In this survey, harmonizing to what stated in the job statement the intent of survey is comparing two company rating of equity which are selected as Discount Dividend Model ( DDM ) and Free Cash Flow to Equity ( FCFE ) . These two theoretical accounts have different characteristics and methods to cipher the estimated value of equity for the terminal of the fiscal twelvemonth.
This appraisal is being done by the investor at the beginning of the fiscal twelvemonth through gauging the intrinsic value of stock derived from the above theoretical accounts ( DDM and FCFE ) , and so at the terminal of the period comparing this value with the existent value of stock for the concerned company. So the chief intent of this survey is construing the two theoretical accounts mentioned in term of truth of their appraisal and placing the theoretical account which is more dependable and suited for doing such appraisal.
In the procedure of ciphering the intrinsic value through each theoretical account, the initial factor to be considered is the Growth Rate of the companies selected to be studied via DDM and FCFE theoretical accounts. As explained in the literature reappraisal before, each rating theoretical account has three different techniques to calculate the intrinsic value of equities of the companies which are based on the growing degree they are in.
For elucidation, the investor should presume a growing rate while calculating the intrinsic value through each technique of these two theoretical accounts. Harmonizing to the growing rate of companies, these two theoretical accounts are classified as:
Zero Growth Model
Changeless Growth Model
Two Stage-Growth Model
Three Stage Growth Model
Multiple Growth Model
In this instance, I have chosen the companies with changeless growing rate in order to gauge their intrinsic values of stocks within 3 old ages. For such appraisal through DDM, I have used the Gordon Growth Model which is being used for calculating the value of stocks sing the growing rate as changeless. Similarly I have used the FCFE for calculating the values of stocks of the companies with changeless growing rate.
Since we are concentrating on gauging the value of equity for a company, while ciphering the growing theoretical account to be selected as the changeless growing rate in the expression of DDM and FCFE, the most suited growing rate for such intent is the Equity Growth Rate of the company since the company ‘s equity value grows every twelvemonth at this rate. Therefore, I have assumed the 5 old ages mean Equity Growth Rate of each company as their changeless growing rate used in calculating computation through DDM and FCFE.
Due to the fact and records, Free Cash Flow and Dividend Discount theoretical accounts introduced few old ages ago and many companies and investors around the universe are utilizing these theoretical accounts in their operations, so the stairss of this undertaking are as below:
First of all, while the definitions and chief constructs of Free Cash Flow and Dividend Discount theoretical accounts considered, we cover the reading of these methods, history of them and the manner to utilize such theoretical accounts.
On the following measure, we consider the conditions, factors and multiples linked with these two methods, the old researches done in this field and besides the sentiments and positions to this country will be covered.
Advantages and disadvantages of utilizing Free Cash Flow and Dividend Discount theoretical accounts.
Choosing the whole engineering sector companies which are listed in Bursa Malaysia, roll uping the required informations and using Free Cash Flow and Dividend Discount theoretical accounts for them.
Comparing the results of these two theoretical account through using Liner Regression Analysis method.
Finally after sing the obtained consequences and construing them, our suggestion will be made for this company while taking into consideration the comparing of such techniques.
As pointed before, the intent of this research is garnering, roll uping and showing the comprehensive information about the Free Cash Flow and Dividend Discount theoretical accounts so we are able to help and assist the companies through presenting different guidelines in this field.
Harmonizing to the result and gained consequences, we summarize the decision at the terminal of research and we try to show and present guidelines for the resulting and be aftering intent in this mode.
Research design trades with detecting about the concerned topic. About Free Cash Flow and Dividend Discount theoretical accounts still there are non many academic researches done in Malaysia, so by making this research we try to see and analyze about these methods, their values and benefits to the companies and investors. By perfect consideration of these methods, while we cover the survey of Malaysian market which few surveies are done in this country, we besides evaluate the benefits of utilizing of such methods in the planetary market and local market for the Malayan companies.
Discount Dividend Model ( Gordon Growth Model ) :
Since projections of dollar dividends can non be made through eternity, several versions of the dividend price reduction theoretical account have been developed based upon different premises about future growing. However in this instance I have applied Gordon Growth Model as a theoretical account designed to value stock in a stable-growth house that pays out what it can afford in dividends.
