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- 1. VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITYTHE INTERNATIONAL UNIVERSITYSCHOOL OF BUSINESSAdvisor: Mr. ROBERT T. CONNOLLYStudent name: TRAN THI THANH THUY (BA070150)Ho Chi Minh city, Vietnam2011<br />APPLICATION OF CAPM (Capital Asset Pricing Model) IN VIETNAM STOCK MARKET<br />APPROVED BY AdvisorAPPROVED BY: Committee, Mr. Robert T. Connolly, MBADr. Le VinhTrien, Ph.D., Chair <br />________________________________ Ms. Le Hong Nhung, MBA<br />________________________________ Ms. Hoang Thi Anh Ngoc, MBA<br />________________________________ Mr. Robert T. Connolly, MBA<br />________________________________ Ms. Le Thi Kim Chi, MBA<br />THESIS COMMITTEE (Whichever applies) <br />ACKNOWLEGEMENT<br />It is with deep gratitude and appreciation that I acknowledge the professional guidance of Mr. Robert T. Connolly. His constant encouragement and support help me to achieve my goal.<br />My gratitude also goes to Mr. John Harackiewicz and Mr. Hua Chia Yee for their generous support. Their practical advice and comments help me a lot in improving this paper. I am also grateful to the faculty of the School of Business Administration of the International University. Gratitude is also expressed to the members of my reading and examination committee, Dr. Le VinhTrien, Ms. Le Hong Nhung, Ms. Hoang Thi Anh Ngoc and Ms. Le Thi Kim Chi. <br />LIST OF TABLES<br /> TOC h z c "Table" Table 1: VN Index annual return 2001 – 2010, calculated from data source PAGEREF _Toc298915131 h 6<br />Table 2: Country bonds rating PAGEREF _Toc298915132 h 7<br />Table 3: VN Index’s return demonstration PAGEREF _Toc298915133 h 16<br />Table 4: Balance sheet of VNM in 2008 and 2009 PAGEREF _Toc298915134 h 18<br />Table 5: Income statement of VNM in 2008 and 2009 PAGEREF _Toc298915135 h 19<br />Table 6: FCFE 2009 of VNM PAGEREF _Toc298915136 h 20<br />Table 7: VNM’s FCFE PAGEREF _Toc298915137 h 22<br />Table 8: Investment decision result of VNM when using CAPM 1 PAGEREF _Toc298915138 h 23<br />Table 9: Investment decision result of VNM when using CAPM 2 PAGEREF _Toc298915139 h 23<br />Table 10: Test result PAGEREF _Toc298915140 h 25<br />Table 11: Test result for buy stock only PAGEREF _Toc298915141 h 26<br />Table 12: Analyze the sensitivity of cost of equity on the changing of Beta PAGEREF _Toc298915142 h 27<br />Table 13: Analyze the sensitivity of cost of equity on the changing of market return PAGEREF _Toc298915143 h 28<br />Table 14: Analyze the sensitivity of cost of equity on the changing of risk free rate PAGEREF _Toc298915144 h 28<br />Table 15: Analyze the sensitivity of estimated price on the changing of cost of equity PAGEREF _Toc298915145 h 29<br />Table16: LIST OF 31 SAMPLE STOCKS PAGEREF _Toc298915146 h 37<br />Table 17: TABLE OF RESULT – CAPM 1 PAGEREF _Toc298915147 h 39<br />Table 18: TABLE OF RESULT – CAPM 2 PAGEREF _Toc298915148 h 42<br />Table 19: TABLE OF PROFIT/LOSS PAGEREF _Toc298915149 h 45<br />Table 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM APPLICATION PAGEREF _Toc298915150 h 47<br />Table 21: STOCK PRICE CALCULATION BASED ON NEW CAPM APPLICATION PAGEREF _Toc298915151 h 49<br />Table 22: TABLE OF BETA AND COST OF EQUITY PAGEREF _Toc298915152 h 51<br />Table 23: TABLE OF FCFE GROWTH RATE’S SENSITIVITY ANALYSIS PAGEREF _Toc298915153 h 52<br />Table 24: TABLE OF VIETNAM INFLATION RATE PAGEREF _Toc298915154 h 52<br />Table 25: TABLE OF VIETNAM GDP GROWTH RATE PAGEREF _Toc298915155 h 52<br />LIST OF FIGURES<br /> TOC h z c "Figure" Figure 1: Security Market Line (SML) PAGEREF _Toc298742785 h 4<br />Figure 2: VN Index Time period PAGEREF _Toc298742786 h 13<br />Figure 3: The sensitivity of cost of equity on the changing of Beta PAGEREF _Toc298742787 h 26<br />Figure 4: The sensitivity of cost of equity on the changing of market return PAGEREF _Toc298742788 h 27<br />Figure 5: The sensitivity of cost of equity on the changing of risk free rate PAGEREF _Toc298742789 h 27<br />Figure 6: The sensitivity of estimated price on the changing of cost of equity PAGEREF _Toc298742790 h 28<br />TABLE OF CONTENTS<br /> TOC o "1-3" h z u LIST OF TABLES PAGEREF _Toc298742812 h iv<br />LIST OF FIGURES PAGEREF _Toc298742813 h v<br />CHAPTER 1: INTRODUCTION PAGEREF _Toc298742814 h 1<br />CHAPTER 2: LITERATURE REVIEW PAGEREF _Toc298742815 h 3<br />A - CAPITAL ASSET PRICING MODEL (CAPM) PAGEREF _Toc298742816 h 3<br />B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE) PAGEREF _Toc298742817 h 5<br />C - CAPM APPLICATION FOR EMERGING MARKET PAGEREF _Toc298742818 h 7<br />D - STOCK VALUATION METHOD – THE DISCOUNTED CASH FLOW METHOD PAGEREF _Toc298742819 h 9<br />1 - Dividend Discount Model (DDM): PAGEREF _Toc298742820 h 9<br />2 - Discounted Free Cash Flow to Equity (Discounted FCFE) PAGEREF _Toc298742821 h 10<br />CHAPTER 3: METHODOLOGY PAGEREF _Toc298742822 h 11<br />A - TRADITIONAL CAPM APPLICATION PAGEREF _Toc298742823 h 12<br />BETA CALCULATION PAGEREF _Toc298742824 h 12<br />MARKET RETURN CALCULATION PAGEREF _Toc298742825 h 14<br />B - CAPM APPLICATION FOR EMERGING MARKET PAGEREF _Toc298742826 h 15<br />C - FREE CASH FLOW TO EQUITY (FCFE) PAGEREF _Toc298742827 h 16<br />D - INTRINSIC PRICE CALCULATION AND DECISION MAKING PAGEREF _Toc298742828 h 22<br />CHAPTER 4: RESULT PAGEREF _Toc298742829 h 24<br />A - TEST RESULT PAGEREF _Toc298742830 h 24<br />B - SENSITIVITY ANALYSIS RESULT PAGEREF _Toc298742831 h 26<br />CHAPTER 5: DISCUSSION / IMPLEMENTATION PAGEREF _Toc298742832 h 29<br />A – RESULT EXPLANATION PAGEREF _Toc298742833 h 29<br />B – LIMITATION OF THE TEST PAGEREF _Toc298742834 h 30<br />C – IMPLEMENTATION IN PRACTICE PAGEREF _Toc298742835 h 30<br />CHAPTER 6: CONCLUSION & RECOMMENDATION PAGEREF _Toc298742836 h 32<br />LIST OF REFERENCES PAGEREF _Toc298742837 h 33<br />APPENDIX PAGEREF _Toc298742838 h 34<br />CHAPTER 1: INTRODUCTION<br />CAPM – Capital Asset Pricing Model is the most famous model used to estimate the cost of equity. However, this beautiful and easy-to-apply model has met lots of criticism (CFA curriculum). The reason is because the assumptions are difficult to meet and the result is difficult to test. Theoretically, CAPM is proven to be not a correct measurement, especially in emerging markets like Vietnam. The questions are: Does CAPM actually work in Vietnam market? Can investors use CAPM as an effective investment tool? Therefore, the purpose of this paper is to test whether investors can use CAPM to make profit in the Vietnam stock market.<br />This paper has no interest in testing the accuracy of CAPM, but testing the potential profitability of using CAPM in making investment decisions in the Vietnam stock market, specifically in HOSE – Ho Chi Minh stock exchange. The test was constructed in 31 random stocks of HOSE, which are listed before 2008 and the time range of the test is from 2008 to 2010.<br />The idea is to estimate an intrinsic price of each stock at the end of 2009 based on cost of equity calculated by CAPM, assuming that present time is the end of 2009. Then, compare with market price at the end of 2009 and make buy/sell decisions. For example, if the intrinsic price calculated based on CAPM is higher than the market price on Dec 2009, a buy decision will be made and vice versa. After that, those buy/sell decisions will be checked whether they were profitable decisions based on the historical price data available in 2010.<br />Again, CAPM – Capital Asset Pricing Model is a standard and available model built from Markowitz portfolio theory in order to estimate cost of equity, the name itself demonstrate the objective of CAPM. The main purpose of this paper is to test the investment profitability when using the cost of equity, calculated by a popular and world wide accepted model. In other words, this paper do not test whether the value of cost of equity calculated by CAPM is correct or not; instead, this paper want to test whether the buy/sell decision based on that cost of equity is profitable. The reason why I do not test the accuracy of CAPM is because cost of equity is an estimated number and there is no factual one for comparison.