May 18, 2004
Hafiz Al Asad Bin Hoque
(Course instructor)
School of Business,
Independent University,
Baridhara, Dhaka.
Dear Sir,
It is our immense pleasure to submit our class project on BOC Bangladesh Limited and Beximco Pharmaceuticals Ltd. as you asked us to prepare and submit as a requirement of Finance 405 program. The name of our project is " Return and risk comparison of financial asset in Bangladesh"
We have tried our best to compile the pertinent information as comprehensively as possible and if you need any further information, we will be obliged to assist you.
Thanking you,
......................
ACKNOWLEDGEMENTS
At first we would like to thank our instructor for giving us such an important job like return and risk comparison of financial asset as a class project. We would like to place our gratitude to the Supervisor of BOC Bangladesh Limited to enable us to complete our class project in their esteemed organization. Without his helpful guidance, the completion of this research project was unthinkable. A very special thanks goes to Mr. Waliur Rahman Bhuiyan managing director of BOC Bangladesh ltd. for helping us in all phase of the research process. Finally we would like to thank Hosne Ara Pervin Sheuli; Asst. Secretary Research & Library (DSE) for helping in all sorts of collection of data. Her overwhelming support for this project gave us the inspiration to do a better report.
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
2. INTRODUCTION
2. a. Origin of the report
2. b. Objective of the Report
2. c. Limitations of the Study
2. d. Literature Review
3. RESEARCH METHODOLOGY
3. a. Data source & Time period covered
3. b. Methods for calculation of returns and risk
3. c. Coefficient of variation
3. d. Selection of assets
4. A BRIEF HISTORY OF BOC BANGLADESH LIMITED
5. RANGE OF PRODUCTS AND SERVICES (BOC)
6. A BRIEF HISTORY OF BEXIMCO PHARMACEUTICALS LIMITED
7. RANGE OF PRODUCTS (BPL)
8. INVESTMENT SETTINGS IN BANGLADESH
8. a. Macro Environment
8. b. Classification of financial market
8. c. Alternative Investment opportunities
8. c. 1. International Bond
8. c. 2. Acquiring Foreign Equities
8. c. 3. Special Equity Instrument Option
8. c. 4. Investment Companies
8. c. 5. Real Estate
8. c. 6. Low Liquidity Investments
9. RESULTS AND ANALYSIS
10. CONCLUSION
11. REFERENCES
EXECUTIVE SUMMARY
This report “Return and risk comparison of financial asset in Bangladesh” is prepared to fulfill the partial requirement of Finance 405 program of Business Administration Program of Independent University, Bangladesh. The topic of dissertation was selected upon consultation with course instructor of respective department.
The main aim of this report is to find out the financial situation and the financial trend of BOC Bangladesh Ltd. and Beximco Pharmaceuticals Ltd. From this analysis we find out the financial performance and also find out the risk and return of these two companies and this analysis is done from the annual report issued by BOC Bangladesh Ltd. and Beximco Pharmaceuticals Ltd. from the year 1999 to 2003, which was the main source of information.
We have compared these two stocks through the help of coefficient of variation. After analyzing the CV of BOC and BPL, we have found that BOC has much less CV than That of BPL. And after considering these entire situation we suggest the investor to invest in BOC not BPL.
INTRODUCTION
Origin of the report
This report is prepared to fulfill the partial requirement of Fin 405 of business administration program of Independent University on the risk and return analysis of two leading companies in Bangladesh. So the business organization BOC Bangladesh Limited and Beximco Pharmaceuticals Ltd. (BPL) are chosen and we are discussing on different financial data of these two companies over five years from 1999 to 2003. We based this report from the background information and knowledge that we acquired from BOC, BPL and Dhaka Stock Exchange (DSE) and it provides a reliable and effective insight into the risk & return analysis of the particular companies. We did this report on financial performance because it’s a requirement of Finance course. We have tried to reflect our experience on our report in terms of financial performance of BOC Bangladesh Limited and Beximco Pharmaceuticals Ltd.
Objective of the Report
The specific objectives aimed for this report is:
1. To fulfill the partial requirement of the course under the guidance of the coordinator Hafiz Al Asad Bin Hoque.
2. To gain experience and knowledge of analyzing the financial performance from the real life, this will help us in the practical working environment.