The Gordon Growth Model
The Gordon growing theoretical account can be used to value a house that is in ‘steady province ‘ with dividends turning at a rate that can be sustained everlastingly.
The Gordon growing theoretical account relates the value of a stock to its expected dividends in the following clip period, the cost of equity and the expected growing rate in dividends.
DPS1 = Expected Dividends one twelvemonth from now ( following period )
ke = Required rate of return for equity investors
g = Growth rate in dividends everlastingly
The value of expected dividend for the following twelvemonth is calculated as below:
Expected DPS = Current DPS A- ( 1+g )
ke or the Needed Rate of Return is calculated by CAPM ( Capital Asset Pricing Model ) and it depends on whether the undertaking is to the full financed by equity or both equity and debts.
is Risk Free Rate or the authorities Treasury Bill rate which is available for
each company in their profile. This rate is besides changeless during the computation.
is the Market Risk Premium which is changeless during the computation.
Beta is sensitiveness of the plus returns to market returns or the systematic hazard. The
higher the sensitiveness of the plus return to the market return, the higher the Beta.
While the Gordon growing theoretical account is a simple and powerful attack to valuing equity, its usage is limited to houses that are turning at a stable rate. There are two penetrations deserving maintaining in head when gauging a ‘stable ‘ growing rate. First, since the growing rate in the house ‘s dividends is expected to last forever, the house ‘s other steps of public presentation ( including net incomes ) can besides be expected to turn at the same rate. Since we could non entree any beginning for happening the Dividend Growth rate and besides being non possible to cipher this rate through any expression, I have assumed Equity Growth Rate alternatively of Dividend Growth Rate as the changeless growing rate in our computation.
The 2nd issue relates to what growing rate is sensible as a ‘stable ‘ growing rate. Harmonizing to basic characteristic of changeless growing theoretical accounts, this growing rate has to be less than or equal to the growing rate of the economic system in which the house operates.
Free Cash Flow to Equity ( FCFE )
The free hard currency flow to equity theoretical account does non stand for a extremist going from the traditional dividend price reduction theoretical account. In fact, one manner to depict a free hard currency flow to equity theoretical account is that it represents a theoretical account where we discount possible dividends instead than existent dividends. Consequently, the Constant Growth version of the FCFE rating theoretical account presented in this survey is simple discrepancy on the dividend price reduction theoretical account, with one important alteration – free hard currency flows to equity replace dividends in the theoretical account.
The changeless growing FCFE theoretical account
The changeless growing FCFE theoretical account is designed to value houses that are turning at a stable rate and are hence in steady province.
The value of equity, under the changeless growing theoretical account, is a map of the expected FCFE in the following period, the stable growing rate and the needed rate of return.
P0 = Value of stock today
FCFE1 = Expected FCFE following twelvemonth
ke = Cost of equity of the house
gn = Growth rate in FCFE for the house everlastingly
The theoretical account is really similar to the Gordon growing theoretical account in its implicit in premises and plants under some of the same restraints. The growing rate used in the theoretical account has to be sensible, comparative to the nominal growing rate in the economic system in which the house operates. As a general regulation, a ‘stable ‘ growing rate can non transcend the growing rate of the economic system in which the house operates by more than one or two per centum. The premise that a house is in steady province besides implies that it possesses other features shared by stable houses.
Similar to Gordon Growth Model in DDM, we should presume a growing rate at which the company ‘s earning is turning invariably. In this method besides we refer to the Equity Growth Rate as the growing we use in our computation.
The value of FCFE of each company is calculated as below:
FCFE = Operating Cash Flow – Cash Needed for Meeting Growth
Operating CF = Net Income + Depreciation & A ; Amortization
Cash Needed for Meeting Growth = Capital Expenditure+ Change in Working Capital
Working Capital = Total Current Assets + Total Current Liabilities
Change in WC = Current WC – Last Year WC
After ciphering the whole parts as above, eventually we need to take into consideration of Debt Ratio since after obtaining the FCFE we should deduct the value of debt from this value in order to derive the net FCFE. In this manner, we calculate Debt Ratio ( DR ) harmonizing to its definition as below:
DR = Total Debt ? Total Asset
Entire Debt = Short Term Debt + Long Term Debt
Sing the DR calculated as above, we can research the FCFE expression as below:
FCFE = N. Inc + Dep – ( ( Cap Exp ) A- ( 1-DR ) ) – ( ( I” WC ) A- ( 1-DR ) )
In this survey, I have collected the one-year fiscal informations of nine Malayan companies listed in Bursa Malaysia. In this manner, we searched 100 top ranked companies in Bursa Malaysia and studied on their fiscal informations and their public presentations during recent old ages. Then we selected nine companies out of these 100 companies with focal point on their earning growing and dividend growing.