<br />CHAPTER 2: LITERATURE REVIEW<br />A - CAPITAL ASSET PRICING MODEL (CAPM)<br />For any investment decision, it is very important to estimate the intrinsic value or the correct price of the investment. By estimating the correct price, investors can see whether that asset is underpriced or overpriced so that he or she can make a buy or sell decision.<br />CAPM – Capital Asset Pricing Model is the most well-known and accepted pricing model. CAPM is used to estimate cost of equity, also called as investor’s expected return which is an important component to determine intrinsic price of a stock or intrinsic value of a firm. <br />Capital Asset Pricing Model (CAPM) was built from Harry Markowitz’s portfolio optimization Model. <br />According to Markowitz’s portfolio optimization Model, when the portfolio is well diversified, it will eliminate all unsystematic risk (diversifiable risk) and only systematic risk (undiversified risk) is left. Market return accounts for all risky assets trading in market, so there is no unsystematic risk such as industry risk, company risk, etc but only systematic risk, the risk that all market suffers like country risk, interest rate risk,… (Those are macro factors which affect the whole economy) The line that shows the relationship between expected return and systematic risk (β) is called Security Market Line (SML)<br />Figure SEQ Figure * ARABIC 1: Security Market Line (SML)<br />Risk-free rate of returnExpected returnSystematic risk (β)Security market line (SML)<br />Even when there is no systematic risk, the expected return still equals to Risk free rate of return (Rf) – the expected rate of return of risk-free asset. SML slopes upward because of “higher risk, higher return”. In fact, CAPM is the formula of SML, which is a regression line: <br />E(R)=Rf+ βRM-Rf<br />The logic is to estimate expected return based on the return investor can earn without risk and the equity risk premium, which is the difference between the whole economy return and that non-risky return. Beta is the slope of the SML, which show the level of risk. Since SML slopes upward, risk and return has a positive relationship, “higher risk, higher return”. There is no negative Beta. Indeed, the expected return itself always contains the risk in it. <br />The logic of CAPM is that: In order to estimate the expected return (cost of equity) of a single stock, we just have to compare it with SML by calculating a new Beta - the sensitivity of that stock’s return with the market return. In other words, market return is used as a benchmark and we adjust stock return – cost of equity of each stock – according to market return by calculating the sensitivity of stock return to market return, and this sensitivity is expressed by Beta:<br />β=Cov(RA,Rm)σm2 (CFA curriculum, level 1 – 2010)<br />Then, we apply the CAPM formula: costofequity=ke=Rf+ βRM-Rf<br />ke is the cost of equity, the return of the stock that we are looking for.<br />Rf is the return of risk free assets or it is the interest rate of government bond since government bond is considered to have no credit risk. In the U.S., 10 year Treasury bond is used.<br />RM is the market return. If what we are looking for is stock return then the market return is the index return. In US market, we use S&P 500’s return, which accounts for 75% of U.S. market capitalization (standardandpoors.com). <br />Since market return is used as benchmark, the Beta of the market will be 1 and the stock’s Beta will fluctuate depending on their sensitivity to market return. Different stock has different Beta because they have different risk relative to market Beta. If a stock’s Beta is less than one, we say it is a defensive stock and if more than one, it is an aggressive stock. As a result, an investor will have different expected return over different stock. In a corporation, equity is owned by stock holders so that expected return over a stock is also called cost of equity.<br />Therefore, CAPM is actually very easy to apply. However, when applying CAPM in Vietnam market, there are many obstacles and many assumptions are required.<br />B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE)<br />Assume that current year is 2009. It is now the end of 2009 and we are calculating the expected return to make investment decisions. The original CAPM formula is:<br />kA=Rf+ βARM-Rf<br />If we apply CAPM to HOSE similarly to U.S stock market then we have:<br />kA: Cost of equity, expected return of stock A (what we are looking for)Rf: risk free rate – interest rate of Vietnam government 10 year term bondβA: systematic risk based on stock A return covariance with VN-Index returnRM: VN-Index return in 2009<br />Reasons why the original CAPM might be expected to fail:<br />1- CAPM was built from Markowitz portfolio theory so it has a same assumption, market return must consist of all risky assets of the whole economy, not only stocks but also real estate, gold, currency, etc. However, there is no published market return in the real world that can satisfy that assumption. As the result, we take the Index return as RM. For example, in U.S they use S&P 500 return for calculation. However, the S&P 500 accounts for only 75% U.S. market capitalization (standardandpoors.com) so can not fully represent “the Market”. In Vietnam, there is still no consensus on how much total market capitalization is represented by VN Index. In my estimation, VN Index is not even 50% of Vietnam market capitalization. The reason is that stock is just one investment channel along with gold and foreign currency, which attracts lots of investors’ attention. Besides, the VN Index is just the Ho Chi Minh stock exchange; there is another HNX Index for Hanoi stock market. Thus, using the VN Index as a benchmark for Beta calculation may not give the correct Beta value.<br />2- VN Index annual return change annually with very high volatility. Moreover, the VN Index was just established since 2001 so the size of VN Index is small and does not compose of all industries. Hence, VN Index is not representative of a diversified economy and the market liquidity is focused on a few high-capitalized stocks. (Table 1)<br />Table SEQ Table * ARABIC 1: VN Index annual return 2001 – 2010, calculated from data source<br />VN Index annual return2010-2.04%200956.78%2008-65.95%200723.30%2006144.49%200528.50%200443.38%2003-8.95%2002-22.13%200113.83%<br />3- U.S. government bond may not have credit risk but Vietnam government bonds do have risk. Due to country risk, Vietnam bonds are rated Ba3 by Moody and BB- by S&P, both ratings are below investment bonds (Table 2). The fact that Vietnam government may not be able to pay debt is possible. In other words, Vietnam government bonds are not risk free assets. Besides, the quality and length of data on bond are not suitable for making long-term assumption. Moreover, it is difficult to find long term Vietnam bond actively traded in market. <br />Table SEQ Table * ARABIC 2: Country bonds rating<br />As a result, cost of equity will change every year with high volatility, if we use that cost of equity to discount long term cash flows, it could yield undesired result.<br />C - CAPM APPLICATION FOR EMERGING MARKET<br />The formula used is still the standard formula of CAPM but the numbers applied are different to solve problem stated above<br />kA=Rf+ βARM-Rf<br />Beta: VN Index is not diversified enough to be a correct benchmark. Therefore, Beta should be calculated relative to global index (CFA curriculum, level 2- 2010). In this paper I use S&P Global 1200<br />Market return: Global index return. This is a good benchmark in term of market diversification and market capitalization<br />Risk free rate: Since the Vietnam government bond is not a risk free asset and with the unavailability of information, we should use the bond rate of developed country and then adjust it with inflation difference between the two countries (CFA curriculum, level 2 - 2010). In this paper I use the U.S. 10 year bond. <br />As a result, by using this method of application, cost of equity should have lower volatility and would be presumed to give more correct cost of equity for discounting long term cash flows.