18.09 28.1 80.62 39.12 14.06
Sep-13 3,937.68 408.00 378 1562.00 721.00 799.00 33.20 127.00 18.60 412.35 33.00 19.10 28.15 81.09 41.09 11.72
Aug-13 4,127.48 467 416 1544.00 806.00 929.00 35.50 141.00 20.04 447.45 34.00 22.85 31.33 86.93 46.99 12.55
Jul-13 3,940.80 389 308 1446.00 652.00 692.00 31.10 125.00 21.29 384.20 33.00 21.10 28.4 85.36 40.22 13.61
Jun-13 4,104.64 382 335 1065.00 558.00 682.00 32.80 129.00 26.11 358.15 35.00 23.66 40.12 65.69 41.09 15.42
 Return Risk Calculation
Berger Baraka Olympic
Date DSE Index Renata Heidelberg BATC BATA RKBN LFAR SGBD BEXIMCO ISBL IDLC RAKCem City Bank
Paints Power Ind.

Jun-18 0.01152535 0.07246256 0.05131195 0.01829376 0.00299876 0.08355389 0.04059040 0.09265944 -0.04029304 0.08703105 0.01276595 -0.03558718 -0.01339286 -0.05436157 0.00233100 -0.00591716

May-18 -0.06888567 -0.04200016 -0.08752328 -0.0046037 -0.00683252 -0.13244964 -0.08135593 -0.03428239 -0.13607595 0.20998552 -0.07843137 -0.07868852 -0.04136947 -0.10113636 -0.04241071 -0.01140684

Apr-18 0.02532943 0.02269227 -0.00132837 -0.00724849 -0.03605505 0.00498243 0.03690685 -0.03908431 0.30041152 -0.01637010 -0.06593407 0.00660066 0.01889534 -0.04 -0.02819957 -0.09334394

Mar-18 -0.03574542 -0.02156847 -0.03610755 -0.04791996 0.01135781 0.11895539 -0.05638474 -0.03293737 -0.03187251 -0.05153015 -0.13880126 -0.04416403 -0.03506311 0.06013878 -0.03151261 0.03371710

Feb-18 -0.03888221 0.02511786 -0.04453144 -0.04492032 -0.00905475 -0.03559907 -0.00165563 -0.02577591 -0.04198473 0.04333943 -0.07038123 -0.06213017 -0.05812417 -0.08886547 -0.06831082 -0.09881423

Jan-18 -0.03278715 0.09428927 -0.03812662 0.11059501 0.00844854 -0.0052359 -0.13590844 -0.02762148 -0.02962963 0.03233155 -0.06830601 -0.01744186 -0.11254396 -0.01248699 -0.06170799 -0.20110519

Dec-17 -0.00988448 0.02816901 0.03938356 0.03075664 0.01428200 -0.08296763 0.25719424 0.00256410 -0.01459854 -0.04512844 0.08284023 -0.04444444 -0.05116796 0.01016117 0.01680672 -0.02369942

Nov-17 0.04772251 0.04941885 0.00294406 0.06423941 0.00330004 0.22209603 -0.06081081 0.05805751 0.03123823 0.03492048 0.02424242 0.04287369 0.02508551 0.11440843 0.04264018 0.13294040

Oct-17 -0.01202231 0.02857960 -0.04899673 0.03612002 0.00173988 0.03683108 -0.03425775 -0.01759062 -0.0544484 -0.00651977 -0.04347826 -0.01003728 0.01858304 -0.05741627 -0.00174927 0.05261948

Sep-17 0.01438624 0.02157185 0.00046685 -0.00415932 -0.00182355 0.02942959 0.04251700 -0.03696099 -0.07230109 0.01208939 0.04545454 -0.05858531 -0.0023175 -0.00730727 -0.03416557 0.03866348

Aug-17 0.02487612 -0.12683163 -0.05763308 -0.00496639 -0.04936437 -0.03194472 -0.02970297 -0.00965938 -0.05638629 -0.01834515 -0.07042254 -0.04708001 0.07338308 -0.04700557 -0.00856133 0.0475

Jul-17 0.03617371 -0.01858094 0.01247216 0.06750786 0.0708035 0.01913494 -0.03656598 0.03092243 0 0.00714285 0.10248447 0.02289473 0.13559322 0.03123877 0.02616501 0.12296462