After choosing the most suited companies for our instance, we referred to Negara Bank, Thomson One Banking and Bursa Malaysia websites for roll uping the whole input informations needed for our prognosiss and computations. As explained above about the expressions applied in both DDM and FCFE theoretical accounts, several input informations were needed to be entered in the expression. Thomson One Banking and Bursa Malaysia provide investors with about the whole information and fiscal informations required for them to calculate decide and put in companies stocks.
Harmonizing to the expressions applied in both DDM and FCFE theoretical accounts, below is the list of required input informations which I have collected from the two web sites mentioned above.
Input Data required for DDM:
Dividend Per Share ( for 5 old ages )
Equity Growth Ratio 5 old ages Average
Beta of the Company
Risk-free Rate or Government Treasury Bill Rate ( 5 old ages )
Average Hazard Premium
Input Data required for FCFE:
Net Income ( 4 old ages )
Depreciation and Amortization ( 5 old ages )
Capital Expenditure ( 5 old ages )
Entire Current Assets ( 5 old ages )
Entire Current Liabilities ( 5 old ages )
Debt Ratio or Entire Debt Pct Total Assets ( 5 old ages )
Equity Growth Ratio 5 old ages Average
Beta of the Company
Risk-free Rate or Government Treasury Bill Rate ( 5 old ages )
Average Hazard Premium
Risk-free Rate and Average Risk Premium rate are collected from Negara Bank of Malaysia web site and the other informations are collected from Thomson One Banking and Bursa Malaysia websites. The period of input informations for each company is five old ages. With come ining informations of 5 old ages in the expression the intrinsic values of four old ages will be calculated and eventually these values will be compared with the existent monetary values of stock at the terminal of each fiscal twelvemonth.
After roll uping the whole information and ciphering the intrinsic values ( IV ) for all of the companies by utilizing DDM and FCFE theoretical accounts and comparing these values with the existent monetary values ( AP ) of each company for each twelvemonth, as explained before, there are several factors impacting the results of both methods. In order to see these two theoretical accounts more in inside informations in term of the relation between each IV calculated with each theoretical account and the AP at the terminal of each twelvemonth I have applied SPSS for ciphering the Arrested development for both theoretical accounts. In this portion, foremost we introduce the Hypothesis and explicate it as below:
Measure in Hypothesis Testing:
State hypothesis Statement
Holmium: ( Null Hypothesis, Always contains “ = “ , “ & lt ; “ or “ & gt ; ” )
H1: ( Alternate Hypothesis, Never contains the “ = ” , “ & lt ; ” or “ & gt ; ” )
State the degree of significance I± ( degree of hazard )
Decide on the trial statistics or the P-Value
Reject H0 if P-Value & lt ; I±
Do non reject H0 if P-Value a‰? I±
The Hypothesis for this survey is including two separate hypothesizes as below:
H0: There is no relation between IV of FCFE and AP
H1: There is relation between IV of FCFE and AP
H0: There is no relation between IV of DDM and AP
H1: There is relation between IV of DDM and AP
Data Collection Method
The informations aggregation method adopted for this research is utilizing the secondary informations. In term of secondary informations, we refer to the different related mention books, and so we use internet to roll up, analyze and show the information. In this manner, we try to mention to the latest articles and mention books in order to happen the latest information which is suited.
After garnering these informations, survey and sing them, we try to analyze the Free Cash Flow and Dividend Discount theoretical accounts, their characteristics and Scopess, and so by sing the whole state of affairs and involved factors, we apply these two theoretical accounts for our research.
In term of secondary informations, we besides try to roll up the whole information and information from the engineering sector companies which are listed in Bursa Malaysia. To entree such informations, due to some restrictions and troubles, we consider the Bursa Malaysia web site and Thomson Banker as our mention, as this site is supplying perfect information about the listed companies in Malaysia.