<br />There might be a concern that using global index is inappropriate since it may not be composed of Vietnam capitalization. However, many published models looking at emerging markets use a global index in calculation. The first reason is that Global index composes of all industries that Vietnam listed companies are operating. The second reason is because of the effect of globalization and that S&P 1200 consist of all big markets that have big effects on the world economy and world market price. For example, the financial crisis in the U.S. in 2008 affected the whole world economy. U.S. stock market went down, Global index also went down, VN Index certainly also went down and reached the bottom even though many companies’ performance was growing and they had good financial report. There was no place to hide in stock market at that time. The third reason is that there is no conflict with other components of CAPM formula. If RM is Global index return then my Beta is calculated relative to Global Index and my Rf is US bonds rate adjust with Vietnam inflation.<br />In summary, the application of CAPM for emerging market logically should perform better than the traditional application of CAPM, which is used for developed market. However, we need to do the test to see which one actually works better.<br />D - STOCK VALUATION METHOD – THE DISCOUNTED CASH FLOW METHOD<br />When we know that CAPM is used to calculate cost of equity - ke, it is also important to know what valuation methods use ke to estimate stock price. In order to value intrinsic price of stock, we might use 2 types of discounted cash flow method, the dividend discount model (DDM) and Discounted Free cash flow to Equity (Discounted FCFE)<br />The general idea is to discount future cash flow to present time, the general formula is: PV= t=1∞CFt1+rt . PV is the present value of expected cash flow. The difference is the type of Cash Flow that we use.<br />1 - Dividend Discount Model (DDM):<br />In DDM, dividend per share is the cash flow and cost of equity is used as the discount rate. Then, when we discount future dividends per share to expected return, we will have the price per share, which is:<br /><ul><li>V0= t=1∞DIVt1+ket</li></ul>This dividend technique is used to estimate the intrinsic price of a stock. However, this technique is not appropriate to such young and primitive market like Vietnam. In Vietnam, dividend data is difficult to measure under some reasons below:<br />-There are high rate of return investment alternatives available so that limited dividend is paid out<br />-Most of listed companies are in supernormal growth period that they do not pay out dividend<br />-The assumption of relatively constant growth for the long term is inappropriate due to spontaneous dividend payment policy without long term strategic plan<br />- The data of dividend per share is unavailable and difficult to calculate<br />2 - Discounted Free Cash Flow to Equity (Discounted FCFE)<br />FCFE is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment.<br />In this method, we calculate the present value of future FCFE. Then, that discounted FCFE will be divided by the number of shares outstanding to get the price of stock.<br />FCFE is cash flow available to shareholders. Thus, the appropriate discount rate is cost of equity <br /><ul><li>PV of FCFE= t=1∞FCFEt1+ket</li></ul>Price per share= PV of FCFENumber of shares outstanding<br />Advantages of the discounted FCFE method:<br />- Whether the company decision is to pay out cash for equity in form of dividend or to keep cash for reinvestment, FCFE is not affected.<br />- Growth rate of FCFE is more stable and easier to estimate than dividend per share.<br />- FCFE can easily be computed based on financial statement.<br />As the result, based on advantages and disadvantages of 2 methods, this paper uses the Discounted FCFE for valuation.<br />CHAPTER 3: METHODOLOGY<br />The objective of this paper is to test whether investors might make profitable investment decisions by applying CAPM in valuation. <br />The research is constructed on a portfolio of 31 stocks trading in HOSE (Ho Chi Minh stock exchange). Those stocks are chosen randomly. Stocks must be listed before 2008 because the examined time period is from 2008 to 2010.<br />In order to construct the test, we assume that time 0, present time, is the end of 2009. The investor makes buy/sell decisions and holds the investment for one year. Transactions will be closed at the end of 2010. The idea is to calculate the how much the stock price should be at time 0 and then compare with current price to make a buy/sell decision. After that, we will see whether those buy/sell decisions are profitable when the investor closes transactions at the end of 2010. <br />The purpose of this test is to answer the questions below:<br />1) Is CAPM an effective tool with high successful rate?<br />2) Between 2 methods of CAPM applications, the traditional application for developed market and the application recommended for emerging market, which one has a higher success rate?<br />The sensitivity analysis is also constructed in order to give a better view on the effects of each component RM, Rf, on cost of equity and the effect of cost of equity on price estimation.<br />All the computations are constructed in Excel worksheet. The following provides explanation and method of computation. Since it is too much to show all calculations of 31 stocks, one single stock is chosen for demonstration and I choose VNM<br />The result of the test and further discussion on CAPM implementation in the Vietnam stock market will be mentioned in chapter 4 and 5<br />A - TRADITIONAL CAPM APPLICATION<br />kA=Rf+ βARM-Rf<br />kA: Cost of equity, expected return of stock ARf: risk free rate – interest rate of Vietnam government 10 year term bondβA: systematic risk based on stock A return covariance with VN-Index returnRM: VN-Index annual return 2009<br />According to Duetche Bank’s research, the risk free rate of Vietnam in 2009 is 10.4%. I use this number because there is no data on Vietnam long term bond rate in 2009. Beta and market return are not available so we need to calculate them from available daily price data.<br />BETA CALCULATION<br />Now we know that Beta is computed based on covariance with VN-index, the problem left is which period of time we should choose to compute beta. I divide VN-Index time line in 3 periods. (Figure 2)<br />Period 1 is from the date VN index is establish to 2005, this is the start up period and market movement is unstable. Period 2 is from 2005 to 2007, this period has an abnormal return that only happens once in 60 years (Hua Chia Yee, CFA). Thus, I choose the period from October 2008 to December 2009, where market movement is in a cycle. The purpose of this is to minimize Beta error (Hua Chia Yee, CFA)<br />Beta is calculated by dividing the covariance of stock A return (RA) and VN Index return (RM) by the variance of VN Index return (σm2)<br />β=Cov(RA,Rm)σm2 (CFA curriculum)<br />Figure SEQ Figure * ARABIC 2: VN Index Time period<br />Period 1: start upPeriod 2: abnormal returnInvestigate time trend Oct 2008 – Dec 2009<br />The source we have is daily price of VN Index and other 31 stocks, which are available and can be downloaded from internet (www.cophieu68.com). In order to have Beta value of individual stocks, these following steps need to be taken.<br />Step 1: From source data, extract weekly end price, the closing price of final transaction day in a week from October 10, 2008 to December 25, 2009. Friday is usually the final transaction day of a week.<br />Step 2: Calculate weekly return. For an individual stock, there are 63 weekly returns from 10 Oct 2008 to 25 Dec 2009.