3. To find out the financial situation of BOC & BPL.
4. Forecast the future performance and cash flow.
4. Calculate the Risk and Return of these two esteemed organizations.
5. Measure the risk through the use of Coefficient of variation (CV)
6. Compare the CV of these two companies.
7. Give the decision, where to invest money based on risk & return analysis.
Limitations of the Study
• Lack of availability of information and data, some time there are some back dated information they provide
• The record system of the annual report is not efficient
• Lack of access in many section of the organizations
• Time is not sufficient to complete the study perfectly.
Literature Review
Brigham, Gapenski (1996) state that securities are peaces of paper whish represent claims against real asset such as equipment, plant, trucks, and commodities etc there are many different types of securities, ranging from relatively simple, direct claim securities, such as bonds, to complex indirect claim securities, such as options of futures, inverse floaters and other exotic derivatives, whose values depend on, or are derived from, the values of direct claim securities.
It has been revealed by Ahmed, Khan and Islam that stock in many companies are owned by few persons who accumulated their holdings from the secondary market. Moreover, the local companies option for debt financing irrespective of their leverage position. In addition, many of the high yielding risk free savings instruments have been affecting the demand for stock market securities. In view of this, it require an analysis whether stock investments in Bangladesh are providing return high enough to attract the investors, because, a rational investor will always expect additional return for taking risk. Although one study has indicated that the average monthly returns from Stock Exchanges is higher than the monthly interest rate offered by Nationalized Commercial Banks (Ahmed, 1991)
Khan, Islam and Khatun stated that investment can be defined as the commitment of funds for the acquisition of any asset. Generally investment is made with the objective of maximizing return to the investor. Investment can take place in different forms of asset. These include real assets and financial assets. Investment in financial assets like stocks and bonds are made within the framework of a complex system m of financial markets. These markets provide necessary mechanism to facilitate smooth transfer of savings towards productive investments. Thus financial markets ensure efficient allocation of a country’s resources.
Ross, Westerfield and Jaffe (1996) stated that investors will only hold a risky security if its expected return is high enough to compensate for its risk.
Stock is the risky investment. Both variance and standard deviation of return are equally used to measure the risk of stocks. It has been established by different theories that investors are risk averse and will always prefer risk free security to a risky security of some return. As a result, rational investors will require additional return as a premium to the risk being undertaken. This has led to develop different models like Single Index Model (Markowitz, 1955) and Capital Asset Pricing Model (Sharpa, 1965; Linter, 1966 and Mossin, 1964). All these models provide an estimate of the required rate of return of a security compared to its risk component. In other word, higher is the riskiness of a security, higher should be the required rate of return.
RESEARCH METHODOLOGY
Information used to prepare this report has been collected from both the Secondary source and the primary survey. The secondary sources of information were collected from BOC, BPL, Dhaka Stock Exchange, Annual report of BOC, BPL, periodicals and materials from various newspapers and articles. An open discussion method was followed to gather primary information by interviewing the company secretary of the company.
Data source & Time period covered
We have concentrated on secondary sources for different data used in our project. The secondary sources of information were collected from BOC Bangladesh Limited, Dhaka Stock Exchange, Annual report of BOC Bangladesh Limited, Beximco Pharmaceuticals Ltd., periodicals and materials from various newspapers and articles. We have also used some websites for collection of data, such as www.bangladesh-bank.org, www.financialexpress-bd.com, www.dse-bd.org etc. For this analysis we have used five years data from the year 1999 to the year 2003.
Methods for calculation of returns and risk
Measurement of return
There are several ways of calculating return. Some of them are as follows:
HPR: end ÷ beg
HPY: HPR- 1
AM: ∑ HPY ÷ n
GM: (∏ HPR) 1/n -1
Measurement of risk
Variance: ∑ {Probability × (Possible return- Expected return)2}
Expected Std. Deviation: √variance
Historical SD: √ ∑ (Possible return ÷ Expected return)2 / n
Coefficient of variation
As a general rule, the higher the expected return, the larger the standard deviation. To illustrate, suppose project x has a 30% expected rate of return and a 10% standard deviation. Project y has a 10% expected rate of return and a 5% standard deviation. If the project return are approximately normal, then project x would have a very small probability of a negative return in spite of it’s 10% standard deviation. Project y even with a standard deviation only half as large, would have a much higher probability of a loss. To deal with the situation in which expected return differ, one should standardized the standard deviation and calculate the risk per unit of return. This is accomplished by using the coefficient of variation (CV), which is defined as the standard deviation divided by the expected value.