The broad and assorted scope of information used in our undertaking gave us this option to split them into two parts of quantitative and qualitative information. In term of qualitative portion, the information and information of selected company collected from different web sites. In term of quantitative portion, the information obtained from other methods, will be studied and considered. At the concluding phase, the result of both parts will be compared and combined together for fixing the concluding consequence.
Arrested development analysis is used to foretell the value of a dependant variable based on the value of at least one independent variable. Regression analysis, besides, explicate the impact of alterations in an independent variable on the dependant variable
In this survey, dependent variable is the variable we wish to explicate ( Actual Value ) and independent variable is the variable used to explicate the dependant variable ( Intrinsic Valuess calculated by DDM and FCFE ) .
In Simple Linear Regression Model that we will utilize in this research:
Merely one independent variable, Ten
Relationship between X and Y is described by a additive map
Changes in Y are assumed to be caused by alterations in Ten
Figure 3.1: Different sort of relationship between X and Y
The simple additive arrested development equation provides an estimation of the population arrested development line
Coefficient of Determination, r2
The coefficient of finding is the part of the entire fluctuation in the dependant variable that is explained by fluctuation in the independent variable. The coefficient of finding is besides called r-squared and is denoted as r2:
r2 = 1
Perfect additive relationship between X and Y:
100 % of the fluctuation in Y is explained by fluctuation in Ten
0 & lt ; r2 & lt ; 1
Weaker additive relationships between X and Y:
Some but non all of the fluctuation in Y is explained by fluctuation in Ten
r2 = 0
No additive relationship between X and Y:
The value of Y does non depend on Ten. ( None of the fluctuation in Y is explained by fluctuation in X )
In our instance, for the intent of truth and velocity in our computations, we designed package in Microsoft Excel which is programmed with all the expressions and computations needed for our appraisal in term of utilizing both DDM and FCFE theoretical accounts. For each method, after come ining the whole input informations needed by the package, the intrinsic value of stock for each company will be calculated individually. After obtaining the intrinsic values by each theoretical account, the package compares the two intrinsic values for each company with the existent value of stock for each twelvemonth. This comparing is shown in signifier of diagram drawn by the package. Below ( Table 3.1 and Figure 3.2 ) are the samples of computations and diagram presented by this package for one company.
After all intrinsic values of the engineering sector obtained in Excel Software, we transfer these informations to SPSS Software to ciphering arrested development for both intrinsic values presented by DDM and FCFE theoretical accounts. This arrested development computation is for the intent of construing the intrinsic values for each company obtained by each theoretical account and so compare them with the existent monetary values of stock at the terminal of each twelvemonth. Finally the arrested development method will supply us with the Comparing Free Cash Flow Model and Dividend Discounted Model in Valuing Malaysian Listed Companies.
Table 3.1: FCFE and DDM intrinsic value computation for Genting Berhad company
Entire Current Assets
Entire Current Liability
Tax return on Equity
Change in Working Capital
Cash Needed for Meeting Growth
FCF / Share
Hazard Premium ( Rm-Rf )
Cost of Equity ( Ks )
Expected Growth Rate
Value of Equity ( Price ) FCFE
Value of Equity ( Price ) DDM
Figure 3.2: FCFE and DDM intrinsic values tendency against existent value for Genting Berhad
List of Companies Selected in this Survey
1- SP Setia Berhad
SP Setia Bhd ( SP SETIA BHD ) . The Group ‘s chief activity is developing belongings. Other activities include building edifice and route, fabrication and trading wood merchandises and edifice stuffs and investing retention. The Group ‘s operations are wholly carried out in Malaysia.
2- Kulim ( Malaysia ) Berhad
Kulim ( Malaysia ) Berhad. The Group ‘s chief activities are oil thenar planting and healed thenar oil processing. Other activities include fabricating and selling oleochemicals and gum elastic merchandises, speedy service eating houses, rental office edifice and development of lodging and commercial estate. The Group ‘s operations are carried out in Malaysia, Papua New Guinea, Indonesia, the United Kingdom, China, Japan, and Netherlands.
