Download - Calculation of Beta coefficient of NTC
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1.0 Background Source
Dr. Mahmuda Akter, Professor, Dhaka University and adjunct faculty of East West University
has assigned this report to me, as this report is a requirement of the course “Investment
Theory”.
2.0 Objectives of the Report
The objective of the report is to build a strong familiarity about the Beta Coefficient of a
company. By preparing this report I am trying to give an overall calculation and evaluation of
beta coefficient of National Tea Company Limited. Moreover the superficial objective of the
report is to acquire knowledge about the insights of interpreting the terms. Preparing this report
such kind of topic is extremely beneficial for us as the students of finance.
2.1 Scope of the Report
To analyze beta coefficient of a DSE listed company
To analyze and evaluate CAPM and Beta of a company
To analyze the return on stock of a company
2.2 Methodology
The data source of this report is basically secondary sources.
The following methodology is used
Collect secondary data from the different periodicals published by DSE.
Collect relevant information from different books.
Collect some data from the Internet to broaden our scope of analysis
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Analysis of data
Analyzing the beta coefficient
2.3 Limitations
Lack of in-depth understanding of certain terms and concepts prevented us from going into Details.
Lacks of knowledge in research.
Time constraint was also a problem.
Lack of information and coordination.
Confidentiality of data was another imperative barrier that was faced during the conduct of this study.
Power Crisis.
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3.0 Background of the National Tea Company Limited
National Tea Company Ltd. has been formed in the year 1978 under the Companies Act , 1913 ,
as a Public Limited Company. It is a Joint venture of the Government and the General Public.
Thus it occupies a unique position of being the first in the field of joint ownership of Public and
Private interest in Tea sector. (Government and its financial organization holds 51% of shares
and rest 49% by the General Public)The Company started with 9(nine) “A”-class tea estates all
of which are situated in the Sylhet division. The tea estates are: Patrakhola, Kurmah,
Champarai, Madanmohanpur, Madabpur, Jagadishpur, Teliapara, Chundeecherra and
Lackatoorah. After the war of Liberation, ownership of these estates was vested in the
Government and their management and the operation were entrusted to erstwhile Bangladesh
Tea Industry Management Committee, by the Chairman of Tea Board being ex-officio
Chairman of that Committee.
It has 12 (Twelve) Tea Estates having 10,949.58 hectares of land, out of which more than 50%
area is under tea plantation. NTC is one of the major tea producing company in Bangladesh,
annual average production of tea is about 5.20 million kgs. Teas are being sold through
Chittagong Auction Market. There are about 12,500 permanent labours, 400 subordinate staffs
and 60 executives are working in the company.
In pursuance of the government decision 3(three) other Tea Estates namely: Parkul, Premnagar
& Bejoya were taken over by the Company in the month of September 1982.
NTCL is a listed Company since 1978 and its shares are being traded at both Dhaka and
Chittagong Stock Exchanges.
Nature of Business
The NTCL carries on the business of plantation, cultivation, manufacturing and selling of tea
and rubber. Company’s annual average production is about 5.20 million kg. Major portion of
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tea are being sold through Chittagong Auction Market. In the year 2000 NTCL started Local
Marketing of tea in a small scale through its dealers. NTCL has a Sales Center in its Registered
Office, which is open for all the interested consumers.
Working forces
There are about 12,500 permanent labours in the Company’s 12(twelve) Tea Estates. Most of
them are from ethnic group. They are staying in the gardens with their dependents.
Labour Welfare
Company has to provide food-grain at a subsidized rate of Tk.1.30/kg and free medical facilities
for the labors and their dependents. Company provides free housing facilities to the labourers
along with pure drinking water and modern sanitation etc. Company also provides free primary
education for their children.
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4.0 Capital Asset Pricing Model (CAPM) and Beta (β)
The capital asset pricing model (CAPM) is a method of valuing not just securities, but any
investment, using a DCF with a risk adjusted discount rate.
The method used to calculate an appropriate discount rate uses the investment's beta. This is a
measure of the amount of risk that the investment would have in the context of a diversified
portfolio. Beta is denoted by the Greek letter β. Estimates of the beta of the shares of most listed
companies can be obtained from sources such as DSE or CSE.
The discount rate used in a CAPM DCF is:
r = rf + β × (rm - rf)
Where,
rf = the risk free rate
rm = the expected return on the market and
β = the beta of the cash flows or security being valued.
β coefficient, as one of the important terms in modern financial theory, is not only widely used
in evaluating systematic risk of the stocks and portfolios, but regarded as a core parameter of
capital asset pricing model (CAPM). However, how to properly estimate β is still a suspending
problem. To ensure effective assessment of risk, beta should be stationary, whereas many
studies show that it seems to be time varying, that is, the systematic risk of shocks may change
over time in accordance with the change of firms’ specific characters (e.g. the firms’ life cycle,
capital structure) and market condition (e.g. fluctuation of market). Thus, understanding the
time-varying trait of β coefficient is useful not only in fully evaluating systematic risk of the
firm, but in properly applying it to measure expected stock return.