Formula for Coefficient of variation (CV): Risk ÷ Return
Selection of assets
For this analysis we have selected two manufacturing companies from two different sector. These companies are BOC Bangladesh Limited and Beximco Pharmaceuticals Ltd. (BPL). BOC is the market leader in fuel & power sector; on the other hand BPL is holding the second position in the pharmaceutical sector. Now the days both of these companies are doing well in their particular sector. For this reason we have decided that, if some one wants to invest his money in manufacturing companies, one of these two companies should be our choice for investment.
In the following section we will provide the brief history and major products of our selected companies:
1. BOC Bangladesh Limited
2. Beximco Pharmaceuticals Limited
A BRIEF HISTORY OF BOC BANGLADESH LIMITED
BOC Bangladesh Limited is both an old and a relatively new company. Old because it has been present in what is now Bangladesh, in one form or the other, since the days of British India. New because it was registered under it’s own identity only in 1973. The Company began, after the independence of Bangladesh, with a modest turnover of a little over Tk.6 million. The turnover in 1999 exceeded Taka 1 billion.
BOC Bangladesh Limited started out as Bangladesh Oxygen Limited with 3 small Oxygen plants and Dissolved Acetylene plants, one of each in Dhaka, Chittagong and Khu1na. In addition, it had an operating contract to run the Oxygen plants of Chittagong Steel Mills (CSM), which is still there today. For the manufacture of Welding Electrodes the Company had only one very small extruder.
From inception, the Company had remained the sole supplier of Medical Oxygen in the Country. In the mid 70's a Nitrous Oxide plant still the only one in Bangladesh, was imported and installed in Dhaka to provide the nation with this vital anaesthetic gas. Later in the decade a Carbon Dioxide plant was bought and installed in Dhaka and this was the first in the Country to produce dry ice. In the early 80's the first liquid gas plant was imported from New Zealand and again installed in Dhaka, where the demand for Oxygen was concentrated.
Shortly after that came the first boom in ship cutting and demand for Oxygen "went through the roof". The Company invested immediately in additional compressing capacity for the surplus Oxygen at CSM while simultaneously pursuing the Government to permit it to invest in new production capacity. Eventually the Company was permitted to import 400 cubic metres per hour air separation plant from Australia, capable of producing Liquid Oxygen, Nitrogen and, for the first time in Bangladesh, Agron. This was installed in Chittagong, essentially to feed the ship cutting market on the beach. In the early 90's booster was added to this to increase output, pending investment in further capacity.
Meanwhile, the welding business of the Company was also growing fast and in the early 80's a state of the art RAM extruder was added to the production line, dramatically improving output and quality of electrodes. The Company, in another innovative move, invested in a wire drawing machine for the electrode factory. A second RAM was added in the late 80's to keep up with demand.
The Company went "public" in 1985 when the Government renounced its right shares in favor of the public. Today, BOC Bangladesh is one of the premier companies in the Country. Bangladesh Oxygen Limited changed its name to BOC Bangladesh Limited in March 1995 in line with a world wide programme of the BOC Group.
The 90's witnessed another change in the fortunes of the Company with deregulation and liberalisation of the economy. A site was specially purchased at Rupganj, near Dhaka, where the Company installed a 30 tonnes per day air separation plant, the largest in the country. The US made plant produces Oxygen, Nitrogen and Argon and is technologically, as advanced as any in the world. It came on stream in 1995.
At the same time, the Company also invested in a modern integrated welding electrode plant, made by the largest welding electrode manufacturers in the world, which was imported and installed at the new site in Rupganj. A technical collaboration arrangement was also made with the suppliers ESAB AB of Sweden and the plant went into production in 1995. Welding business received ISO 9002 certification in the following year. A distribution agreement has been signed with world class Welding Company, The Lincoln Company of USA.
In March 1998 a second line of production was added to the integrated Welding Electrode Factory at Rupganj, doubling the capacity. Same year, in November 1998 a new site with a 20 TPD liquid plant was acquired in Shitalpur, Chittagong.
The BOC Group, of which BOC Bangladesh Limited is a member, has its headquarters at Windlesham in the UK. It employs in excess of 40,000 people and contributes to the economies of nearly 60 countries world wide, with an annual turnover of E3.3 billion plus.