<br />Weekly return= ending price of week 2-ending price of week 1ending price of week 1<br />Step 3: Calculate individual stock’s Beta. After having weekly return of VN Index and other 31 stocks, Beta of an individual stock is calculated by dividing covariance between VN Index weekly return and Stock A’s weekly return to variance of VN Index weekly return. <br />β=Cov(RA,Rm)σm2 (CFA curriculum, level 1-2010, portfolio management)<br />The result of those calculations is showed in Appendix (Table 21)<br />The reason why I do not use daily data for Beta calculation is because it is not necessary to do so. In order to minimize Beta error, 25 weekly returns is recommended (CFA curriculum, level 1-2010) and my period is 63 weeks already. Besides, by skillfully taking only beginning and ending price of the week, I can eliminate error and inconsistency of raw price data.<br />MARKET RETURN CALCULATION<br />Next component in CAPM formula is market return. From VN-Index price data sources, we have closing price of each transaction day. What is needed is VN Index return of 2009<br />Step 1: Calculate daily return. <br />Daily return= Closing price in day 2-Closing price in day 1Closing price in day 1<br />Step 2: Plus 1 to daily return, then we got table 3<br />Table SEQ Table * ARABIC 3: VN Index’s return demonstration<br />CODEDATEClosing priceDaily return(1 + daily return)VN INDEX12/31/2009494.8-0.00120.9988VN INDEX12/30/2009495.40.02271.0227VN INDEX12/29/2009484.4-0.01660.9834VN INDEX12/28/2009492.6-0.00500.9950VN INDEX12/25/2009495.10.03341.0334VN INDEX12/24/2009479.10.01761.0176VN INDEX12/23/2009470.80.01201.0120VN INDEX1/6/20093140.00671.0067…..…….….….VN INDEX1/2/2009313.3-0.00730.9927<br />Step 3: Calculate 2009 return. <br />VN Index 2009 return = [the product of (1 + daily return)] - 1 = (0.9988 x 1.0227 x… x 0.9927) – 1 = 0.5678<br />As the result, we have RM = VN Index 2009 return = 0.5678 = 56.78%<br />Since we have all three component of CAPM, just apply CAPM formula we will have cost of equity of each stock. The result of cost of equity from those computations are showed in Appendix (Table 21)<br />B - CAPM APPLICATION FOR EMERGING MARKET<br />kA=Rf+ βARM-Rf<br />Risk-free rate (Rf) = 10-year U.S government bond yield + (VN inflation – U.S. Inflation)<br />10 year U.S. bond yield in 2009 is taken from federalreserve.com, which equals to 3.26%.VN inflation and U.S. inflation in 2009 are retrieved from IMF’s website (International Monetary Fund), which equal to 6.717% and -0.4% respectively. Hence, Rf = 3.26 + [6.717-(-0.4)] = 10.38%<br />Market return (RM) is a global index return instead of VN Index return and I choose S&P Global 1200. S&P Global 1200 captures approximately 70% of world’s market capitalization. This index is a composite of seven headline indices: S&P 500(United States), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50, and S&P Latin America 40.<br />Daily price data of S&P Global 1200 is available on standardandpoors.com. Apply the computation similar to VN Index return calculation we have S&P Global 1200’s 2009 return is 27.8%<br />Beta (β) is computed similarly to Beta calculation of traditional CAPM application, but instead of VN Index return, we use S&P Global 1200.<br />Since we have all three components, cost of equity will be easily calculated and the table of result is showed in Appendix (Table 22)<br />C - FREE CASH FLOW TO EQUITY (FCFE)<br />Step 1: Calculate FCFE in 2009<br />The Free cash flow to equity in 2009 is computed based on financial statement. The FCFE formula that I used is: <br />FCFE = Net Income + NCC– FCInv – WCInv + Net borrowing<br />(CFA curriculum, level 2 – 2010)<br />NCC: Non-cash charges like depreciation expense, deferred tax are not real cash outflows. Thus, they should be added back.<br />FCInv: Fixed capital investment is the difference of total value of fixed assets in 2009 comparing to 2008. This is a cash outflow but is not deducted in Net Income so we have to deduct it from Net Income.<br />WCInv: Working Capital Investment is the change of Working capital. This is a cash outflow so it needs to be subtracted from Net Income. The formula of WCInv I used is: <br />WCInv = change in Account Receivable + change in Inventory – Change in Account Payable<br />Net borrowing: since FCFE is cash available to equity (shareholders) only, we have to adjust for cash flow to debt holders. <br />Net borrowing = New debt – Debt repayment = Change in long term liability + change in Note payable<br />The Future FCFE is estimated based on inflation rate, GDP growth rate and historical FCFE <br />VNM stock is taken as an example to show details of those calculations. VNM’s financial statements in 2008 and 2009 can be found in table 4 and 5, and calculation result is in table 6.<br />Table SEQ Table * ARABIC 4: Balance sheet of VNM in 2008 and 2009<br />Column120092008Current Assets5,069,1573,187,605Cash and Cash Equivalents426,135338,654Short term financial investment2,314,253374,002Short term Account Receivables728,634646,385Inventory1,311,7651,775,342Other Current Assets288,37053,222Non-current Assets3,412,8792,779,354Long term Account Receivable8,822475Fixed assets2,524,9641,936,923Real Estate Investment27,48927,489Long term Financial Investments602,479570,657Other long term assets249,125243,810TOTAL ASSETS8,482,0365,966,959Liabilities1,808,9311,154,432Short term Liabilities1,552,606972,502Long term Liabilities256,325181,930Owners equity6,637,7394,761,913Expenditures and Other Funds182,26596,198TOTAL DEBT & EQUITY8,482,0365,966,959<br />Source: www.cophieu68.com<br />Table SEQ Table * ARABIC 5: Income statement of VNM in 2008 and 2009<br />Column120092008Gross Sale Revenues10,820,1428,380,563Deduction revenues206,371171,581Net Sales10,613,7718,208,982Cost of goods sold6,735,0625,610,969Gross profit3,878,7092,598,013Financial activities Revenues439,936264,810Financial Expenses184,828197,621Selling Expenses1,245,4761,052,308Managing Expenses292,942297,804Net Profit from Operating activities2,595,3991,315,090Other incomes143,031130,173Other Expenses7,0720Other profits135,959130,173Total profit before tax2,731,3581,371,313Corporate Income Tax Expenses355,291119,771Profit after Corporate Income Tax2,375,6921,250,120EBITDA1,000,0001,000,000EPS13,5317,113P/E6.123.3Last Price of Quarter83166VOLUME351,228,150175,297,500Book value18.927.2<br />Source: www.cophieu68.com<br />Table SEQ Table * ARABIC 6: FCFE 2009 of VNM<br />Net Income2,375,692Non cash charge7,072Fixed Capital Investment588,041Change in Account Receivables82,249Change in Inventory-463,577Change in current liability580,104Working Capital Investment-961,432Change in long-term debt74,395Note payable0Net borrowing74,395FCFE2,830,550<br />Notes:<br />Net Income 2009 is the number of “Profit after corporate Income tax” taken from Table 5<br />Non cash charge 2009 is other expense from Table 5<br />Fixed Capital Investment 2009: 2,524,964 - 1,936,923 = 588,041<br />Working Capital Investment2009: 82,249 + (-463,577) – 580,104 = -961,432<br />Net borrowing: 74,395 + 0 = 74,395<br />FCFE 2009: 2,375,692 + 7,072 – 588,041 – (-198,776) +74,395 = 2,830,550<br />Step 2: Estimate FCFE from 2010 to 2020<br />We assume that the company will exist and keep growing forever.<br />FCFE 2010-2020 is estimated based on FCFE 2009 and expected growth rate<br />My expectation of FCFE growth rate in period 2010 – 2020 is 20% per year. The reasons are:<br />- The usually FCFE growth rate used for analysis in emerging market is from 10% to 30% and I take 20% in the middle. The reasons are because 30% is too high for Vietnam and 10% is too low due to high inflation rate (Appendix – Table 23) and high bank rate of 14% - 20%.<br />- Vietnam use 2020 as time marker for economic goals. From 2011 to 2020 GDP growth rate per year is 6.5%-7% in average. In 2020, Vietnam goal is to become an industrial economy. Thus, I take 2020 as the turning point.<br />- Due to the characteristic of emerging market, FCFE growth rate of each company goes wildly. In period of 2006-2009, the range of average growth rate of 31 sample stocks is enormously huge, fluctuate from -1,989% to 1,097% (Table 20). Hence, the historical growth rate can not be used for estimation. Also, re-evaluation of FCFE is required at the end of every year, after closing transaction.