Jun-17 0.04681192 0.05315372 0.00380058 0.01383165 -0.0010596 -0.02632941 -0.02631579 0.05181918 0.02752880 0 0.03205128 0.00237404 0.00283286 0.03917910 0.03213088 0.13007614

May-17 -0.01322972 -0.00525124 -0.06715328 0.09529416 0.00283361 0.03738004 -0.01071975 0.03009653 -0.04083512 -0.02230085 -0.0310559 0.03806133 -0.0153417 -0.03318903 -0.02946241 0.03107621

Apr-17 -0.04267074 0.01479235 -0.07271321 0.04860482 0.01228038 -0.01350546 -0.08926081 -0.06776072 -0.0257254 0.00416082 -0.21654501 -0.08310318 0.02428571 -0.03616134 -0.06208505 -0.17689822

Mar-17 0.01904968 -0.01830973 -0.06356393 -0.02955508 -0.01309271 -0.01048149 -0.12560976 -0.06577646 0 -0.05017762 -0.07013575 -0.10353364 0.00574712 -0.06410674 -0.04506511 0.17829949

Feb-17 0.02639740 0.00708511 0.00290592 0.00376844 -0.00850803 0.00692612 -0.01204819 -0.00443131 0.04143302 -0.02616216 -0.01995565 0.14806201 0.04191616 -0.00517967 -0.00579216 -0.01191223

Jan-17 0.0858391 0.01418701 -0.00307804 0.00459122 -0.00166375 -0.02193548 0.01096224 0.05506493 0.29644588 -0.00228665 0.51851851 0.44943820 0.17199825 0.00324780 0.09535361 0.23166023

Dec-16 0.04890611 -0.00522361 0.00509554 -0.02194036 -0.02601279 0.00623214 0.07460733 0.04904632 0.06540447 -0.03279919 -0.01 0.09650924 0.24535722 0.04161028 -0.01125461 0.08777824

Nov-16 0.04552749 0.00284900 0.00862701 -0.01083187 0.00093904 -0.02703386 0.03663500 -0.0228967 0.15621890 0.01931093 -0.02912621 -0.02326514 -0.01675618 0.02774494 0.12378187 0.07300585

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Oct-16 -0.02193952 -0.01458069 0.00460999 0.01881624 -0.00754046 0.00654814 -0.06944444 0.02172786 -0.09418657 0.01401768 -0.00322581 0.03443983 -0.03523316 -0.01371648 -0.05096419 -0.04518072

Sep-16 0.03724895 0.00390944 0.01383436 0.02959087 -0.00033878 0.01825597 0.04761904 0.04669703 0.02636447 0.06676175 0.04377104 0.01048218 0.01621735 0.01390723 0.03166869 0.06118721

Aug-16 0.00027180 -0.02144128 -0.02745455 -0.07357062 -0.0044688 0.00763209 0.08933717 0.05783132 -0.03395889 0.01074268 -0.071875 0.02846054 0.03736071 -0.1099214 -0.00364078 -0.00454545

- -
Jul-16 0.00394003 -0.05147679 0.05363984 -0.02185185 -0.01576763 -0.02666667 -0.12262958 0.08496732 -0.02099738 0.103448276 0.005050505 -0.01739342 -0.06239332 -0.0376203
0.031047224 0.034554538

-
Jun-16 0.019955243 0.071428571 -0.02793296 0.028571429 0.02991453 0.024723487 -0.02586207 0.026845638 -0.00824295 0.029409036 0.115384615 0.071277347 0.057257676 -0.01457671 0.048143054
0.033011272

-
May-16 0.053316618 0.025974026 0.022857143 -0.02015677 0 -0.00966495 0.412173913 0.064285714 0.104456157 0.050892074 0.181818182 -0.00723961 0.075404508 0.040443321 0.055152395
0.009964129

Apr-16 -0.03714031 0.006535948 0.047904192 0.050588235 0 0.009102731 -0.14050822 -0.0070922 -0.10964164 0.074031414 -0.04347826 0.027015964 0.045410156 0.035811488 -0.06012427 0.0335

-
Mar-16 -0.03422681 -0.01199262 -0.07393715 -0.08863474 -0.05339806 -0.05932722 -0.10201342 -0.22099448 -0.01719078 -0.04166667 0.031236809 -0.05882353 0.029494175 -0.05246753 -0.07493062
0.037831847