A BRIEF HISTORY OF BEXIMCO PHARMACEUTICALS LIMITED
Beximco Pharmaceuticals Ltd. (BPL) is the leading pharmaceutical manufacturer in Bangladesh since its inception in 1979. The current Factory of Beximco Pharmaceuticals Ltd is situated in Tongi, Gazipur, a 15 minutes drive from the Dhaka International Airport.
The plant produces about 80 formulations in tablet, capsule, liquid, cream, powder, inhaler, and suppository form. Many of its products are brand leaders in their respective fields. The company produces pharmaceutical specialties of uncompromising quality. BPL's products come in tablet, capsule, powder, liquid, cream, and suppository and inhaler forms. Today, BPL holds a commendable 16% share in the domestic market after competing with such Multinational Giants as Glaxo-Welcome, Novartis, Hoecsht, Rhone Poulenc Rorer and Fisons. While Pharmaceutical companies in many developed countries have lost their luster, the business is still highly attractive in Bangladesh.
Beximco Pharmaceuticals is an industry leader in the Bangladesh Pharmaceutical Industry. Beximco Pharmaceuticals has always emphasized the need for uncompromising quality. Beximco strictly follows WHO guidelines at every stage of manufacturing and procures its raw materials from the very best sources. But what makes Beximco a success story is its people. Beximco's team is highly skilled and motivated professionals work around the clock to guarantee the safety and efficiency of its products.
The company stands out for its strong product differentiation, progressive management, and aggressive exploration of opportunities, such as penetration of international markets, introduction of newer drugs and high tech dosage forms. BPL is the pioneer in introducing medical service activities; publishing a full-fledged medical newsletter regularly, conducting clinical seminars and symposiums to have better understanding of various diseases and their management.
BPL is one of the first companies to have an extensively computerized and automated working environment connecting every corner of the country to the center. Productivity through connectivity is one of their heritages of progress. BPL is the first company to go beyond the national boundary, exporting it’s quality products in overseas market in Asia, Africa and Europe. BPL is getting ready to export its products to the US and European Markets.
BPL received the Export Gold Trophy in 1994-95 for its exports of two basic chemicals making it the first pharmaceutical company in Bangladesh to win the Export Trophy. But the entire scenario has changed slightly in the year 2002. The emergence of new competitor and the rising raw material cost has made a big question in front of the management of BPL.
Range of Products (BPL)
| | Asthma inhalers | Topical antihemorrhoid |
| Prosan | Aristovit-B | Respiratory anti-inflammator |
| Recox | ACE inhibitor | Vitamin B Complex tablet |
| Atova | Prostatic drug | Digestive enzyme |
| Triocim | Neoceptin R | Sytemic antifungal |
| Pacet | Cosmotrin | Intracef injection |
INVESTMENT SETTINGS IN BANGLADESH
Macro Environment
Bangladesh is an agricultural country. With some three-fifths of the population engaged in farming. Jute and tea are principal sources of foreign exchange. Other important agricultural products are wheat, pulses (leguminous plants, such as peas, beans, and lentils), sweet potatoes, oilseeds of various kinds, sugarcane, tobacco, and fruits such as bananas, mangoes, and pineapples. The country is the world's largest exporter of jute and jute goods. Tea is also one of the major foreign exchange earners. Bangladesh also exports frozen shrimps, frog legs and handicrafts. There has also been a rapid growth in manufacturing industries, which offer a wide range of exportable goods such as leather goods and ready-made garments. Within the last few years' remittances from Bangladeshis employed abroad have contributed largely toward foreign exchange earnings. The prevailing political and economic stability has greatly encouraged investment in the private sector. For higher GDP growth, investments in both public and private sectors will need to be accelerated. The trend of foreign direct investment is very encouraging.
Current economic highlights
Industrial production growth has averaged more than 6% over the last 5 years. The export sector has been the engine of industrial growth, with ready-made garments leading the way, having grown at an average of 30% over the last 5 years.
Global output and trade growth rates are expected to reach 4.1% and 5.5% in 2004 respectively. The industry sector attained 7.3 percent growth in FY03, against 6.5 percent in FY02. The manufacturing sub-sector displayed a healthy gain in growth, spurred by the growth in exports and imports. The services sector grew by 5.8 percent, against 5.4 percent in FY02.