3- Texchem Resources Berhad
Texchem Resources Berhad. The Group ‘s chief activity is merchandising in industrial chemicals and other merchandises. Other activities include fabrication and selling of natural surimi, fishmeal, feedmeal and seafood merchandises, operation of a concatenation of retail sushi mercantile establishments, fabricating and merchandising of packaging merchandises for the electronics, electrical, semiconducting material and disc thrust industries, fabrication of household attention merchandises and family insect powders and distribution and selling of a broad scope of consumer and household attention merchandises and investing retention. The Group ‘s operations are located in Malaysia, Singapore, Thailand, Vietnam, China, Myanmar and other states.
4- Tradewinds ( M ) Berhad
Tradewinds ( M ) Berhad. The Group ‘s chief activities are fabricating and merchandising refined sugar. Other activities include cultivating oil thenar, treating and selling thenar merchandises, supplying plantation direction, consultative services, investing retention and proviso of direction services. The Group ‘s operations are located in Malaysia, Indonesia, Indo-China, Singapore, Canada and other states.
5- Hap Seng Consolidated Berhad
Hap Seng Consolidated Berhad. The Group ‘s chief activities are merchandising and administering fertilizers and agro-chemicals. Other activities include cultivating and treating oil thenar, sweeping trading, packing, selling and sweeping trading of comestible oils and nutrient merchandises, belongings development, merchandising crude oil merchandises, manufacturing and selling commercial dawdlers, merchandising motor vehicles, trim parts, serving motor vehicles, fabrication and trading bricks, operating of rock preies, merchandising off constructing stuff, supplying fiscal services, supplying recreational installations and investing retention. Operationss are chiefly carried out in Malaysia.
6- Chemical Company of Malaysia Berhad
The Group ‘s chief activities are fabricating and selling fertilisers. Other activities include fabrication and selling chlor-alkali and coagulator merchandises, industrial and forte chemicals and H2O intervention merchandises, pharmaceutical and healthcare merchandises and investing retention. Operationss are carried out largely in Malaysia.
7- Ancom Berhad
The Group ‘s chief activities are fabricating and selling agricultural merchandises and industrial chemical merchandises. Other activities are providing goods and services to oil and gas industry ; trading computing machine hardware and package ; supplying IT related confer withing services ; ship owning and ship operating ; supplying transit, container draw, bulk lading handling, chemical repositing, and beating services ; administer publishing ink dissolver ; fabricating steel constructions for oil and gas industry ; trading and catching in electrical technology merchandises, and investing retention. The Group operates in Malaysia, China, Singapore, Hong Kong, Indonesia, Middle East, Philippines, Europe, Germany, and Australia.
8- Padiberas Nasional Berhad
The Group ‘s chief activities are securing, importation, purchasing, processing and merchandising rice, rice byproducts and Paddy. The Group operates preponderantly in Malaysia.
9- Telekom Malaysia Berhad
The Group ‘s chief activities are consolidating all domestic fixed line services. Other activities include runing cellular concern, international operations and pull offing big figure of non-core concerns with the aim of rationalizing and steamlining the non-core concern in maximizing the Group assets/entities ‘ value proposition, whilst turning the concern that offers potencies. The Group operates in Malaysia, Indonesia and other states.
10- Oriental Holdings Berhad
The Group ‘s chief activities are retailing, piecing and administering motor vehicle, fabricating engines, seats and other related parts every bit good as trading spare parts, accoutrements and related constituent parts. Other activities include fabrication, piecing and administering fictile constituent parts, fabricating plastic proficient and industrial goods and equipment, cultivating oil thenar, runing hotels and resorts, puting in portions and bonds, allowing belongingss, renting companies, developing residential and commercial belongingss, supplying direction, selling, advertizement and cardinal reserve services, freight forwarding, transporting agents, committee agents, fabricating wire gauze, wire mesh, barbed wire, dyer’s rocket mesh, nails and edifice stuff, administering cement, , fabrication and covering concrete merchandises. Operationss of the Group are carried out in Malaysia, Singapore and other states.
11- Petronas Gas Berhad
The Company ‘s chief activities are dividing natural gas into its constituents and hive awaying, transporting and administering such constituents. Other activity includes selling industrial public-service corporations. Operationss are carried out in Malaysia.
12- Genting Berhad
The Group ‘s chief activities are runing hotel, gambling and amusement, Tourss and travel related services. Other activities include coevals and supply of electric power, oil thenar plantations, palm oil milling, building, belongings development and direction, oil and gas geographic expedition, sale of rough oil and investing retention. Operationss of the Group are carried out in Malaysia, Asia Pacific, Europe and other states.