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5.0 Estimation of beta
To estimate beta, one needs a list of returns for the asset and returns for the index; these returns
can be daily, weekly or any period. Then one uses standard formulas from linear regression. The
slope of the fitted line from the linear least-squares calculation is the estimated Beta. The y-
intercept is the alpha ()
Myron Scholes and Joseph Williams (1977) provided a model for estimating betas from non-
synchronous data.
Beta is commonly mis explained as asset volatility relative to market volatility. If that were the
case it should simply be the ratio of these volatilities. In fact, the standard estimation uses the
slope of the least squares regression line—this gives a slope, which is less than the volatility
ratio. Specifically it gives the volatility ratio multiplied by the correlation of the plotted data. To
take an extreme example, something may have a beta of zero even though it is highly volatile,
provided it is uncorrelated with the market.
The relative volatility ratio is actually known as Total Beta. Total Beta is equal to the identity:
Beta/R or the standard deviation of the stock/standard deviation of the market (the relative
volatility). Total Beta captures the security's risk as a stand-alone asset (since the correlation
coefficient, R, has been removed from Beta), rather than part of a well-diversified portfolio.
Since appraisers frequently value closely held companies as stand-alone assets, Total Beta is
gaining acceptance in the business valuation industry. Appraisers can now use Total Beta in the
following equation:
Total Cost of Equity (TCOE) = Risk-Free rate + Total Beta*Equity Risk Premium
Once appraisers have a number of TCOE benchmarks, they can compare/contrast the risk
factors present in these publicly traded benchmarks and the risks in their closely held company
to better defend/support their valuations.
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6.0 Calculation of beta (β) of National Tea Company Limited
The following data are used to calculate the β coefficient of National Tea Company Limited:
Data of the month of January, February & March-2013Closing Price and Closing Index
Date Stock Daily Price (Close) Index Daily Price (Close)
10-04-2013 820.00 3,738.7008-04-2013 810.00 3,665.4231-03-2013 810.00 3,722.4128-03-2013 810.00 3,794.2925-03-2013 800.00 3,818.3019-03-2013 800.00 3,976.9013-03-2013 800.00 3,925.2111-03-2013 760.60 3,842.3210-03-2013 797.80 3,873.4606-03-2013 810.00 3,937.4605-03-2013 815.30 3,963.2604-03-2013 815.00 3,982.4903-03-2013 820.00 3,848.9927-02-2013 832.50 4,035.2726-02-2013 822.10 4,147.3025-02-2013 825.10 4,093.2920-02-2013 842.50 4,254.5519-02-2013 842.50 4,301.1218-02-2013 833.70 4,356.6117-02-2013 817.20 4,374.2314-02-2013 817.30 4,396.8413-02-2013 819.50 4,349.9712-02-2013 820.30 4,332.0411-02-2013 823.30 4,354.2807-02-2013 848.10 4,318.1905-02-2013 850.00 4,309.3304-02-2013 851.20 4,270.8903-02-2013 851.50 4,261.0131-01-2013 855.30 4,230.6930-01-2013 848.50 4,227.5429-01-2013 841.90 4,250.31
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28-01-2013 864.30 4,197.4424-01-2013 862.60 4,167.6923-01-2013 867.20 4,154.0822-01-2013 873.90 4,142.0820-01-2013 925.00 4,136.8617-01-2013 925.50 4,167.0616-01-2013 940.00 4,132.6915-01-2013 945.20 4,113.1714-01-2013 934.80 4,111.6113-01-2013 956.00 4,123.0110-01-2013 927.00 4,132.9909-01-2013 877.60 4,122.42
Source: Stock Bangladesh, http://www.stockbangladesh.com
Calculation of Stock and Index return from market data:
Let,
Stock return = Y (Ri)Index return = X (Rm)
Stock return of each day = Today’s return – Previous days return * 100 Previous days return
For example, Y value of 11th March = 800 - 760 * 100
760
= 5.26%
Date Stock Daily Price (Close)
Index Daily Price (Close)
Excess Stock Returns
Excess Market Returns