The Gross Domestic Product (GDP) of Bangladesh in FY03 at current market prices was Taka 3,004.9 billion against Taka 2,732.0 billion in FY02, indicating a nominal 10.0 percent growth in FY03 against 7.8 percent growth in FY02. On a constant price basis, the real GDP also recorded a higher growth rate of 5.3 percent in FY03 against 4.4 percent in FY02. Per capita GDP increased in FY03 to Taka 22,523 and Taka 17,784 in nominal and real terms respectively, from Taka 20,754 and Taka 17,112 in FY02.
Revenue collection increased by Tk 509.6 crores or 27.88 percent to Tk.2337.2 crores during March, 2004.
Per Capita GNI at current prices, in Taka 23578. Per Capita GDP at current prices, in Taka 22525. Net National Income at current prices, in million Taka 2905516.
Export receipts of January, 2004 amounted to US$ 730.3 million which is higher by US$ 161.3 million or 28.35 percent compared to receipts of January, 2003.
Import payments in December, 2003 amounted to US$ 875.9 million which is higher by US$ 78.2 million or 9.80 percent compared to December, 2002. Here we can see that the increasing rate of export is higher than import, which is a positive economic indicator.
Foreign exchange reserves at the end of March, 2004 were higher by US$ 880.3 million or 49.64 percent as against US$ 1773.2 million at the end March, 2003.
The annual rate of inflation increased to 5.51 percent at the end of January, 2004 from 4.38 percent at the end of June, 2003. The rate of inflation on point - to - point basis increased to 5.96 percent at the end of January, 2004 from 5.03 percent at the end of June, 2003.
During July,2003- February,2004 workers' remittances increased by US$ 220.0 million or 11.16 percent to US$ 2191.44 million as compared to US$ 1971.46 million during July,2002- February,2003.
Economic outlook for FY2004
Riding on a sustained recovery in exports, persistent strength in remittance inflows and rising domestic demand, Bangladesh economy is well on its way to achieve projected 5.5 percent GDP growth inFY2004. The economic growth continues to pick up as all the leading indicators show positive trend in this fiscal year. Revenue collection and slow implementation of the development budget remain the sore points in the economy which otherwise had an excellent time till April. The quarterly update said inflation is now on decline, grain harvest have grown strongly, industrial production index increased by 5.2% till November 2003. Strong growth in export and import also mean that trade service growth would improve. Thus, the projected 5.5% GDP growth for FY04 is very likely to be achieved.
Rebound in Bangladesh’s export performance, which started in February 2003, has continued. Export earnings during the first seven moths of FY04 increased by 16.2 percent relative to earnings in the corresponding period of the previous year.
Net crop production for FY04 is estimated at 25.3 million tons, about 4.1% higher than last year. Manufacturing growth also appears to have been quite healthy. The medium and large scale industrial production index has increased by 5.2% in November 2003, compared to only 2% growth in November 2002.
The exchange market was further liberalized in December 2003 with the removal of L/C margin requirements. The exchange rate is estimated to have depreciated by 5 percent in real and nominal terms since the float in May 2003.
Growth of remittances from Bangladeshis abroad has rebounded in recent months. Remittances in the first eight months of the current fiscal year increased by 11.2 percent relative to the corresponding period of the previous year.
In summary, all of these indicators show a positive attitude toward the economy of Bangladesh. So from this economy analysis we can easily say that in the near future Bangladesh will be a perfect place for investment.
Classification of financial market
| CLASSIFICATION BY NATURE OF CLAIM:
|
| CLASSIFICATION BY MATURITY OF CLAIM:
|
| CLASSIFICATION BY SEASONING OF CLAIM:
|
| CLASSIFICATION BY IMMEDIATE DELIVERY OR FUTURE DELIVERY:
|
| CLASSIFICATION BY ORGANIZATIONAL STRUCTURE:
|
Figure: Summary of classification of financial markets
Banking Sector Performance, Regulation and Bank Supervision:
The principal performance trends and industry statistics of the banking sector are discussed in this area. The banking sector in Bangladesh comprises of four types of scheduled banks. There are 4 nationalized commercial banks (NCBs), 5 government-owned development finance institutions (DFIs), 30 private commercial banks (PCBs) and 10 foreign commercial banks (FCBs). Presently 49 banks with 6,236 branches are in operation in the banking sector of Bangladesh.