-
Feb-16 -0.006371 0.007434944 -0.01636364 -0.09244243 -0.0514198 0.049422336 0.043417367 0.083832335 -0.00334308 0.020616967 -0.07692308 -0.09371095 0.088705146 -0.08997794 0.008866076
0.033455732

-
Jan-16 -0.01390255 0.003731343 -0.02135231 0.045084746 -0.01138088 -0.03169671 -0.04289544 -0.07222222 -0.00374688 0.021748266 -0.07142857 -0.02675314 0.009236004 0.095649171 0.102933608
0.035798584

-
Dec-15 0.005221579 -0.01289134 -0.00706714 0.013745704 -0.00976709 0.006253909 -0.08578431 0.208053691 0.050743657 0 0.062264939 0.016062603 0.041383674 0.015071854 -0.00461066
0.003820189

- -
Nov-15 0.00361706 0.035271687 -0.06291391 -0.01121305 -0.01553254 -0.02796353 -0.02275449 -0.03870968 0.041457859 0 0.051993068 0.042161259 -0.01484807 0.014553015
0.045075209 0.030781693

- -
Oct-15 -0.05927355 -0.0349586 -0.05625 -0.00304878 -0.00441826 -0.06321185 -0.2239777 -0.06626506 -0.12514946 -0.09677419 -0.07753797 -0.05288141 -0.04153566 0.00522466
0.072534297 0.103160189

Sep-15 0.017493384 0.035238095 0.061359867 -0.03749592 0.040613027 0.024504084 -0.04355556 0.006060606 0.003198721 0.067062315 0.033333333 0.037693178 0.108305648 0.096370692 -0.01274302 0.069273743

Aug-15 -0.00493291 -0.02867715 -0.0503937 0.015562914 -0.01360544 -0.08926674 -0.11417323 -0.01785714 -0.1064666 0.141727837 0.363636364 0.035923467 -0.09209733 -0.00177725 -0.09130048 0.026965003

Jul-15 0.04564596 0.243958573 0.114035088 -0.00821018 0.05 0.155310006 0.075359865 0.018181818 0.0397474 0.103770645 0.294117647 0.027688604 0.223370234 0.17756909 0.051350086 0.064102564

-
Jun-15 -0.00083934 0.118404118 0.126482213 0.064685315 0.06779661 0.150423729 0.009401709 0.006097561 -0.10445775 0.078510452 -0.05555556 -0.00756836 0.068275625 -0.07839471 -0.04988399
0.119434629

May-15 0.133341405 0.04155496 0.09287257 -0.08097686 0.031468531 -0.03278689 0.097560976 0.086092715 0.581273014 0.005614598 0.125 0.238512035 0.239334342 0.042179472 0.426343865 0.124592303

Apr-15 -0.10665537 -0.10551559 0.028888889 -0.01425404 -0.15571956 -0.11165049 -0.06899563 -0.17032967 -0.18271711 0.092722862 -0.2 0.083065811 -0.18696187 -0.05129513 0.074278157 0

Mar-15 -0.04885991 0.007246377 -0.10714286 0.030688867 -0.01811594 0.300710339 -0.01632302 0.005524862 0.003018542 0.069598495 -0.16666667 0.003220612 -0.12674544 -0.01595181 -0.033241 -0.20652174

Feb-15 0.008291632 0.145228216 0.026476578 0.04396728 0.121039805 0.227713178 -0.06506024 0.090361446 0.042247191 0.09760786 0 -0.03869969 -0.01041667 -0.03420599 0.001921435 0.018987342

Jan-15 -0.02896632 0.014025245 -0.01603206 0.107169811 0.050341297 -0.04972376 0.012195122 -0.05142857 -0.15108737 0.014384955 0.043478261 0.021343874 0.014667817 0.029046563 -0.06244996 -0.04097117

-
Dec-14 0.020031786 0.014224751 0.012170385 -0.03495994 0.039929015 0.014953271 0.145251397 0.011560694 -0.06924716 0.207711864 -0.08 0.056517776 0.048959181 0.076492135 0.058351178
0.043478261

5|Page
 Nov-14 -0.07805762 -0.05128205 -0.05192308 0.001093693 -0.09405145 -0.02193784 -0.20148699 -0.06486486 -0.05535055 0.039869813 -0.07407407 0.073457792 -0.06717687 0.114004405 -0.13543219 -0.08070866

