Rationales of the research Vietnam's stock market has been born for 22 years since 1998 but has made a strong development, making an important contribution to the country's economic development. Vietnam's stock market is happening very vibrant and growing quite fast. Contributing to the success of the stock market is the participation of its members: government, financial intermediaries, listed companies and investors. Securities investment is a new investment channel for our country's financial market, bringing a lot of profits for domestic and foreign investors.
However, it also contains great risks. In order to make the stock market more stable and professional, when deciding to invest, investors must analyze and revalue stocks. Valuation is absolutely necessary. It helps listed companies determine the fair price when issuing stocks, determining the cost of equity as well as the cost of merger and acquisition.
Besides, stock valuation helps commercial banks to determine stock value before deciding to lend. Valuing stocks is also an indispensable stage in all decisions of individuals as well as organizations, help investors know the real value of stocks, find investment opportunities and make appropriate investment decisions. Supply and demand activities in the market are often sentimental and follow the “herd mentality” so the stock price is raised, far exceeding its real value. Therefore, many investors have made the wrong decision.
They have suffered heavy economic losses from those mistakes. On the one hand, the stock valuation methods have its own advantages and disadvantages. This is a challenge for analysts: How to choose the right and most appropriate valuation methods for Vietnam's stock market and for each type of business? On the other hand, stock valuation carry subjective views as well as depending on the qualifications of the analysts. As a result, it still has multi – dimensional perspectives, positive and negative sides of the valuation results.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com With a desire to find reasonable valuation methods for stocks on Vietnam's stock market and then make recommendations to improve the financial position of a particular enterprise, help the intrinsic value of shares of that enterprise increase in the future, I decided to choose the research topic: DETERMINING THE INTRINSIC VALUE OF COMMON STOCK – THE CASE OF DHG PHARMACEUTICAL JOINT STOCK COMPANY. Research questions - What is the intrinsic value of DHG stock after applying alternative valuation methods and recommendation to different stakeholders? 2. Objectives of the research General objectives On the basis of theories of stock analysis and stock valuation, analyzing and valuing DHG stock. Since then, making recommendations to investors and business managers.
Particular objectives - Systematizing the theory of common stock analysis and pricing. - Analyzing the financial ratios of DHG Pharmaceutical Joint Stock Company. - Applying valuation methods to value DHG stock. - Describing the difficulties in the process of valuing DHG stock.
- Making recommendations for investors and business managers. Subjects and scope of the research Research subject: Determining the intrinsic value of DHG stock. Research scope: - Space: DHG Pharmaceutical Joint Stock Company. - Time: Statistics collected from 2015 to 2019.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Research methodology Secondary data collection Literature review Alternative valuation methods such as FCFF, FCFE, DDM, P/E, P/B. Details of methods will be explained clearly in chapter 1. Organization of the graduation thesis Apart from Introduction, Conclusion, Recommendations and References; contents of the graduation thesis are organized into 4 chapters: Chapter 1: Literature review of stock valuation Chapter 2: Analysis of macroeconomic environment and pharmaceutical industry Chapter 3: Financial situation analysis through financial ratios Chapter 4: Valuation for stock of DHG Pharma – Recommendation for stakeholders LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1 LITERATURE REVIEW OF STOCK VALUATION 1.
Introduction of some theoretical issues about stock valuation 1. Stock market Stock market is a place where shares of pubic listed companies are traded (Frederic S. Buying and selling securities can take place in the primary market, secondary market, stock exchange, over – the counter market, spot market or future market. It help stockholders earn profits from selling securities and its price depends on the supply and demand of the market at that time.
Securities are issued for the purpose of raising capital for businesses/ companies or the government. Definition Common stocks, also known as equity securities or equities, represent ownership shares in a corporation. Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to vote at the corporation’s annual meeting and to a share in the financial benefits of ownership (Bodie, Jane & Marcus, 2014, p. Characteristics of common stock The two most important characteristic of common stock as an investment are its residual claim and limited liability features.
Residual claim means that stockholders are the last in line of all those who have a claim on the assets and income of the corporation. In a liquidation of the firm’s assets, the shareholders have a claim to what is left after all other claimants such as the tax authorities, employees, suppliers, bondholders, and other creditors have been paid. For a firm not in a liquidation, shareholders have claim to the part of operating income left over after interest and taxes LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com have been paid. Management can either pay this residual as cash dividends to shareholders or reinvest it in the business to increase the value of the shares.
Limited liability means that the most shareholders can lose in the event of failure of the corporation is their original investment. Unlike owners of unincorporated businesses, whose creditors can lay claim to the personal assets of the owner (house, car, furniture), corporate shareholders may at worst have worthless stock. They are not personally liable for the firm’s obligations. Definition A corporation is a business owned by stockholders, or shareholders.