Industry assets continued to be dominated by the nationalized commercial banks (NCBs), that held 46.50 percent of total assets in 2001, which decreased (by 0.94 percentage point) to 45.56 percent in 2002. The government-owned specialized banks held 11.47 percent of industry assets in 2002 (a slight decrease from 11.77 percent in 2001), comprised largely of loans to target sectors. The share of private commercial banks in industry assets increased (by 1.29 percentage point) from 34.87 percent in 2001 to 36.16 percent in 2002. Foreign commercial banks held 6.81 percent of the industry assets in 2002, showing a slight increase by 0.05 percentage point over the previous year. 5.3 The total deposits with banks in 2002 rose to Taka 1023.53 billion from Taka 956.28 billion in 2001, showing an overall increase of 7.03 percent. The NCBs continued to dominate by holding Taka 515.06 billion or 50.32 percent of total industry deposits in 2002, with an increase of Taka 28.09 billion or 5.77 percent over the previous year. The PCBs' deposits amounted to Taka 377.08 billion, which constituted 36.84 percent of total industry deposits in 2002. This was in increase of Taka 28.17 billion or 8.07 percent compared to the position in 2001. Deposits of FCBs rose by Taka 6.33 billion or 9.66 percent in 2002 over the previous year. The DFIs' deposits were Taka 59.53 billion in 2002 as against Taka 53.96 billion in 2001, showing an increase of 10.32 percent over the year.
Alternative Investment opportunities
There are different sectors available in Bangladesh for investment. Besides bank, stock, bond & govt. securities there are some other opportunities for investment. These are -
International Bond
Bond can be of two types. Besides local bond there are international bond also. These international bonds can be divided into different parts. Such as:
1. Euro bond
2. Yankee bond
3. International domestic bond
Euro bond
A Euro bond is an international bond denominated in a currency not native to the country where it is issued. For example: Nippon steel can issue Euro yen bond for sale in America.
Yankee bond
Yankee bonds are sold in the country denominated in that currency, where it is issued. For example: Nippon steel can issue some bond in America denominated in dollar.
International domestic bond
International domestic bonds are sold by an issuer within it’s own country in that country’s currency. An example would be a bond sold by Nippon steel in Japan denominated in yen.
Acquiring Foreign Equities:
Foreign equities regarding how buy and sell securities because this procedural information has often been a major impediment. Many investors may recognize the desirability of investing in foreign common stock because of risk and return characteristics, but they may be intimidated by the logistics of the transaction. The purpose of this section is to alleviate this concern by explaining the alternatives available. Currently there are several ways to acquire foreign stock.
1) Purchase or sale of American Depository Receipts (ADRs)
2) Purchase or sale of American Shares
3) Direct purchase or sale of foreign shares listed on a U.S. or foreign stock exchange
4) Purchase or sale of International or Global mutual funds
Purchase or sale of American Depository Receipts (ADRs):
The easiest way to acquire foreign share directly is through American Depository Receipts (ADRs). These are certificates of ownership issued by a U.S. bank that represent indirect ownership of a certain number of shares of a specific foreign firm on deposits in a bank in the firm’s home country. ADRs are a convenient way to own foreign shares because the investor buys and sells them in U.S. dollars and receives all dividends in U.S. dollars. Therefore, the price and returns reflect both the domestic returns for the stock and exchange rate effect.
Purchase or sale of American Shares:
American shares are securities issued in the United States by a transfer agent acting on behalf of a foreign firm. Because of the added effort and expense incurred by the foreign firm, a limited number of American shares are available.
Direct purchase or sale of foreign shares:
The most difficult and complicated foreign equity transaction takes place in the country where the firm is located because it must be carried out in the foreign currency and the shares must then be transferred to he United State. This routine can be cumbersome. A second alternative is a transaction on a foreign stock exchange out side the country where the securities originated. Finally, the investor could purchase foreign stocks listed on the NYSE or AMEX.
Purchase or sale of International or Global mutual funds:
Numerous investment companies invest all or a portion of their funds in stocks of firms out side the Unite State. The alternatives range from global funds, which invest in both U.S. stocks and foreign stocks, to international funds, which invest almost wholly out side the United States.
Special Equity Instrument Option:
In addition to common stock investment, it is also possible to invest in equity-derivative securities, which are securities that have a claim on the common stock of a firm. This would include option – rights to buy or sell common stock at a specified price for a stated period of time. The two kinds of option instruments are (1) Warrants and (2) Puts and Calls.