Oct-14 0.019496285 0.06312769 -0.02071563 -0.0196569 0.110714286 0.046889952 -0.0203933 0.022099448 -0.07794618 0.136069514 0.08 0.071304348 0.012048193 0.06446942 -0.0662724 0.173210162

Sep-14 0.115350884 0.040298507 0.074898785 0.022287176 0.06870229 0.031589339 0.303893637 0.206666667 0.076590077 0.002130616 0.086956522 0.041195111 0.273773637 0.108707285 0.540460879 0.224028269

Aug-14 0.027638549 0.01978691 -0.03891051 0.124024641 0.083764219 -0.01074219 0.233021077 0.02739726 0.161702128 0.059579898 -0.08 0.077035592 0.224907687 -0.08280746 0.056625142 -0.01872399

-
Jul-14 -0.01191156 -0.02377415 0.011811024 0.050474547 -0.0061665 -0.06739526 0.025210084 0.020979021 0.111349957 0 0.026013007 0.129264594 0.089367553 -0.07077085 0.00628053
0.096327834

Jun-14 0.01129677 0.058176101 -0.02868069 -0.01529312 -0.02014099 0.062923524 0.061146497 -0.00694444 0.39198085 -0.01674516 0.041666667 0.019897959 -0.05752054 -0.02878338 -0.02212503 -0.06523157

-
May-14 -0.02986303 -0.11543811 -0.11355932 -0.04231082 -0.1342633 -0.20903522 0.159527326 -0.1627907 -0.01182732 -0.07692308 0 -0.13770795 -0.04579882 -0.01967213 -0.08148592
0.076067687

-
Apr-14 0.016667483 0.309653916 0.398104265 0.06637744 0.303409091 0.181900452 0.362173038 0.036144578 -0.09668803 0.340751945 -0.16129032 -0.00184502 0.165401749 -0.04984424 0.174524982
0.003051882

-
Mar-14 -0.05429213 -0.06632653 -0.05592841 0.00260983 0.013824885 0.06557377 0.227160494 0.006060606 -0.07464162 -0.02824147 -0.03125 -0.16977279 -0.0815275 -0.03803596 -0.06018519
0.093591517

-
Feb-14 -0.00069638 0.240506329 0.054245283 0.191809228 0.154255319 0.152222222 0.015037594 0.18705036 -0.10248447 0.109364081 0 0.071975917 0.243100688 -0.03813747 -0.05203762
0.073076923

Jan-14 0.114054681 0.131264916 0.112860892 0.203368684 0.089855072 0.034482759 0.191044776 0.158333333 0.118055556 -0.02086897 0.032258065 0.056433409 0.170028818 0.227682701 0.075089392 0.044531762

Dec-13 0.008469008 -0.01179245 -0.00522193 -0.03491872 -0.04696133 -0.02247191 0.027607362 -0.03225806 -0.06968159 0.035301063 -0.03125 0.027365492 0.048338369 -0.04357443 0.020929667 0

Nov-13 0.066284919 0.024154589 0.037940379 0.055944056 0.031339031 0.115288221 0.055016181 0.033333333 0.18935236 0.068500063 -0.05882353 0.191818684 0.060142349 0.121557926 0.050357873 0.086059744

- -
Oct-13 0.007628858 0.014705882 -0.02380952 0.007042254 -0.02635229 -0.00125156 -0.06927711 -0.05511811 -0.02043011 0.03030303 -0.0017762 -0.00579603 -0.04794354 0.199658703
0.038801989 0.052879581

- -
Sep-13 -0.04598447 -0.12633833 -0.09134615 0.011658031 -0.10545906 -0.13993541 -0.06478873 -0.09929078 -0.07185629 -0.02941176 -0.10150016 -0.06718049 -0.12555863 -0.06613546
0.078444519 0.164113786

Aug-13 0.047371092 0.200514139 0.350649351 0.067773167 0.236196319 0.342485549 0.1414791 0.128 -0.05871301 0.164627798 0.03030303 0.082938389 0.103169014 0.01839269 0.168324217 -0.07788391

-
Jul-13 -0.0399158 0.018324607 -0.08059701 0.357746479 0.168458781 0.014662757 -0.05182927 -0.03100775 -0.1846036 0.072734888 -0.05714286 -0.29212363 0.299436748 -0.02117303 -0.11738003
0.108199493