<br />As the result, FCFE 2010 = FCFE 2009 + |FCFE2009|x0.2 = 2,830,550 x 1.2 = 3,396,660<br />FCFE 2011 = FCFE 2010 + |FCFE2010|x0.2 = 4,075,992 and so on (Table 7)<br />Step 3: Estimate FCFE from 2021 to infinity and discount those cash flows to 2020<br />From 2021 to infinity, I expect the growth rate of FCFE is 5% per year.<br />In order to discount FCFE from 2021 to infinity back to 2020, I use formula:<br />FCFE 2020 part 2= FCFE 2020 part 1×( 1+0.05)(ke-0.05)=59,710,641.06<br />ke is cost of equity calculated above.<br />FCFE 2020 part 1 = FCFE 2019 + |FCFE2019|x0.2 = 21,031,223.44<br />Table SEQ Table * ARABIC 7: VNM’s FCFE<br /> VNM20103,396,660.0020114,075,992.0020124,891,190.4020135,869,428.4820147,043,314.1820158,451,977.01201610,142,372.41201712,170,846.90201814,605,016.28201917,526,019.53202080,741,864.492020 - part 121,031,223.442020 - part 259,710,641.06<br />Step 4: Plus FCFE 2020 part 1 and FCFE part 2 to get FCFE 2020<br />FCFE 2020 = 21,031,223.44 + 59,710,641.06 = 80,741,864.50<br />Step 5: Calculate value of FCFEs at 2009<br />PV of FCFE= t=1∞FCFEt1+ket<br />Then we have PV of FCFE of VNM will equal to 14,285,829.19 (Table 8). ke is the cost of equity, which equals 41.98% by CAPM 1 and 17.52% by CAPM 2<br />D - INTRINSIC PRICE CALCULATION AND DECISION MAKING<br />Table SEQ Table * ARABIC 8: Investment decision result of VNM when using CAPM 1<br />No.CODEPrice at 31 Dec 2009Price at 31 Dec 2010BUY/SELLCAPM 1 - TRADITIONAL CAPM APPLICATIONDISCOUNTED FCFECost of equity (%)Calculated priceDecisionResult1VNM71.786B14,285,829.19 41.9840.67 SLOSS<br />From table 5, we have VNM number of shares at the end of 2009 is 351,228,150. By dividing 14,285,829.19 to 351,228,150, we got the intrinsic price equals to 40.67.<br />Compare 40.67 with the price at 31 Dec 2009 we make the decision is “S” meaning sell decision.<br />However, the actual price at 31 Dec 2010, the time of closing transaction, is 86. Hence, to make profit, investor should make buy decision. This is presented as letter “B” in column “BUY/SELL”<br />As the result, if investor uses traditional CAPM application, he or she will have a loss because of the mismatch between column “BUY/SELL” and column “Decision”.<br />In contrast, investor will have a gain if he/she uses CAPM application for emerging market (CAPM 2), which is showed below:<br />Table SEQ Table * ARABIC 9: Investment decision result of VNM when using CAPM 2<br />No.CODEPrice at 31 Dec 2009Price at 31 Dec 2010BUY/SELLCAMP 2 - CAPM APPLICATION FOR EMERGING MARKETDISCOUNTED FCFECost of equity (%)Calculated priceDecisionResult1VNM71.786B65,218,670.55 17.52113.99 BGAIN<br />This process is applied similarly to the other 30 stocks. In both cases of CAPM 1 and CAPM 2, the “GAIN” result is counted as successful result. The result comparison between CAPM 1 and CAPM 2 is showed in next chapter.<br />CHAPTER 4: RESULT<br />A - TEST RESULT<br />With the assumption that short – selling is allowed in Vietnam, the table of result is:<br />Table SEQ Table * ARABIC 10: Test result<br /> CAPM 1 - TRADITIONAL CAPM APPLICATIONCAPM 2- NEW CAPM APPLICATIONNumber of trials31 stocks31 stocksNumber of success(Number of “GAIN” counted)2320Successful rate74.19%64.52%Successful rate of the whole market with 95% confidence intervalFrom 58.79% to 89.56% From 47.68% to 81.36%PROFITABILITY12.89%7.62%<br />Although CAPM 2 logically should perform better than CAPM 1, the result is quite surprising. Traditional CAPM application actually works better then new one, with 74.19% successful rate compare to 64.52%. The result is for a random sample of 31 stocks. By applying statistical analysis on confidence interval of population proportion, 95% that the successful rate of CAPM 1 in the whole HOSE’s stock population is from 59% to 90% and of CAPM 2 is from 48% to 81%. The formula applied is: p±zα/2pqn (Complete business statistics)<br />Which is shown in the test result is that CAPM 2 is an effective tool, 74.19% successful rate is a very high number in investment world. However, this result is for 1 time testing only. To ensure 99% that the successful rate of CAPM 1 is 75%, the minimum number of testing times is:<br />n=zα/22pqB2=(2.576)2(0.7419)(0.2581)0.752=2.259 ≈3 times<br />Hence, in order to have 99% confidence that CAPM 1 will give 75% successful rate, the test should be conducted in at least 3 years. Therefore, 2 more year of testing is recommended.<br />PROFIT/LOSS and PROFITABILITY are calculated with the assumption that the capital is distributed equally to 31 stocks. Details can be found in Appendix- Table 19 – Table of PROFIT/LOSS<br />We can only achieve 12.89% return only if short selling is available. Since stock price fluctuation is too high, more than 10%, maintaining short sell in one whole year is not possible. Moreover, short selling has never been allowed in Vietnam stock market. Thus, if we only consider stocks that have buy decision only, then the result will be as table 11<br />When the total value of 31 stocks went down -10%, 4.72% of return can be earned instead of 12.89%, which means 14.72% higher than portfolio performance instead of 22.89% and 5.76% higher than index performance instead of 14.93% (VN Index return in 2010 is -2.04% from table 1)<br />Table SEQ Table * ARABIC 11: Test result for buy stock only<br /> CAPM 1 - TRADITIONAL CAPM APPLICATIONCAPM 2- NEW CAPM APPLICATIONNumber of BUY stocks10 out of 31 stocks19 out of 31 stocksNumber of success(Number of “GAIN” counted)6 out of 109 out of 19Successful rate60.00%47.37%PROFITABILITY4.72%-1.82%<br />The purpose of table 11 is to show that not all the chances available in the market can fully be taken because of some other constraints. In this case, the constraint is legal issue. The result of table 11 can be helpful in further research about short selling issue in Vietnam market.<br />B - SENSITIVITY ANALYSIS RESULT<br />VNM data is taken as sample. This analysis help us have a good imagination on how each components is related and their effects on final result<br />Among Beta, risk free rate, and market return, Beta has biggest effect on intrinsic price. 0.1 changes in Beta will cause up to 4.64% change in cost of equity which equal to nearly 10 unit difference in intrinsic price, in the case of VNM. 10 unit differences in intrinsic price is a huge number and that can change the whole result from buy to sell and vice versa.<br />Table SEQ Table * ARABIC 12: Analyze the sensitivity of cost of equity on the changing of Beta<br />Beta VNMCost of equity (%)Figure SEQ Figure * ARABIC 3: The sensitivity of cost of equity on the changing of Beta 41.9871120374650.115.040.219.680.324.310.428.950.533.590.638.230.742.870.847.500.952.14156.78SLOPE46.381.161.42For every 0.1 change in Beta, cost of equity change1.266.064.64%1.370.691.475.331.579.971.684.611.789.251.893.891.998.522103.16<br />Figure SEQ Figure * ARABIC 4: The sensitivity of cost of equity on the changing of market returnTable SEQ Table * ARABIC 13: Analyze the sensitivity of cost of equity on the changing of market return<br />RmCost of equity493395186055 41.9856.721010.131513.532016.942520.343023.753527.154030.564533.965037.37SLOPE0.685540.77For every unit change in market return, cost of equity change6044.180.68%<br />Figure SEQ Figure * ARABIC 5: The sensitivity of cost of equity on the changing of risk free rateTable SEQ Table * ARABIC 14: Analyze the sensitivity of cost of equity on the changing of risk free rate<br />RFRCost of equity 41.9819748527940138.98239.30339.62439.94540.26640.58740.90841.22941.541041.861142.171242.491342.811443.131543.45SLOPE0.321643.77For every unit change in market return, cost of equity change1744.090.32%1844.411944.73<br />Table SEQ Table * ARABIC 15: Analyze the sensitivity of estimated price on the changing of cost of equity<br />Figure 6: The sensitivity of estimated price on the changing of cost of equity244238-4853<br />In average, when 1% change in cost of equity will cause -31.6 change in price. The sensitivity of intrinsic price on the changing of cost of equity (figure 6) is a parabolic line. If the cost of equity is low, the effect will be more serious. High cost of equity may not have as much impact as low cost of equity but ke change about 5% for 0.1 change in Beta of different stock and more than 7% for more than 10% change in RM every year. <br /> In summary, if analyzing in the same year then Beta has high effect on cost of equity, 0.1 change in Beta cause 4.64% change in cost of equity, and 4.64% change in cost of equity cause huge different in intrinsic price. If in different year then market return have biggest impact on intrinsic price. 