Warrants:
A warrant is an option issued by a corporation that gives the holder the right to acquire a firm common stock from the company at a specific price, within a designated time period. The warrant does not constitute ownership of the stock, only the option to buy the stock.
Puts and Calls:
A call option is similar to warrant because it is an option to buy the common stock of a company within a certain period at a specific price called the striking price. A call option differs from a warrant because it is not issued by the company but by another investor who is willing to assume the other side of the transaction. Call options are generally valid for less than a year, whereas warrant extend more than five years. The holder of a put option has the right to sell a given stock at a specific price during a designated time period. Put are useful to investors who expect a stock price a decline during the specific period or to investors who own the stock and want protection from a price decline.
Future Contracts:
Another instrument that provides an alternative to the purchase of an investment is a Future contract. This agreement provides for the future exchange of a particular asset at a specific delivery date (usually within nine months) in exchange for a specific payment at the time of delivery. Although the full payment is not made until the delivery date, a good faith deposit, the margin, is made to protect the seller.
Financial Futures:
In addition to Future Contracts on commodities, there are also has been the development of futures contracts on financial instruments such as T-bills, T-bonds, and Eurobonds. These future contracts allow individual investors, bond portfolio managers, and corporate financial managers to protect them selves against volatile interest rates.
Investment Companies:
The investment alternatives describe so far are individual securities that can be acquired from government equity, a corporation, or another individual. Investment Company sells shares in it self and uses the proceeds of these sales to acquire bonds, stocks, or other investment instruments. As a result investor how acquires shares in an investment company is a partial owner of the investment company’s portfolio of stocks or bonds. Distinguish investment companies by the types of investment instruments the will acquire.
Money Market Funds:
Money market funds are investment companies that acquire high quality, short-term investments (referred to money market instruments), such as T-bills, high grade commercial paper from various corporation or large CDs from the major money center banks. The typical minimum initial investment in a money market fund is $1000.
Bonds Funds:
Bond funds generally invest in various long-term government, corporate, or municipal bonds. They differ by the type and quality of the bonds include in the portfolio as assessed by various rating services. Specifically, the bond funds range from those that invest only risk-free government bonds and high grade corporate bonds to those that concentrate in lower rated corporate or municipal bonds, called High-yield bonds or Junk bonds.
Common Stock Funds:
Numerous common stock funds invest to achieve stated investment objectives, which can include aggressive growth, income, precious metal investments, and international stocks. Such funds offer smaller investors the benefits of diversification and professional management. They include different investment styles such as growth or value and concentrate in alternative-sized firms, including small-cap, mid-cap, large capitalization stock.
Index Funds:
Index funds are mutual funds created to equal the performances of a market index like S&P 500. Such funds appeal to passive investors who want to simply experience returns equal to some market index because either they do not want to try to “beat the market” or they believe in efficient markets.
Real Estate:
Most investors view real estate as an interesting and profitable investment alternative but believe that it is only available to a small group of experts with a lot of capital to invest. In reality, some feasible real estate investments require no detailed experts or large capital commitments.
Real Estate Investment Trusts (REITS):
A Real Estate Investment Trust is an investment fund designed to invest in various real Estate properties. It is similar to a stock or bond mutual fund, except that the money provided the investors to invest in property and building rather than a stock or bond. There are several types of REITS:
1. Construction and Development Trusts: Construction and development trusts lend the money require by builders during the initial construction of a building.
2. Mortgage Trusts: Mortgage trusts provide the long-term financing for properties. Specifically, they acquire long-term mortgages on properties once construction is completed.
3. Equity Trusts: Equity trusts own various income-producing properties such as office buildings, shopping centers, or apartment house.
Direct Real Estate Investment:
The most common type of direct real estate investment is the purchase of a home, which is the largest investment most people ever make. There are several types of direct real estate investment:
1. Raw Land: Another direct real estate investment is purchase of raw land with the intention of selling it in the future at a profit. Raw land generally has low liquidity compare to most stocks or bonds.
2. Land Development: Land development can involve buying raw land, dividing it into individual lots, and building houses on it. Alternatively, buying land and building a shopping mall would also be considered land development.
3. Rental Property: Many investors with an interest in real estate investing acquire apartment buildings or houses with low down payments, with the intention of deriving enough income from the rents to pay the expenses of the structure, including the mortgage payments.