Average
Return
0.562% 2.358% 0.457% 2.215% 1.454% 2.078% 1.636% 0.887% 0.769% 2.539% 0.006% 0.607% 1.407% 2.393% 0.551% 1.755%
(monthly
)
Average
Return 6.745% 28.296% 5.487% 26.583% 17.445% 24.938% 19.634% 10.650% 9.228% 30.471% 0.070% 7.284% 16.885% 28.716% 6.606% 21.066%
(annual)

Variance 0.211% 0.660% 0.770% 0.525% 0.564% 0.972% 1.606% 0.643% 1.786% 0.634% 1.466% 0.858% 1.163% 0.708% 1.156% 0.921%

Standard
4.59% 8.13% 8.78% 7.25% 7.51% 9.86% 12.67% 8.02% 13.37% 7.97% 12.11% 9.26% 10.78% 8.42% 10.75% 9.60%
Deviation

Beta 1 0.659 0.810 0.007 0.555 0.511 1.291 1.054 1.867 0.229 1.351 1.127 1.735 0.585 1.528 1.238

6|Page
 Covariance
Renata Heidelberg BATC BATA RKBN LFAR SGBD BEXIMCO Berger Paints ISBL Baraka Power IDLC Olympic Ind. RAK Ce City Bank
Renata 0.006491834 0.00504352 0.001984709 0.00473852 0.005281616 0.003342665 0.003047537 0.000904469 0.003917405 0.001567849 0.00076187 0.002768072 0.003542593 0.001308539 0.000978177
Heidelberg 0.00504352 0.007576245 0.000805983 0.004423687 0.004406852 0.005022965 0.003179191 0.00084532 0.003591367 0.001263361 0.001563935 0.003521289 0.002839795 0.003036993 0.002260333
BATC 0.001984709 0.000805983 0.005167373 0.002866907 0.001636694 0.000325155 0.001374877 -0.002070671 0.001091688 -0.000403028 -0.00069381 -0.000663483 0.003097597 -0.000323671 -0.001272606
BATA 0.00473852 0.004423687 0.002866907 0.005546476 0.00445914 0.003479947 0.003032171 -0.000542192 0.003996971 0.000708018 0.000494127 0.002081421 0.003109118 0.001573264 0.001188353
RKBN 0.005281616 0.004406852 0.001636694 0.00445914 0.00956274 0.001963765 0.003777755 0.000286928 0.00361012 -0.000477756 0.000760017 0.001625457 0.002667991 0.00107573 3.88191E-05
LFAR 0.003342665 0.005022965 0.000325155 0.003479947 0.001963765 0.01579618 0.003595022 0.004527548 0.00263801 0.00188577 0.001636782 0.004090451 0.001905126 0.005899959 0.002401886
SGBD 0.003047537 0.003179191 0.001374877 0.003032171 0.003777755 0.003595022 0.006318513 0.002728233 0.001906325 0.003053176 0.002176244 0.004349629 0.002412712 0.003560191 0.002051931
BEXIMCO 0.000904469 0.00084532 -0.002070671 -0.000542192 0.000286928 0.004527548 0.002728233 0.017564889 -0.002021292 0.005234012 0.007298347 0.006894352 0.000156546 0.006945315 0.002909877
Berger Paints 0.003917405 0.003591367 0.001091688 0.003996971 0.00361012 0.00263801 0.001906325 -0.002021292 0.006238408 0.000485089 0.00014881 0.000595069 0.001702294 0.000219121 0.000811573
ISBL 0.001567849 0.001263361 -0.000403028 0.000708018 -0.000477756 0.00188577 0.003053176 0.005234012 0.000485089 0.014419446 0.005939489 0.004934269 0.00170435 0.003045482 0.004855547
Baraka Power 0.00076187 0.001563935 -0.00069381 0.000494127 0.000760017 0.001636782 0.002176244 0.007298347 0.00014881 0.005939489 0.008435479 0.005278085 0.000946304 0.003818933 0.003147208
IDLC 0.002768072 0.003521289 -0.000663483 0.002081421 0.001625457 0.004090451 0.004349629 0.006894352 0.000595069 0.004934269 0.005278085 0.011433991 0.001554645 0.006115758 0.005183898
Olympic Ind. 0.003542593 0.002839795 0.003097597 0.003109118 0.002667991 0.001905126 0.002412712 0.000156546 0.001702294 0.00170435 0.000946304 0.001554645 0.006966711 0.001300923 0.001486258
RAKCem 0.001308539 0.003036993 -0.000323671 0.001573264 0.00107573 0.005899959 0.003560191 0.006945315 0.000219121 0.003045482 0.003818933 0.006115758 0.001300923 0.011366172 0.004356911
City Bank 0.000978177 0.002260333 -0.001272606 0.001188353 3.88191E-05 0.002401886 0.002051931 0.002909877 0.000811573 0.004855547 0.003147208 0.005183898 0.001486258 0.004356911 0.009061048