A business becomes a corporation when the state approves its articles of incorporation 1and the first stock share is issued. Unlike a proprietorship and a partnership, a corporation is legal entity distinct from its owners (Horngren, Harrison & Oliver, 2012, p. Advantages and disadvantages of a corporation Advantages: Separate legal entity A corporation is a distinct entity from a legal perspective. It is an entity that exists apart from its owners.
However, the corporation has many of the rights that a person has. Items that the business owns (its assets) and those items that the business has to pay later (its liabilities) belong to the corporation and not the individual stockholders. Transferable ownership rights Stockholders may transfer stock as they wish by selling or trading the stock to another person, giving the stock away, bequeathing it in a will or disposing of the stock in any other way. The transfer of stock is entirely at the discretion of 1 The articles of incorporation are the rules approved by the state that govern the management of the corporation LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com the stockholder.
It does not require the approval of either the corporation or other stockholders. Continuous life The life of a corporation is stated in its charter. The life may be perpetual, or it may be limited to a specific number of years. If it is limited, the company can extend the life through renewal of the charter.
Limited liability of stockholders Since a corporation is a separate legal entity, creditors have recourse only to corporate assets to satisfy their claims. The liability of stockholders is normally limited to their investment in the corporation. Creditors have no legal claim on the personal assets of the owners unless fraud has occurred. Ability to acquire capital It is relatively easy for a corporation to obtain capital through the issuance of stock.
Buying stock in a corporation is often attractive to an investor because a stockholder has limited liability and shares of stock are readily transferable. Disadvantages: Separation of ownership and management Stockholders legally own the corporation. However, they manage the corporation indirectly through a board of directors they elect. Thus, stockholders do not have to disrupt their personal affairs to manage the business.
Additional taxes Corporations are separate taxable entities. First, corporations pay their own income tax on corporate income. Then, the stockholders pay personal income tax on the earnings that they receive from corporations. Government regulation LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com To protect persons who loan money to a corporation or who invest in its stock, states monitor the actions of corporation.
Corporations are subjected to more governmental regulation than other form of business. Intrinsic value versus market price The intrinsic value of an asset is the present value of expected future cash flows earning from that asset, discounted to the present with the investor’s appropriate required rate of return. The market value of an asset is its price when it is traded in the market. This value is determined by supply and demand in the market.
If the intrinsic value, or the investor’s own estimate of what the stock is really worth, exceeds the market price, the stock is considered undervalued and a good investment. If the intrinsic value is lower than the market value, this stock is overpriced in the market. If the stock market works effectively, market value and real value of securities would be equal. Anytime, when the intrinsic value of a security is different from its current market value, the competition between investors seeking profit opportunities will quickly push market prices back to their intrinsic values.
Therefore, an effective market is one in which the value of all securities at any time fully reflects all publicly available information. In such a market, the market value and the intrinsic value are the same. Definition of stock valuation Stock valuation is a method of determining the intrinsic value of a stock. The importance of valuing stocks evolves from the fact that the intrinsic value of a stock is not attached to its current price.
By knowing a stock’s intrinsic value, an investor may determine whether the stock is overvalued or undervalued at its current market price. If the intrinsic value is greater than the market price, the stock is considered undervalued. At that time, investors will buy this stock because the price of the stock will increase to return to its intrinsic value. In contrast, investors will not buy LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com stocks being sold at prices higher than their intrinsic value because after a while, the stock price will decline to return to its intrinsic value.
Stock analysis Stock analysis is a top-down approach in 3 steps: Economic analysis, industry analysis and company analysis. Economic analysis To determine the fair price for a company's stock, securities analysts must forecast dividends and expected earnings from the company. The performance of each company will be influenced by the state of the overall economy and each industry. In addition, the macroeconomic picture affects stocks in different ways with varying degrees.
In conclusion, analyzing the economy including the global economy and the domestic economy to identify the factors that positively and negatively affect the company, and then make forecasts for the valuation of the company's stock. Global economy First, world economic growth may affect the domestic economic situation, import and export prospects, industry and company. Second, exchange rate between domestic currency and foreign currency. Exchange rate affects import and export trends, trends of accumulation and investment of the economy.
Domestic macroeconomic Volatility of the stock market is closely related to the domestic macro economy. The analysis of the macro economy is to assess the business environment and the impact of the business environment on the operation and business results of the company, and then impact on the company's stock price. There are many basic macro factors that directly affect stock analysis and stock valuation.