1% change in RM cause 0.68% change in cost of equity but every year, RM changes more than 10% (Table 1) which cause more than 7% change in cost of equity and certainly intrinsic price will be affected heavily. Therefore, re-valuation every year is necessary. The risk free rate (Rf) does not have much impact since it does not change much every year (less than 1% every year).<br />CHAPTER 5: DISCUSSION / IMPLEMENTATION<br />A – RESULT EXPLANATION<br />Possible reasons why CAPM 1 perform better than CAPM 2<br />1. Traditional CAPM application might be used in many funds in Vietnam with high capitalization<br />2. The accuracy of CAPM can not be tested. Although CAPM has limitations and logically it will not give the correct result, no one can know for sure what the correct result is. To get cost of equity the input numbers are based mostly on analysts’ personal expectation and judgments. In other words, cost of equity is no more than an estimated number and there is no factual one for comparison since it deals with future matters. Besides, there is no better pricing model has been developed.<br />3. Vietnam market is inefficient. Market price does not fully reflect market information. Therefore, even if CAPM 2 gives the correct price of stock, the market will not move accordingly so investors will suffer loss.<br />Based on the result of this paper’ test, CAPM is still a very promising valuation tool.<br />There might be a concern that beside CAPM, there is another variable that affect the result, which is the FCFE. It is true that FCFE does have effect on the result. However, the effect of FCFE is minimized because:<br />- The FCFE 2009 (at time 0) is real and calculated based on real performance (financial statement) by a standardized method. Thus, only the growth rate is the concern.<br />- I assume that all 31 sample stocks have the same FCFE grow rate. By that, I ignore the different growth rates caused by micro factors, and only focus on the growth rate caused by macro factors. In other words, I minimize the effect of FCFE growth rate by keeping the constant growth for all 31 stocks and only cost of equity is counted.<br />- In order to test the effect of FCFE growth rate, a sensitivity analysis is constructed (Appendix, table 23). The result shows that, when g fluctuates from 15 to 30%, the growth rate range usually used in emerging markets, the successful rate of CAPM 1 has very small volatility of 1 success, from 74-77% <br />B – LIMITATION OF THE TEST<br />The result might not be reliable in different years since the test is constructed in 1 year price only. In order to increase the reliability of the test result 5 to 20 years of testing is recommended, 3 years of testing at a minimum.<br />The portfolio of 31 stocks is chosen randomly without careful research. When implementing, we can take only stocks that have Buy decision or more analysis of individual stock valuation should be taken for better portfolio performance.<br />The FCFE’s growth rate should be tailored to specific stock and industry. Different company has different characteristics that there should be different estimation on FCFE’s growth rate. By considering micro factors on FCFE growth rate, we may have better result, higher successful rate.<br />C – IMPLEMENTATION IN PRACTICE<br />For implementation, revaluation is needed at the end of holding period, after closing all transactions and before doing new series of transactions. The reason is because CAPM components and FCFE change every year with high volatility.<br />Implementation of this paper need to be flexible and adjustments should be made to match investors’ strategy and investment objectives. Adjustments also depend on analyst’s trading styles. Specifically, 1 year holding can be suitable for mutual fund but it is not suitable for hedge fund. 12% return might be able to meet objectives of middle age investors but might not be a desired number of young investors. The adjustments can be made on the following factors:<br />The time line: The time line is the time period for Beta calculation, the time of opening and closing transaction. The adjustments in time line is the most important because they has to match investment strategy and investment style of analyst. The time of T-bond, risk free rate… are also needed to be adjusted to tailor analyst’s judgment. <br />FCFE growth rate: This growth rate is varied based on company characteristics and analyst judgment.<br />Capital distribution: In order to meet required return of aggressive investors, more money should be put in high return stocks, stocks that have big difference between intrinsic price and current price. Capital distribution is varied by analyst judgment.<br />CHAPTER 6: CONCLUSION & RECOMMENDATION<br />CAPM is a promising fundamental analysis tool to earn profit in Vietnam stock market. The test results show that using a CAPM model can have a positive impact on Buy/Sell decisions.<br />Although the CAPM application for emerging markets should theoretically work better than the traditional CAPM application, the result shows the contradiction. Therefore, CAPM 1 is recommended for application in Vietnam stock market.<br />There are 3 possible explanations for the better performance of traditional CAPM application, which are the popularity of traditional CAPM, the inability of testing CAPM accuracy and the inefficiency of Vietnam market. Further research on those possible reasons should be constructed for better conclusion.<br />Investor’s suitability has to be taken into account to make suitable adjustments for better implementation.<br />In order to increase the reliability of this paper result, more testing on different years is recommended. Since there might be other models or other buy/sell signals (technical analysis) that can perform better than CAPM, comparison between them is also recommended. My recommendation is that fundamental analysis give a picture of what will happen in future and technical analysis tell us when it will happens by buy/sell signals. Thus, by combining those two, we can eliminate the limitation of two analysis styles and achieve even higher return.<br />LIST OF REFERENCES<br /> BIBLIOGRAPHY l 1033 (2009). Cost of Equity in Asia. Hong Kong: Duetsche Bank.<br />(2009). Complete Business Statistics, 7th edition. In J. S. Amir D.Aczel, Complete Business Statistics (pp. 235-245). McGraw Hill.<br />Board of Governors of the Federal Reserve System. (n.d.). Retrieved May 10, 2011, from Federal Reserve Web site: http://www.federalreserve.gov<br />CFAinstitute. (2010). CFA program curriculum. New York: Pearson Custom publishing.