Low Liquidity Investments:
Most of the investment alternatives described thus fur the trade on securities markets and except the real estate, have good liquidity. The investments have very poor liquidity and financial institutions do not typically acquire them because of the liquidity and high transaction costs compared to stocks or bonds. Many of these assets are sold at auctions, causing expected prices to vary substantially. Many financial theorists view the following low-liquidity investments more as hobbies than investments.
Antiques: Dealers who acquire them at estate sales or auctions to refurbish and sell at profit earn the greatest returns from antiques. The high transaction costs and illiquidity of antiques may erode any profit that the individual may except to earn when selling these prices.
Art: The entertainment sections of newspapers or the personal finance sections of magazines often carry stories of the results of major art auction.
Coins and Stamps: Many individuals enjoy collecting coins or stamps as a hobby and as an investment. The market for coins and stamps is fragmented compared to the stock market, but it is more liquid than the market for art and antiques as indicated by the publication of weekly and monthly price lists.
Diamonds: diamonds can be and have been good investments during many periods. Still investors who purchase diamonds must realized that (a) diamonds can be highly liquid, (b) the grading process that determines their quality is quite subjective, (c) most investment-grade gems require substantial investments, and (d) they generate no positive cash flow during the holding period until the stone is sold.
RESULTS AND ANALYSIS
In the following table, we have calculated Arithmetic mean from nominal rate of return and deduct inflation from nominal rate of return to find out real return. The data for five years are as follows:
| | | | BOC | | | |
| | | | | | | |
| Year | Market price | Nominal rate of return (%) | Inflation rate (%) | Real return % | Std. deviation | CV |
| 1998 | 94 | | | | | |
| 1999 | 98 | 4.255319149 | 4.03 | 0.225319 | | |
| 2000 | 127.35 | 29.94897959 | 5.08 | 24.86898 | | |
| 2001 | 98.85 | -22.37926973 | 6.36 | -28.7393 | | |
| 2002 | 104.75 | 5.968639353 | 9.03 | -3.06136 | | |
| 2003 | 160 | 52.74463007 | 13.51 | 39.23463 | | |
| Average | | AM: 14.10% | | | 25.45% | 1.80% |
| | | | | | | |
| | | | BPL | | | |
| | | | | | | |
| Year | Market price | Nominal rate of return | Inflation rate | Real return | Std. deviation | CV |
| 1998 | 51.83 | | | | | |
| 1999 | 32.31 | -37.66158595 | 4.03 | -41.6916 | | |
| 2000 | 66.9 | 107.0566388 | 5.08 | 101.9766 | | |
| 2001 | 49.5 | -26.00896861 | 6.36 | -32.369 | | |
| 2002 | 41.83 | -15.49494949 | 9.03 | -24.5249 | | |
| 2003 | 35.8 | -14.41549127 | 13.51 | -27.9255 | | |
| Average | | AM: 2.70% | | | 52.84% | 19.57% |
CONCLUSION
In this report we have discussed about different return and risk of BOC & BPL. Our main job was to determine the financial position of this company whether it is running good or not and gibe decision where to invest money on the basis of risk and return of the particular company. As we are very new in finance course so we face some problem while doing this assignment. But we have tried hard to complete this assignment successfully.
REFERENCES
Brigham, F. E; and Gapenski,C. (1996) Intermediate Financial Management,5th edition, U.S.A: Management Capital Elm Street Publishing Services.
Khan, A; Islam, S; and Khatun, K (1993) Stock Returns in Bangladesh: An Empirical Study, Journal of Finance and Banking, vol. 3. No.1, July.
Ahmed, M. F; Khan, H. R; and Islam, M. S. (1991) Industrial Financing Through Capital Market in Bangladesh Journal of The Asia Foundation, Dhaka and the Bureau of Economic Research, University of Dhaka.
Ross, Z; Westerfield, K; and Jaffe, H. (1996) Corporate Finance, 7th edition, U.S.A: Thomson.
Fabozzi, F. J.; Modigliani, F.; Jones, F. J.; and Ferri, M. G. (2002) Foundations of Financial Markets and Institutions, 3rd edition, Singapore, Pearson Pte. Ltd.
Monthly review report Dhaka stock exchange (1999 – 2003)
Annual report BOC & BPL
Website:
www.bangladesh-bank.org
www.financialexpress-bd.com
www.dse-bd.org