Covariance is a statistical measure of how two assets move relative to each other. A positive covariance indicates that two assets move in the same
direction. A negative covariance indicates two assets move in differing directions.

Correlation, is a statistic that measures the degree to which the prices of two securities change in relation to each other. Correlation’s value that must
fall between -1 and 1.

7|Page
 Sharpe Ratio and Efficient Frontier
Weigh
Security Return
t
Renata 28.30% 0%
Heidelberg 5.49% 0%
BATC 26.58% 37%
BATA 17.45% 0%
RKBN 24.94% 0%
LFAR 19.63% 0%
SGBD 10.65% 0%
BEXIMCO 9.23% 5%
Berger Paints 30.47% 35%
ISBL 0.07% 0%
Baraka Power 7.28% 0% Efficient Frontier
IDLC 16.88% 0%
Olympic Ind. 28.72% 8% Risk Return
RAKCem 6.61% 0%
City Bank 21.07% 15%
5.41% 10%
1
Portfolio Return 0.26357797
Variance of Portfolio 0.002185772 4.70% 15%
Standard Deviation of
0.046752242
Portfolio 4.32% 20%
Risk Free Rate 10%
Sharpe Ratio 3.498826253
4.38% 25%

4.88% 27%

5.26% 28%

5.79% 29%

6.72% 30%

Efficiency Frontier
35%
30%
25%
Portfolio Return

20%
15%
10%
5%
0%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%

Portfolio Standard Deviation

 Security Analysis

Assumptions

 Sales Growth Rate is assumed to be 5%. This is attributed to Bangladesh’s economic growth being
projected at 6.5%-7%. This will mean more business for the real estate industry of Bangladesh, which
will in turn lead to buying more cement. Furthermore, cement prices are rising, further boosting sales
revenue. However, the cement industry is competitive, and hence Heidelberg Cement will share in the
increased cement sales with several other cement manufacturers. Taking this into account, a sales
growth rate of 5% is expected to reflect both the rising sales and existence of competition.
 Cost of Goods Sold as a percentage of Sales is assumed to be 80%. This is because the most
important raw material in cement manufacturing, clinker, has to be imported from abroad. As a result,
clinker is expensive to buy, and also incurs significant transportation costs to bring to Bangladesh.
Clinker prices are also experiencing a growing trend, hence it is likely to offset the increased revenues
from rising cement prices.
 Operating Expense as a percentage of Sales is assumed to be 10%. Selling and distribution expenses,
and fees paid for technical expertise, which is important in the manufacture of cement, takes up a sizable
portion of costs. Advertising costs are high because the industry is competitive, so Heidelberg has to
spend money to compete with competitors. Distribution expenses are high, because of the costs incurred
in bringing clinker from abroad. Assuming operating expenses at 10% fairly reflects these costs.
 Terminal Growth Rate is assumed to be at 1%. This is because even though revenue is expected to
grow, cost of goods sold takes up a large portion of the revenue. As a result, the free cash flow will grow
at a generally slow pace. Furthermore, the cement industry faces fluctuating global prices, and there is
no guarantee that cement prices will continue to increase in future. Taking all these considerations into
account, the terminal growth rate has been set at 1%.
 Incremental CAPEX as a percentage of Sales Increase is assumed to be 20%. This is because the
capacity utilization of Heidelberg Cement is around 70%. This means that Heidelberg Cement produces
70% of the maximum amount it can produce. As a result, they will not need to make significant
expansion to increase sales. However, a certain degree of capital spending is necessary to support the
increased sales with the existing capacity, and since the industry is capital intensive, the amount of
capital expenditure will be a decent amount. Hence, the percentage of CAPEX as a percentage of Sales
Increase is set at 20%.
 Incremental WC as a percentage of Sales Increase is assumed at 25%. A certain proportion of
current assets has to be maintained by Heidelberg Cement to account for the various short-term expenses
and debt owed to creditors. As sales increases, Heidelberg will have to purchase more raw material on
credit, spend more to cover manufacturing costs, and spend more to transport cement to buyers. Setting
incremental Working Capital at 25% of Incremental Sales maintains enough current assets to support the
costs of increasing sales, while at the same time not leading inefficient use of current assets.
 Tax rate is set at 25%. The present corporate tax rate in Bangladesh is 25%. This has been the tax rate
for 2016 to 2018.

