Group Formation and Companies allocation 1

• Mughal Iron - C
• DYNEA Pakistan - E
• Engro Fertilizer- D
• Tariq Glass - B
• Atock Petroleum - A
• Citi Pharma - F
•
 Group Formation and Company allocation - 2

• Image Pakistan Ltd - E

• Sazgar Engineering -C
• PNSC -B
• Airlink Communication -A
• PEL - F
• Flying Cement -D
 Weekly review
• Policy rate unchanged at 9.75% and signaling rate to remain at this level.
• T-bill yields contracting 15-68bps, PIB yields contracting 71-79bps,
• CAD swelling to US$9.1bn in 1HFY22,
• GoP successfully issuing US$1bn Sukuk at 7.95% for a tenor of 7 years,
• Foreign debt rising by US$9.4bn in 1HFY22,
• Oil hitting US$90/bbl since CY14,
• Foreign investors repatriating US$891mn in 1HFY22 and
• SBP’s FX reserves falling US$846mn in the week ending 21st Jan’22.
• SBP Act approved leading to possible release of IMF tranche
Levered and unlevered beta

• Unlevered Beta: Levered beta less (1-t) Debt/equity

• 1.15 less ( .6) 20/80 : 1

• Levered Beta: Unlevered beta + (1- t) Debt/equity

• 1 + (.6) 20/80 : 1.15
 Options

A contract that gives the buyer right, no obligation, to buy/ sell an asset at strike
price prior to or on a specified date., depending on the form of the option.
 Call option: nd Right to buy Put option: Right to sell at a fixed strike price.
If the option can be exercised any time before the expiration, it is called an America
option; if it can be exercised only on its expiration date, it is a European option.

If current stock price is greater than the strike price, the option is in-the money.
 Option computation

1. NS: Hedge portfolio number:

Profit if prices goes up less Profit if up price goes up
less Profit if price goes down / price up less price down.

2. Hedge portfolio payoff ( verifying hedge portfolio number)

NS x Price up less Profit (difference between strike price and up price)
NS x Price down less Profit

3. Present value of Hedge portfolio Payoff at Risk Free rate and as per time period

4. Value of Option
NS x Current price less PV of payoff
 ST-1 Binomial Model – single period

• Payoff if price goup to 60 less strike price of 42 = 18

• In case it goes down Zero

• To compute hedge quantity = ( Payoff if price up) minus ( payoff if price go down )
Divided by ( Price up minus Price down) = 18 – 0 / 60 – 30 = 18/30 = 0.6

• To verify this number: at P 60 x .6 Pay 0ff 36, if P 30 x .6 = 18

• Difference: 36 leass 18 = 18 same as in first line of slide

 Value of option (VC)
• CU stands for profit if price goes up
• rRF is Risk Free rate
• T is (1) and N is number of periods
• D is down %
• U is up %
• CD : profit if price goes down
 ST- 1 contd.

• Now we compute PV of 18 at Risk Free rate of 5% , daily compounding

• 18/1 + (.05 /365) raise ti 365 = 17.12

• Option price = current stock price 40, purchased 0.6 (40 x .6) :
24 less 17.12 : 6.88

• Formula mechanism 8 – 3 of chapter

 Fischer Black and Myron Scholes Developed Black
Scholes Model (OPM) in 1973 - Assumptions
• 1. Stock under call option provides no dividends during the life of the option.
• 2. There are no transaction costs for buying or selling either the stock or the option.
• 3. Short-term, risk-free rate is known and is constant during the life of option.
• 4. Buyer may borrow any fraction of purchase price at short-term, risk-free rate.
• 5. Short selling permitted; short seller will receive full cash for a security sold short.
• 6. The call option can be exercised only on its expiration date.
• 7. Trading in all securities takes place continuously, and stock price moves
randomly.
 Five variables of option value

• The value of the option is a function of five variables:

• (1) P, the stock’s price;
• (2) t, the option’s time to expiration;
• (3) X, the strike price;
• (4) σ, the standard deviation of the underlying stock; and
• (5) rRF, the risk-free rate.
Black and Sholes Model
MBA Executive Course
Business Finance II
Distribution to Shareholders -
chapter 14
Dividend

• Profit distribution

• Dividend vs. Interest

• Cash Cash outflow

• Stock (Bonus shares) Book entry

 Profit Distribution

• How much to be distributed ?

• Mode of distribution: Dividend, Stock repurchase

• Policy: Steady, stable dividend growth rate, payout ratio

• Optimal policy - balance between dividends & growth, to increase firm’s stock price.

• Irrelevance theory: Miller and Modigliani (MM) Model: dividend

policy has no effect on either the value of its stock or it's cost of capital.
 Profit Distribution ….. Contd.

• Dividend preference theory:

firm’s value will be maximized by a high dividend payout ratio, as investors regard
cash dividends as being less risky than potential capital gains.

• The tax effect: long-term capital gains are subject to lower taxes than dividends,
investors prefer to have companies retain earnings rather than pay.

• signaling hypothesis/information content hypothesis.

• clientele effect suggests that a firm will attract investors who like the firm’s payout
 Profit Distribution –contd.

• policy of steadily increasing dividend. provides investors with stable, dependable

income, & departures from it give signals about future earnings.
• Residual distribution set the long-run target distribution at a level that will permit
the firm to meet its equity requirements with retained earnings.
• Stock repurchase plan, a firm buys back some of its outstanding stock
• Legal constraints, investment opportunities, availability and cost of funds from other
sources, and taxes are also considered when firms establish dividend policies
• stock split “divide the pie into smaller slices.” if: (1) The price is quite high.
• stock dividend and splits are to keep stock prices within an “optimal” trading range.
• dividend reinvestment plan (DRIP)
Dividend Policy

• Residual

• Stable

• Consistent payout ratio

• Regular plus extra based on high income