13- Tenaga Nasional Berhad
The Group ‘s chief activities are bring forthing, conveying, administering, runing and selling electricity.Other activities include mending, proving and keeping power workss, supplying technology, procurance and building services for power workss related merchandises, piecing and fabricating high electromotive force switchgears, coal excavation and trading. Operationss are carried out in Malaysia, Mauritius, Pakistan, India and Indonesia.
14- Kwantas Corporation Berhad
The Group ‘s chief activities are fabricating and selling thenar merchandises and runing bulking installings. Other activities include buying and selling Diesel, bring forthing and providing electricity and steams. Operationss are carried out in Malaysia and People ‘s Republic of China.
15- DRB-Hicom Berhad
The Group ‘s chief activities are fabricating, piecing and selling motor and military vehicles including selling related spares and services. Other activities include inspecting vehicles, supplying solid waste direction, telecommunications services, banking and related fiscal services, belongings retentions, development and building work. Operationss are carried out in Malaysia.
16- UEM Builders Berhad
The Group ‘s chief activities are project designing, managing and constructing in the Fieldss of civil, electrical and mechanical technology, pavement building and fabrication prey merchandises, premix, wetmix and chromium steel steel pipes and other technology services. Other activities include substructure and installations direction, operation and care of the Penang Bridge. The Group operates in Malaysia, United Kingdom, India and Qatar.
17- YTL Corp. Berhad
The Group ‘s chief activities are supplying H2O supply, waste H2O and power coevals services. Other activities include fabrication, trading and providing ready-mixed concrete, bricks, cane furniture, dry concrete merchandises, pictures and related merchandises, scoria cement, edifice and building stuffs, quarry operations, civil technology plants, belongings development, investing and direction, hotel and resort operations, operation of nutrient, drink and amusement centres, developing and selling telephone services, engage purchase and recognition ; real property and sub-contract ; progressing cognition, accomplishment and preparation, chartering of aircraft, cultivation of thenars, investing in e-commerce and Internet related services, proviso of fiscal, exchequer, secretarial and retail services, H2O intervention procedures and investing retention. The Group operates in Malaysia, United Kingdom and Other states.
18- Fraser & A ; Neave Holdings Berhad
The Group ‘s chief activities are fabricating and administering soft drinks. Other activities include administering dairy merchandises, fabrication and merchandising glass containers, belongings investing retention, belongings development and investing and investing retention. The Group operates in Malaysia, Vietnam, China, Singapore, Philippines, Middle East, Thailand and other states.
19- YTL Power International Berhad
The Group ‘s chief activities are selling H2O and disposing waste H2O. Other activities are power coevals and investing retention. The Group operates in Malaysia and United Kingdom.
20- Osk Holdings Berhad
The Group ‘s chief activities are stockbroking, campaigner services, and related services for both local and abroad. Other activities include developing residential and commercial belongingss, pull offing unit trust fund, debt capital agreement and related services, proviso of venture capital services and investee entities, money loaning for initial public offers and portion option strategies. The Group are besides involve in hereafters and options broking, corporate advisory, arrangement and related services, direction and lease of belongingss, offshore investing banking activities and investing retention. The Group operates in Malaysia, Singapore, China and Hong Kong.
In this chapter the methodological analysis and informations aggregation is covered. We explained about the method we chose for the computation and analysis parts of our survey. In portion of methodological analysis besides discoursing about the method chosen for this survey we besides introduced hypothesizes of the survey. After presenting and discoursing approximately hypothesizes we explained about our informations aggregation and the beginning of information we used in this survey and as stated, we applied secondary informations for our undertaking. Explaining more in item about two techniques of FCFE and DDM is the following measure after informations aggregation. In this portion we tried to present these two theoretical accounts and their characteristics and facets. All the expressions applied for both methods and their different premises and conditions are covered in this measure. In the following measure we discussed about the documenting design of our undertaking. In this subject, we introduced the Excel plan designed by us in order to cipher the intrinsic values of each company and eventually compare these values with the existent values at the terminal of each twelvemonth. The figure at the terminal of each Excel file is demoing such comparing in the following chapter. Finally in this chapter we introduced the 20 nine companies selected for our survey and brief description is given for each company.