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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.

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Collect some data from the Internet to broaden our scope of analysis 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

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The NTCL carries on the business of plantation, cultivation, manufacturing and selling of tea and rubber. Companys annual average production is about 5.20 million kg. Major portion of 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 Companys 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 ()

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 . 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 + (rm - rf)
Where, rf = the risk free rate rm = the expected return on the market and = the beta of the cash flows or security being valued. 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 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

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time-varying trait of coefficient is useful not only in fully evaluating systematic risk of the firm, but in properly applying it to measure expected stock return.

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 yintercept is the alpha () Myron Scholes and Joseph Williams (1977) provided a model for estimating betas from nonsynchronous 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 linethis 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

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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.

6.0 Calculation of beta () of National Tea Company Limited

The following data are used to calculate the coefficient of National Tea Company Limited:
Data of the month of January, February & March-2013

Closing Price and Closing Index Date 10-04-2013 08-04-2013 31-03-2013 28-03-2013 25-03-2013 19-03-2013 13-03-2013 11-03-2013 10-03-2013 06-03-2013 05-03-2013 04-03-2013 03-03-2013 27-02-2013 26-02-2013 25-02-2013 20-02-2013 19-02-2013 18-02-2013 17-02-2013 14-02-2013 13-02-2013 12-02-2013 11-02-2013 07-02-2013 05-02-2013 04-02-2013 Stock Daily Price (Close) 820.00 810.00 810.00 810.00 800.00 800.00 800.00 760.60 797.80 810.00 815.30 815.00 820.00 832.50 822.10 825.10 842.50 842.50 833.70 817.20 817.30 819.50 820.30 823.30 848.10 850.00 851.20 Index Daily Price (Close) 3,738.70 3,665.42 3,722.41 3,794.29 3,818.30 3,976.90 3,925.21 3,842.32 3,873.46 3,937.46 3,963.26 3,982.49 3,848.99 4,035.27 4,147.30 4,093.29 4,254.55 4,301.12 4,356.61 4,374.23 4,396.84 4,349.97 4,332.04 4,354.28 4,318.19 4,309.33 4,270.89

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03-02-2013 31-01-2013 30-01-2013 29-01-2013 28-01-2013 24-01-2013 23-01-2013 22-01-2013 20-01-2013 17-01-2013 16-01-2013 15-01-2013 14-01-2013 13-01-2013 10-01-2013 09-01-2013

851.50 855.30 848.50 841.90 864.30 862.60 867.20 873.90 925.00 925.50 940.00 945.20 934.80 956.00 927.00 877.60

4,261.01 4,230.69 4,227.54 4,250.31 4,197.44 4,167.69 4,154.08 4,142.08 4,136.86 4,167.06 4,132.69 4,113.17 4,111.61 4,123.01 4,132.99 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 =
Todays return Previous days return Previous days return

* 100

For example, Y value of 11th March =

800 - 760 760

* 100

= 5.26% Date 10-04-2013 08-04-2013 31-03-2013 28-03-2013 25-03-2013 19-03-2013 Stock Daily Price (Close) 820.00 810.00 810.00 810.00 800.00 800.00 Index Daily Price (Close) 3,738.70 3,665.42 3,722.41 3,794.29 3,818.30 3,976.90 Excess Stock Returns 1.23% 0.00% 0.00% 1.25% 0.00% 0.00% Excess Market Returns 2.00% -1.53% -1.89% -0.63% -3.99% 1.32%

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13-03-2013 11-03-2013 10-03-2013 06-03-2013 05-03-2013 04-03-2013 03-03-2013 27-02-2013 26-02-2013 25-02-2013 20-02-2013 19-02-2013 18-02-2013 17-02-2013 14-02-2013 13-02-2013 12-02-2013 11-02-2013 07-02-2013 05-02-2013 04-02-2013 03-02-2013 31-01-2013 30-01-2013 29-01-2013 28-01-2013 24-01-2013 23-01-2013 22-01-2013 20-01-2013 17-01-2013 16-01-2013 15-01-2013 14-01-2013 13-01-2013 10-01-2013 09-01-2013 08-01-2013 07-01-2013 06-01-2013 03-01-2013 02-01-2013 01-01-2013

800.00 760.60 797.80 810.00 815.30 815.00 820.00 832.50 822.10 825.10 842.50 842.50 833.70 817.20 817.30 819.50 820.30 823.30 848.10 850.00 851.20 851.50 855.30 848.50 841.90 864.30 862.60 867.20 873.90 925.00 925.50 940.00 945.20 934.80 956.00 927.00 877.60 898.50 836.20 800.00 791.30 760.00 766.20

3,925.21 3,842.32 3,873.46 3,937.46 3,963.26 3,982.49 3,848.99 4,035.27 4,147.30 4,093.29 4,254.55 4,301.12 4,356.61 4,374.23 4,396.84 4,349.97 4,332.04 4,354.28 4,318.19 4,309.33 4,270.89 4,261.01 4,230.69 4,227.54 4,250.31 4,197.44 4,167.69 4,154.08 4,142.08 4,136.86 4,167.06 4,132.69 4,113.17 4,111.61 4,123.01 4,132.99 4,122.42 4,118.77 4,126.92 4,163.74 4,160.88 4,139.08 4,190.99

5.18% -4.66% -1.51% -0.65% 0.04% -0.61% -1.50% 1.27% -0.36% -2.07% 0.00% 1.06% 2.02% -0.01% -0.27% -0.10% -0.36% -2.92% -0.22% -0.14% -0.04% -0.44% 0.80% 0.78% -2.59% 0.20% -0.53% -0.77% -5.52% -0.05% -1.54% -0.55% 1.11% -2.22% 3.13% 5.63% -2.33% 7.45% 4.53% 1.10% 4.12% -0.81% -1.01%

2.16% -0.80% -1.63% -0.65% -0.48% 3.47% -4.62% -2.70% 1.32% -3.79% -1.08% -1.27% -0.40% -0.51% 1.08% 0.41% -0.51% 0.84% 0.21% 0.90% 0.23% 0.72% 0.07% -0.54% 1.26% 0.71% 0.33% 0.29% 0.13% -0.72% 0.83% 0.47% 0.04% -0.28% -0.24% 0.26% 0.09% -0.20% -0.88% 0.07% 0.53% -1.24% -0.34%

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Total Ri = Y = 7.12 Rm = X = -11.18 Y2 X2 XY N Now, = 2.6817 = 1.0729 = 0.16 = 47

7.12%

-11.18%

(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

= [47 * 2.6817 (7.12) 2 / (47) 2] = 0.0341

2m

= (47 *0.16 (-11.18) 2)/ (47) 2 = 0.05999

= 3741.3318 = 0.2449

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So,

=
=

r i, m * m * i / 2m
0.0873*0.2449*0.0341/0.05999

= 0.01215

7.0 Evaluation of beta () 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.

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8.0 References
1. Portfolio Management, 2nd Edition by S. Kevin 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.