<br />Data and Statistic. (n.d.). Retrieved April 20, 2011, from International Monetary Fund Web site: http://www.imf.org<br />Indices. (n.d.). Retrieved May 10, 2011, from Standard and Poor's Web site: http://www.standardandpoors.com/indices/sp-global-1200/en/ap/?indexId=SPGCMP1200USDFF--P-RGLL--<br />Stocks' data source. (n.d.). Retrieved April 15, 2011, from Co phieu 68 Web site: http://www.cophieu68.com/export.php<br />Listed Securities. (n.d.). Retrieved April 5, 2011, from Ho Chi Minh Stock Exchange Web site: http://www.hsx.vn<br />APPENDIX<br />LIST OF 31 SAMPLE STOCKS<br />TABLE OF RESULT OF CAPM 1 – TRADITIONAL CAPM APPLICATION<br />TABLE OF RESULT OF CAPM 2 – NEW CAPM APPLICATION<br />TABLE OF PROFIT/LOSS<br />TABLE OF STOCK PRICE CALCULATION USING CAPM 1<br />TABLE OF STOCK PRICE CALCULATION USING CAPM 2<br />TABLE OF BETA AND COST OF EQUITY <br />TABLE OF FCFE GROWTH RATE SENSITIVITY ANALYSIS<br />TABLE OF VIETNAM INFLATION RATE<br />TABLE OF VIETNAM GDP GROWTH RATE<br /> LINK Excel.Sheet.8 "D:CAPMWorking filesExcel worksheets.xlsx" "Sheet1!R1C1:R37C4" a f 4 h * MERGEFORMAT <br />Table SEQ Table * ARABIC 16: LIST OF 31 SAMPLE STOCKS<br />(List of 31 stocks taken as sample and their listing date)NO.SYMBOL CODELISTED ORGANIZATIONLISTING DATE1ABT BENTRE AQUAPRODUCT IMPORT AND EXPORT JOINT STOCK COMPANY6-Dec-20062AGF Angiang Fisheries Import & Export Joint Stock Company26-Apr-20023BBC BIBICA CORPORATION17-Dec-20014DHA HOA AN JOINT STOCK COMPANY4-Dec-20045DHG HAU GIANG PHARMACEUTICAL JOINT STOCK COMPANY12-Jan-20066DIC DIC INVESTMENT AND TRADING JOINT STOCK COMPANY22-Nov-20067DTT Do Thanh Technology Corporation12-Jun-20068FMC Sao Ta Foods Joint Stock Company20-Oct-20069FPT FPT Corporation21-Nov-200610GIL BinhThanh Import Export Production and Trade Joint Stock Company28-Dec-200111GMD Gemadept Corporation3-Aug-200212HAP Hapaco Group Joint Stock Company8-Feb-200013HAS Ha Noi P&T Construction & Installation Joint Stock Company18-Dec-200214HPG HoaPhat Group Joint Stock Company31-Oct-200715KDC Kinh Do Corporation 18-Nov-200516KHA Khanh Hoi Import Export Joint Stock Company14-Aug-200217PAC Dry Cell and Storage Battery Joint Stock Company 11-Sep-200618PVD Petrovietnam Drilling and Well Services Joint Stock Company15-Nov-200619SAM Sacom Development and Investment Corporation 18-Jul-200020SAV Savimex Corporation26-Apr-200221SCD Chuong Duong Beverages Joint Stock Company11-Dec-200622SFC SaiGon Fuel Company16-Jun-200423SSC Southern Seed Corporation29-Dec-200424TAC Tuong An Vegetable Oil Joint Stock Company12-Jun-200625TCR Taicera Enterprise Company26-Dec-200626TMS Transforwarding Warehousing Joint Stock Corporation8-Feb-200027TNA Thien Nam Trading Import Export Corporation5-Apr-200528TRI SaiGon Beverages Joint Stock Company21-Dec-200129TS4 Seafood Joint Stock Company No47-Jan-200230VNM Viet Nam Dairy Products Joint Stock Company28-Dec-200531VTB Viettronics Tan Binh Joint Stock Company12-Aug-2006Source:Ho Chi Minh Stock Exchangewww.hsx.vn<br />Table SEQ Table * ARABIC 17: TABLE OF RESULT – CAPM 1<br />No.CODENumber of shares at the end 2009Price at 31 Dec 2009Price at 31 Dec 2010PRICE CHANGEBUY/ SELLCAPM 1 - ORIGINAL CAMPDISCOUNTED FCFECost of equity (%)Calculated priceDecisionprice difference with 2009 priceResult1VNM351,228,15071.78614.30 B14,285,829.19 41.9840.67 S31.03LOSS2ABT8,099,99940.238.41.80 S205,803.16 45.0725.41 S14.79GAIN3AGF12,859,28832.722.89.90 S(3,761.83)52.23(0.29)S32.99GAIN4BBC15,371,1922821.76.30 S59,804.87 64.053.89 S24.11GAIN5DHG26,653,842116112.73.30 S2,391,507.62 39.5989.72 S26.28GAIN6DTT5,200,00011.68.82.80 S2,559.68 48.410.49 S11.11GAIN7FMC7,200,00013.412.90.50 S913,074.22 56.90126.82 B113.42LOSS8FPT142,649,19758.163.55.40 B11,259,180.65 54.2778.93 B20.83GAIN9GIL9,839,81828.3235.30 S420,155.33 50.5142.70 B14.40LOSS10GMD48,212,50060.933.227.70 S1,276,316.27 79.0926.47 S34.43GAIN11HAP18,496,2081812.75.30 S(17,788.89)69.05(0.96)S18.96GAIN12HAS8,000,00013.19.14.00 S10,485.55 54.601.31 S11.79GAIN13KDC78,513,07348.6512.40 B4,537,218.09 53.7057.79 B9.19GAIN14KHA14,120,30021.616.55.10 S331,205.96 54.5623.46 B1.86LOSS15PAC20,176,36265.55411.50 S520,018.63 46.4325.77 S39.73GAIN16SAM64,199,21626.818.28.60 S(94,383.76)69.83(1.47)S28.27GAIN17SAV9,660,23040.333.27.10 S29,349.47 44.443.04 S37.26GAIN18SSC9,999,020362511.00 S238,116.64 49.7823.81 S12.19GAIN19TRI27,548,3609.563.50 S(127,817.28)47.05(4.64)S14.14GAIN20TS48,470,35036.621.615.00 S44,568.37 71.865.26 S31.34GAIN21TMS10,102,6262728.41.40 B406,203.78 36.3540.21 B13.21GAIN22TNA8,000,00016.826.810.00 B271,994.14 48.0834.00 B17.20GAIN23DHA10,040,93729.121.87.30 S77,144.00 52.517.68 S21.42GAIN24SFC8,109,00034.528.95.60 S550,683.16 32.2767.91 B33.41LOSS25DIC8,200,00015.618.42.80 B(22,441.90)52.78(2.74)S18.34LOSS26HPG196,363,99835.738.73.00 B6,624,158.63 62.9333.73 S1.97LOSS27PVD26,617,00065.350.914.40 S84,929.14 51.173.19 S62.11GAIN28SCD8,477,64022.327.55.20 B239,356.58 46.1528.23 B5.93GAIN29TAC18,980,2002225.53.50 B145,033.56 80.597.64 S14.36LOSS30TCR37,007,9978.38.90.60 B317,234.99 46.908.57 B0.27GAIN31VTB11,022,66013.413.10.30 S(18,514.53)40.10(1.68)S15.08GAINSUM 1066.9959.2204.9 794.94 731.38 NO. OF SUCCESS23SUCCESSFUL RATE74.19%PROFIT124.70PROFITABILITY12.89%PORFITABILITY OF BUY STOCKS4.72%<br />NOTE:_ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010_ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010, taken from www.cophieu68.com _'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010 _ the calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology _ 'Decision' is what investor make based on 'Calculated price' _ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price _ 'NO. OF SUCCESS' is number of Gain result counted _ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31_ ‘Profitability’, ‘Profitability of buy stocks’ are taken from Table 19 <br />Table SEQ Table * ARABIC 18: TABLE OF RESULT – CAPM 2<br />No.CODENumber of shares at the end 2009Price at 31 Dec 2009Price at 31 Dec 2010PRICE CHANGEBUY/ SELLCAMP 2 - NEW VERSION OF CAPM FOR EMERGING MARKETDISCOUNTED FCFECost of equity (%)Calculated priceDecisionPrice differenceResult1VNM351,228,15071.78614.30 B65,218,670.55 17.52185.69 B113.99GAIN2ABT8,099,99940.238.41.80 S1,360,052.31 15.31167.91 B127.71LOSS3AGF12,859,28832.722.89.90 S(7,837.97)16.25(0.61)S33.31GAIN4BBC15,371,1922821.76.30 S271,534.89 24.7717.67 S10.33GAIN5DHG26,653,842116112.73.30 S9,949,670.55 17.52373.29 B257.29LOSS6DTT5,200,00011.68.82.80 S15,790.99 16.793.04 S8.56GAIN7FMC7,200,00013.412.90.50 S5,012,938.07 20.31696.24 B682.84LOSS8FPT142,649,19758.163.55.40 B45,723,094.77 23.08320.53 B262.43GAIN9GIL9,839,81828.3235.30 S2,049,031.85 19.69208.24 B179.94LOSS10GMD48,212,50060.933.227.70 S8,128,082.07 24.05168.59 B107.69LOSS11HAP18,496,2081812.75.30 S(40,468.45)20.10(2.19)S20.19GAIN12HAS8,000,00013.19.14.00 S70,499.39 17.648.81 S4.29GAIN13KDC78,513,07348.6512.40 B22,365,613.18 20.57284.86 B236.26GAIN14KHA14,120,30021.616.55.10 S1,924,135.66 19.06136.27 B114.67LOSS15PAC20,176,36265.55411.50 S3,168,265.34 16.35157.03 B91.53LOSS16SAM64,199,21626.818.28.60 S(197,122.95)23.64(3.07)S29.87GAIN17SAV9,660,23040.333.27.10 S129,543.82 18.7013.41 S26.89GAIN18SSC9,999,020362511.00 S1,189,718.44 19.21118.98 B82.98LOSS19TRI27,548,3609.563.50 S(217,876.46)20.24(7.91)S17.41GAIN20TS48,470,35036.621.615.00 S254,581.63 23.8030.06 S6.54GAIN21TMS10,102,6262728.41.40 B1,683,724.48 16.33166.66 B139.66GAIN22TNA8,000,00016.826.810.00 B1,375,313.53 18.56171.91 B155.11GAIN23DHA10,040,93729.121.87.30 S365,430.96 20.6436.39 B7.29LOSS24SFC8,109,00034.528.95.60 S2,156,039.34 15.19265.88 B231.38LOSS25DIC8,200,00015.618.42.80 B(39,896.19)21.71(4.87)S20.47LOSS26HPG196,363,99835.738.73.00 B35,599,302.81 22.23181.29 B145.59GAIN27PVD26,617,00065.350.914.40 S278,933.97 24.7710.48 S54.82GAIN28SCD8,477,64022.327.55.20 B1,222,899.27 17.85144.25 B121.95GAIN29TAC18,980,2002225.53.50 B901,978.83 24.7247.52 B25.52GAIN30TCR37,007,9978.38.90.60 B2,931,596.13 13.3579.22 B70.92GAIN31VTB11,022,66013.413.10.30 S(33,534.22)15.03(3.04)S16.44GAINSUM 1066.9959.2204.9 3,972.54 3403.89 NO. OF SUCCESS20SUCCESSFUL RATE64.52%PROFITABILITY7.62%PORFITABILITY OF BUY STOCKS-1.82%<br />NOTE:_ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010_ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010and taken from cophieu68.com _'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010 _ Calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology _ 'Decision' is what investor make based on 'Calculated price' _ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price _ 'NO. OF SUCCESS' is number of Gain result counted _ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31_ ‘Profitability’, ‘Profitability of buy stocks’ are taken from Table 19 <br />Table SEQ Table * ARABIC 19: TABLE