9|Page
 Risk-free rate is set at 7%. This is the rate of return on 10-year T-bonds in Bangladesh. This represents
the return possible from a riskless instrument, and hence is the minimum return investors would seek
from investing in risky assets such as stocks.
 Market return is assumed to be 13%. It is the rate of return of the stock market of Bangladesh. As
historic market returns of DSE as a whole is negative, a proxy is used. The proxy is obtained by adding
the GDP growth rate of Bangladesh (approx. 7.5% for FY2018) with the inflation rate (approx. 5.5%).
 Cost of Equity has been calculated using the Capital Asset Pricing Model (CAPM), considering the risk
free rate to be 7%, the market returns as 13%, and the Beta value for Heidelberg Cement shares from the
calculations shown in the Excel file.
 Cost of Debt has been assumed to be 8%. This was found by adding a credit-risk premium of 1% to the
risk-free rate of 7%. The small credit risk premium is owed to the fact that Heidelberg Cement has no
long-term debt. Furthermore, the company is rich in cash, with a cash balance that exceeds long-term
liabilities. The cash ratio stood at over 80%, indicating the company had enough cash to pay off 80% of
all current liabilities. Hence, Heidelberg Cement is unlikely to suffer from difficulties in making any
future debt repayment.

10 | P a g e
 Projected FCFF
Initial Sales 9,801,506,000.00 Cost of Equity 11.86% Equity Beta 0.810009997
SGR for next 5 years 5% Cost of Debt 8% Risk Free Rate 7%
Terminal Growth rate 1% Debt ratio 46.17% Market Return 13%
COGS (% Sales) 80% WACC 9.154%
Operating Expenses ((% Sales) 10% Value of Debt 4,030,836,000.00
Incremental Capex/Finv ( % of increased 20% Value of Equity 4,699,663,000.00
sales)
Incremental WC % of increased sales ) 25% Cash 2,790,303,000.00
Tax Rate 25% No of shares 56,503,600
Projected
2017 2018 2019 2020 2021 2022
Base Year (0) 1 2 3 4 5
Sales 9,801,506,000.00 10,291,581,300.00 10,806,160,365.00 11,346,468,383.25 11,913,791,802.41 12,509,481,392.53
COGS 7,841,204,800.00 8,233,265,040.00 8,644,928,292.00 9,077,174,706.60 9,531,033,441.93 10,007,585,114.03
Gross Profit 1,960,301,200.00 2,058,316,260.00 2,161,232,073.00 2,269,293,676.65 2,382,758,360.48 2,501,896,278.51
Operating Expenses 980,150,600.00 1,029,158,130.00 1,080,616,036.50 1,134,646,838.33 1,191,379,180.24 1,250,948,139.25
EBIT 980,150,600.00 1,029,158,130.00 1,080,616,036.50 1,134,646,838.33 1,191,379,180.24 1,250,948,139.25
EBIT(1-Tax) 735,112,950.00 771,868,597.50 810,462,027.38 850,985,128.74 893,534,385.18 938,211,104.44
Incremental Capex/Finv 98,015,060.00 102,915,813.00 108,061,603.65 113,464,683.83 119,137,918.02
Incremental WC 122,518,825.00 128,644,766.25 135,077,004.56 141,830,854.79 148,922,397.53
FCFF 551,334,712.50 578,901,448.13 607,846,520.53 638,238,846.56 670,150,788.89
Terminal Value 8,300,359,204.89
Total Cash Flow 551,334,712.50 578,901,448.13 607,846,520.53 638,238,846.56 8,970,509,993.78
PV of FCFF $7,697,009,246.37
Net Debt 1,240,533,000.00
PV of FCFE $6,456,476,246.37
No of share outstanding 56,503,600
Equity Value Per Share 114.2666352

11 | P a g e