10-04-2013 820.00 3,738.70 1.23% 2.00%08-04-2013 810.00 3,665.42 0.00% -1.53%31-03-2013 810.00 3,722.41 0.00% -1.89%28-03-2013 810.00 3,794.29 1.25% -0.63%25-03-2013 800.00 3,818.30 0.00% -3.99%19-03-2013 800.00 3,976.90 0.00% 1.32%13-03-2013 800.00 3,925.21 5.18% 2.16%11-03-2013 760.60 3,842.32 -4.66% -0.80%10-03-2013 797.80 3,873.46 -1.51% -1.63%06-03-2013 810.00 3,937.46 -0.65% -0.65%
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05-03-2013 815.30 3,963.26 0.04% -0.48%04-03-2013 815.00 3,982.49 -0.61% 3.47%03-03-2013 820.00 3,848.99 -1.50% -4.62%27-02-2013 832.50 4,035.27 1.27% -2.70%26-02-2013 822.10 4,147.30 -0.36% 1.32%25-02-2013 825.10 4,093.29 -2.07% -3.79%20-02-2013 842.50 4,254.55 0.00% -1.08%19-02-2013 842.50 4,301.12 1.06% -1.27%18-02-2013 833.70 4,356.61 2.02% -0.40%17-02-2013 817.20 4,374.23 -0.01% -0.51%14-02-2013 817.30 4,396.84 -0.27% 1.08%13-02-2013 819.50 4,349.97 -0.10% 0.41%12-02-2013 820.30 4,332.04 -0.36% -0.51%11-02-2013 823.30 4,354.28 -2.92% 0.84%07-02-2013 848.10 4,318.19 -0.22% 0.21%05-02-2013 850.00 4,309.33 -0.14% 0.90%04-02-2013 851.20 4,270.89 -0.04% 0.23%03-02-2013 851.50 4,261.01 -0.44% 0.72%31-01-2013 855.30 4,230.69 0.80% 0.07%30-01-2013 848.50 4,227.54 0.78% -0.54%29-01-2013 841.90 4,250.31 -2.59% 1.26%28-01-2013 864.30 4,197.44 0.20% 0.71%24-01-2013 862.60 4,167.69 -0.53% 0.33%23-01-2013 867.20 4,154.08 -0.77% 0.29%22-01-2013 873.90 4,142.08 -5.52% 0.13%20-01-2013 925.00 4,136.86 -0.05% -0.72%17-01-2013 925.50 4,167.06 -1.54% 0.83%16-01-2013 940.00 4,132.69 -0.55% 0.47%15-01-2013 945.20 4,113.17 1.11% 0.04%14-01-2013 934.80 4,111.61 -2.22% -0.28%13-01-2013 956.00 4,123.01 3.13% -0.24%10-01-2013 927.00 4,132.99 5.63% 0.26%09-01-2013 877.60 4,122.42 -2.33% 0.09%08-01-2013 898.50 4,118.77 7.45% -0.20%07-01-2013 836.20 4,126.92 4.53% -0.88%06-01-2013 800.00 4,163.74 1.10% 0.07%03-01-2013 791.30 4,160.88 4.12% 0.53%02-01-2013 760.00 4,139.08 -0.81% -1.24%01-01-2013 766.20 4,190.99 -1.01% -0.34%Total 7.12% -11.18%
Ri = Y = 7.12
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Rm = X = -11.18
Y2 = 2.6817
X2 = 1.0729
XY = 0.16
N = 47
Now,
(r i, m) =_______n XY – ( X) * ( Y)_________ (n X2 - ( X) 2 )* (n Y2 - ( Y)2)
= _____[( 47 *0.16 ] – [ (- 11.18 )* (7.12 ) ] __________________
[(47 * 1.0729) – (-11.18) 2] * [(47*2.6817) – (7.12) 2]
87.1216= ---------------------
997.9189
= 0.0873
i = [47 * 2.6817– (7.12) 2 / (47) 2]
= 0.0341
2m = (47 *0.16 – (-11.18) 2)/ (47) 2
= 0.05999
m = 3741.3318
= 0.2449
So,
β = r i, m * m * i / 2m
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= 0.0873*0.2449*0.0341/0.05999
= 0.01215
7.0 Evaluation of beta (β) of National Tea Company Limited
We know that, Beta has no upper or lower bound. Beta can be zero. Some zero-beta assets are
risk-free, such as treasury bonds and cash. However, simply because a beta is zero does not
mean that it is risk-free. A beta can be zero simply because the correlation between that item
and the market is zero.
A negative beta simply means that the stock is inversely correlated with the market. Many
precious metals and precious-metal-related stocks are beta-negative, as their value tends to
increase when the general market is down and vice versa.
A beta coefficient greater than 1 suggests greater responsiveness on the part of the stocks to the
market and vice versa.
In this case, I have found that the beta coefficient of National Tea Company Limited is 0.01215,
which is not greater than the value of one (1). That means the stock price of National Tea
Company Limited will show responsiveness is less to market index or DSE index. If the return
of DSE index increases, the return on the stock price of National Tea Company Limited will
increase and if Market returns decreases, the stock return will also decrease, but not in same
proportion.
8.0 References
1. Portfolio Management, 2nd Edition by S. Kevin
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2. Investment Analysis and Portfolio Management, 8th Edition by Reilly & Brown
3. Investments, 8th Edition by ZVI Bodie, Kane & Marcus
4. http://www.stockbangladesh.com
5. natcobd.com/
6. http://www.dsebd.org
7. Monthly Review of Dhaka Stock Exchange Ltd.