OF PROFIT/LOSS<br />NO.CODEPrice at 31 Dec 2009Price at 31 Dec 2010CAPM 1CAPM 2Amount of money Number of shares can buy within 1,000 thousand VNDAmout of profit/lossAmount of money Number of shares can buy within 1,000 thousands VNDAmount of profit/loss1VNM71.7861,00013.9470(199.4421)1,00013.9470199.4421 2ABT40.238.41,00024.875644.7761 1,00024.8756(44.7761)3AGF32.722.81,00030.5810302.7523 1,00030.5810302.7523 4BBC2821.71,00035.7143225.0000 1,00035.7143225.0000 5DHG116112.71,0008.620728.4483 1,0008.6207(28.4483)6DTT11.68.81,00086.2069241.3793 1,00086.2069241.3793 7FMC13.412.91,00074.6269(37.3134)1,00074.6269(37.3134)8FPT58.163.51,00017.211792.9432 1,00017.211792.9432 9GIL28.3231,00035.3357(187.2792)1,00035.3357(187.2792)10GMD60.933.21,00016.4204454.8440 1,00016.4204(454.8440)11HAP1812.71,00055.5556294.4444 1,00055.5556294.4444 12HAS13.19.11,00076.3359305.3435 1,00076.3359305.3435 13KDC48.6511,00020.576149.3827 1,00020.576149.3827 14KHA21.616.51,00046.2963(236.1111)1,00046.2963(236.1111)15PAC65.5541,00015.2672175.5725 1,00015.2672(175.5725)16SAM26.818.21,00037.3134320.8955 1,00037.3134320.8955 17SAV40.333.21,00024.8139176.1787 1,00024.8139176.1787 18SSC36251,00027.7778305.5556 1,00027.7778(305.5556)19TRI9.561,000105.2632368.4211 1,000105.2632368.4211 20TS436.621.61,00027.3224409.8361 1,00027.3224409.8361 21TMS2728.41,00037.037051.8519 1,00037.037051.8519 22TNA16.826.81,00059.5238595.2381 1,00059.5238595.2381 23DHA29.121.81,00034.3643250.8591 1,00034.3643(250.8591)24SFC34.528.91,00028.9855(162.3188)1,00028.9855(162.3188)25DIC15.618.41,00064.1026(179.4872)1,00064.1026(179.4872)26HPG35.738.71,00028.0112(84.0336)1,00028.011284.0336 27PVD65.350.91,00015.3139220.5207 1,00015.3139220.5207 28SCD22.327.51,00044.8430233.1839 1,00044.8430233.1839 29TAC2225.51,00045.4545(159.0909)1,00045.4545159.0909 30TCR8.38.91,000120.481972.2892 1,000120.481972.2892 31VTB13.413.11,00074.626922.3881 1,00074.626922.3881 TOTAL 31,0001,332.80663,997.0277 1,332.80662,362.0498PROFITABILITY 12.8936% 7.6195%TOTAL OF BUY STOCK10,000484.9180471.866319,000699.6567(345.6226)PROFITABILITY OF BUY STOCK 4.7187% -1.8191%<br />Table SEQ Table * ARABIC 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM APPLICATION<br /> CODECost of equity _ CAPM1No. of sharesPrice at 31 Dec 2009FCFE 2009Average growth rate of FCFE 2006-2009DISCOUNTED FCFECALCULATED PRICE1VNM41.98351,228,15071.72,830,550-626.43%14,285,829.19 40.67 2ABT45.078,099,99940.245,54644.20%205,803.16 25.41 3AGF52.2312,859,28832.7-3,394-14.51%(3,761.83)(0.29)4BBC64.0515,371,1922822,201156.67%59,804.87 3.89 5DHG39.5926,653,842116431,73636.06%2,391,507.62 89.72 6DTT48.415,200,00011.6632-1771.83%2,559.68 0.49 7FMC56.907,200,00013.4286,434104.19%913,074.22 126.82 8FPT54.27142,649,19758.13,296,46096.36%11,259,180.65 78.93 9GIL50.519,839,81828.3110,622-217.61%420,155.33 42.70 10GMD79.0948,212,50060.9630,7781097.20%1,276,316.27 26.47 11HAP69.0518,496,20818-19,79747.30%(17,788.89)(0.96)12HAS54.608,000,00013.13,098-94.05%10,485.55 1.31 13KDC53.7078,513,07348.61,307,935475.97%4,537,218.09 57.79 14KHA54.5614,120,30021.697,742161.76%331,205.96 23.46 15PAC46.4320,176,36265.5120,498203.16%520,018.63 25.77 16SAM69.8364,199,21626.8-105,969-935.22%(94,383.76)(1.47)17SAV44.449,660,23040.36,35635.62%29,349.47 3.04 18SSC49.789,999,0203661,32572.29%238,116.64 23.81 19TRI47.0527,548,3609.5-107,005-152.70%(127,817.28)(4.64)20TS471.868,470,35036.619,382-0.02%44,568.37 5.26 21TMS36.3510,102,6262763,874-163.61%406,203.78 40.21 22TNA48.088,000,00016.866,484288.59%271,994.14 34.00 23DHA52.5110,040,93729.121,520759.55%77,144.00 7.68 24SFC32.278,109,00034.571,091748.05%550,683.16 67.91 25DIC52.788,200,00015.6-20,40483.05%(22,441.90)(2.74)26HPG62.93196,363,99835.72,398,760-1989.35%6,624,158.63 33.73 27PVD51.1726,617,00065.322,797-16.76%84,929.14 3.19 28SCD46.158,477,64022.354,946129.35%239,356.58 28.23 29TAC80.5918,980,2002273,478126.18%145,033.56 7.64 30TCR46.9037,007,9978.374,66179.70%317,234.99 8.57 31VTB40.1011,022,66013.4-13,879-104.37%(18,514.53)(1.68)<br />Table SEQ Table * ARABIC 21: STOCK PRICE CALCULATION BASED ON NEW CAPM APPLICATION<br /> CODECost of equity _ CAPM 2No. of shares at the end of 2009Price at 31 Dec 2009FCFE 2009Average growth rate of FCFE 2006-2009DISCOUNTED FCFECALCULATED PRICE1VNM17.52351,228,15071.72,830,550-626.43%65,218,670.55 185.69 2ABT15.318,099,99940.245,54644.20%1,360,052.31 167.91 3AGF16.2512,859,28832.7-3,394-14.51%(7,837.97)(0.61)4BBC24.7715,371,1922822,201156.67%271,534.89 17.67 5DHG17.5226,653,842116431,73636.06%9,949,670.55 373.29 6DTT16.795,200,00011.6632-1771.83%15,790.99 3.04 7FMC20.317,200,00013.4286,434104.19%5,012,938.07 696.24 8FPT23.08142,649,19758.13,296,46096.36%45,723,094.77 320.53 9GIL19.699,839,81828.3110,622-217.61%2,049,031.85 208.24 10GMD24.0548,212,50060.9630,7781097.20%8,128,082.07 168.59 11HAP20.1018,496,20818-19,79747.30%(40,468.45)(2.19)12HAS17.648,000,00013.13,098-94.05%70,499.39 8.81 13KDC20.5778,513,07348.61,307,935475.97%22,365,613.18 284.86 14KHA19.0614,120,30021.697,742161.76%1,924,135.66 136.27 15PAC16.3520,176,36265.5120,498203.16%3,168,265.34 157.03 16SAM23.6464,199,21626.8-105,969-935.22%(197,122.95)(3.07)17SAV18.709,660,23040.36,35635.62%129,543.82 13.41 18SSC19.219,999,0203661,32572.29%1,189,718.44 118.98 19TRI20.2427,548,3609.5-107,005-152.70%(217,876.46)(7.91)20TS423.808,470,35036.619,382-0.02%254,581.63 30.06 21TMS16.3310,102,6262763,874-163.61%1,683,724.48 166.66 22TNA18.568,000,00016.866,484288.59%1,375,313.53 171.91 23DHA20.6410,040,93729.121,520759.55%365,430.96 36.39 24SFC15.198,109,00034.571,091748.05%2,156,039.34 265.88 25DIC21.718,200,00015.6-20,40483.05%(39,896.19)(4.87)26HPG22.23196,363,99835.72,398,760-1989.35%35,599,302.81 181.29 27PVD24.7726,617,00065.322,797-16.76%278,933.97 10.48 28SCD17.858,477,64022.354,946129.35%1,222,899.27 144.25 29TAC24.7218,980,2002273,478126.18%901,978.83 47.52 30TCR13.3537,007,9978.374,66179.70%2,931,596.13 79.22 31VTB15.0311,022,66013.4-13,879-104.37%(33,534.22)(3.04)<br />Table SEQ Table * ARABIC 22: TABLE OF BETA AND COST OF EQUITY<br />NO.CODECAPM 1CAPM 2Beta (β)Cost of equity (%)Beta (β)Cost of equity (%)1VNM0.6841.980.4112.632ABT0.7545.070.2811.943AGF0.9052.230.3412.234BBC1.1664.050.8314.925DHG0.6339.590.4112.636DTT0.8248.410.3712.407FMC1.0056.900.5713.518FPT0.9554.270.7314.399GIL0.8650.510.5313.3210GMD1.4879.090.7914.7011HAP1.2669.050.5613.4512HAS0.9554.600.4212.6713KDC0.9353.700.5813.5914KHA0.9554.560.5013.1215PAC0.7846.430.3412.2616SAM1.2869.830.7614.5717SAV0.7344.440.4813.0118SSC0.8549.780.5113.1619TRI0.7947.050.5713.4920TS41.3371.860.7714.6121TMS0.5636.350.3412.2622TNA0.8148.080.4712.9623DHA0.9152.510.5913.6224SFC0.4732.270.2811.9025DIC0.9152.780.6513.9626HPG1.1362.930.6814.1227PVD0.8851.170.8314.9228SCD0.7746.150.4312.7429TAC1.5180.590.8214.9130TCR0.7946.900.1711.3231VTB0.6440.100.2711.85<br />Table SEQ Table * ARABIC 23: TABLE OF FCFE GROWTH RATE’S SENSITIVITY ANALYSIS<br />FCFE growth rate 2010 – 2020 (%)RESULT (successful rate)CAPM 1CAPM 21061.29%67.74%1574.19%67.74%2074.19%64.52%2577.42%61.29%3074.19%54.84%<br />Table SEQ Table * ARABIC 24: TABLE OF VIETNAM INFLATION RATE<br />YearInflation rate (consumer prices)RankPercent ChangeDate of Information20033.90%91.00 2002 est.20043.10%115.00-20.51%2003 est.20059.50%189.00206.45%2004 est.20068.30%175.00-12.63%2005 est.20077.50%166.00-9.64%2006 est.20088.30%175.0010.67%2007 est.200924.40%211.00193.98%2008 est.20107.00%167.00-71.31%2009 est.201111.80%205.0068.57%2010 est.Source: CIA World Factbook<br />Table SEQ Table * ARABIC 25: TABLE OF VIETNAM GDP GROWTH RATE<br />YearGDP - real growth rateRankPercent ChangeDate of Information20036.00%22.00 2002 est.20047.20%23.0020.00%2003 est.20057.70%27.006.94%2004 est.20068.50%23.0010.39%2005 est.20078.20%29.00-3.53%2006 est.20088.50%28.003.66%2007 est.20096.20%55.00-27.06%2008 est.20105.30%26.00-14.52%2009 est.20116.80%32.0028.30%2010 est.Average7.16% Definition: This entry gives GDP growth on an annual basis adjusted for inflation and expressed as a percent.Source: CIA World Factbook<br />

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