Question 1 (3 marks):

- Comparing different valuation models

Relative valuation models are different from discounted cash flow models. They are different in the sense
that they do not value a firm or an asset based on what its intrinsic value is. Rather, these models believe
that the market may be wrong about a given stock. However, for an industry in general the market is right.
- Advantages and disadvantages of valuation models
Discounted Cash Flow models

Advantages Disadvantages

- Since DCF valuation, done right, is based - Since it is an attempt to estimate intrinsic value, it requires far more
upon an asset's fundamentals, it should be explicit inputs and information than other valuation approaches
less exposed to market moods and - These inputs and information are not only noisy (and difficult to
perceptions. estimate) but can be manipulated by the analyst to provide the
- If good investors buy businesses, conclusion he or she wants. The quality of the analyst then becomes a
rather than stocks (the Warren Buffet function of how well he or she can hide the manipulation.
adage), discounted cash flow valuation is - In an intrinsic valuation model, there is no guarantee that anything
the right way to think about what you are will emerge as under or over-valued. Thus, it is possible in a DCF
geing when you buy an asset. valuation model, to find every stock in a market to be over-valued.
- DCF valuation forces you to think about This can be a problem for
the underlying characteristics of the firm +equity research analysts, whose job it is to follow sectors and make
and understand its business. If nothing else, recommendations on the most under and over-valued stocks in that
it brings you face to face with the sector
assumptions you are making when you pay
a given price for an asset. +equity portfolio managers, who have to be fully (or close to fully)
invested in equities

Relative Valuation

Advantages Disadvantages

-Relative valuation is much more likely to reflect market -A portfolio that is composed of stocks which are
perceptions and moods than discounted cash flow under-valued on a relative basis may still be overvalued,
valuation. This can be an advantage when it is important even if the analysts' judgments are right. It is just less
that the price reflect these perceptions as is the case when overvalued than other securities in the market.
+ the objective is to sell an asset at that price today (IPO, -Relative valuation is built on the assumption that
M&A) markets are correct in the aggregate but make mistakes
on individual securities. To the degree that markets can
+ investing on "momentum" based strategies
be over or under valued in the aggregate, relative
-With relative valuation, there will always be a significant valuation will fail
proportion of securities that are under-valued and over-
-Relative valuation may require less information in the
valued.
way in which most analysts and portfolio managers use
-Since portfolio managers are judged based upon how they it. However, this is because implicit assumptions are
perform on a relative basis (to the market and other money made about other variables (that would have been
managers), relative valuation is more tailored to their needs required in a discounted cash flow valuation). To the
-Relative valuation generally requires less explicit extent that these implicit assumptions are wrong the
 information than discounted cash flow valuation. relative valuation will also be wrong.

Option Pricing Models

Advantages Disadvantages

-Option pricing models allow us to value assets -When real options (which includes the natural resource options and
that we otherwise would not be able to value. the product patents) are valued, many of the inputs for the option
For instance, equity in deeply troubled firms pricing model are difficult to obtain. For instance, projects do not
and the stock of a small, bio-technology firm trade and thus geing a current value for a project or a variance may
(with no revenues and profits) are difficult to be a daunting task.
value using discounted cash flow approaches -The option pricing models derive their value from an underlying
or with multiples. They can be valued using asset. Thus, to do option pricing, you first need to value the assets. It
option pricing. is therefore an approach that is an addendum to another valuation
-Option pricing models provide us fresh approach.
insights into the drivers of value. In cases -Finally, there is the danger of double counting assets. Thus, an
where an asset is deriving it value from its analyst who uses a higher growth rate in discounted cash flow
option characteristics, for instance, more risk or valuation for a pharmaceutical firm because it has valuable patents
variability can increase value rather than would be double counting the patents if he values the patents as
decrease it. options and adds them on to his discounted cash flow value.

Question 2 (4 marks):

The property which needs to be appraised is a residential land plot in ward A of city X. The
information is collected within 01 year from the date of appraisal in this area (in ward A and
adjacent ward). There are 3 land parcels successfully transacted and key factors are similar to the
parcel of the land which needs to be appraised. Information is as follows:
TT Factors The plot of land Comparable plot Comparable plot of Comparable plot
that needs to be of land 1 land 2 of land 3
appraised
1 Price ? VND 3.960 billion VND 3.5 billion VND 6.09 billion
2 Total area 65m2 55m2 50 m2 70m2
3 Selling price / ? VND … million/m2 VND … million/m2 VND … million/m2
m2
4 Legal status Land Use Rights No land Use Rights Land Use Rights Land Use Rights
Certificate is granted Certificate Certificate is granted Certificate is
granted
5 Business Facing a 10 meter- Facing a 10 meter- Facing an 8 meter- Facing two 8
advantage Lane Lane Lane meter- lanes
6 The Stable power supply, Stable power Stable power supply, Stable power
infrastructure good water supply; supply, good water good water supply supply, good water
Poor drainage supply and and drainage supply and
drainage drainage

7 Direction West East South East North

8 View A densely populated A densely A densely populated A park
area populated area area
9 Payment 100% immediately Twice, 45% 100% immediately 100% immediately
 immediately, 55%
after 1 year
In addition, through market surveys, the following information was collected:
- The cost of the land use right of comparable plot of land 1 is 1.4 million VND / m2.
If there are two lots of land which are the same, except for each of the factors from 4 to 8, we
have the following data:
- The price of land facing the 8 meter- lane is 90% of the price of the land facing the 10meter -lane.
The price of land facing the 10 meter lane is 90% of the price of land facing two 8meter - lanes.
- The price of land with the view to the park is 110% of the price of the land with the view to the
residential area.
- The price of good drainage land is 115% of the price of poor drainage land.
- The land prices of the land plot facing the West and the North are the same and is 90% of land
price of the plot facing the Southeast. The land price of the land plot facing the East is 95% of land
price of the plot facing the Southeast.
- The interest rate for one-year term loan is 10% / year.
Find the value of the plot of land that needs to be appraised?
Question 3 (1 mark)
Nam Trieu joint stock company is expected to pay dividend of VND 5000 dong/share next year.
Expected dividend growth rate is 10% pa in the next 10 years and subsequently 9% pa in the next 9
years and subsequently 8% pa in the next 8 years and subsequently 4% to infinity. If the investors
require a rate of return of 10% pa from the share of Nam Trieu joint stock company then what is the
current price of the share?

D11  D1 (1  10%)9 (1  9%)  12850.815

D20  D1 (1  10%)9 (1  9%)9 (1  8%)  27654.538

D28  D1 (1  10%)9 (1  9%)9 (1  8%)8 (1  4%)  49290.819

V0  5000VND because the Expected dividend growth rate = Required rate of return = 10%

D11   1  g   12850.815   1  9%  
t 9

V10  1     1      101399.655
( R  g )   1  R   (10%  9%)   1  10%  

D20   1  g   27654.538   1  8%  
t 8

V19  1     1      210488.228
( R  g )   1  R   (10%  8%)   1  10%  

D28 49290.819
V27    821513.65
( R  g ) (10%  4%)
 V10 V19 V27
Vo   
=>Current price = (1  10%)10
(1  10%)19
(1  10%) 27

 5000  101399.655  210488.228  821513.65  1138401.533

Question 4 (1 mark)
Hoang Long joint stock company issued fixed rate bonds bearing interest at 14% pa. The bonds have
a par value of VND 1,000,000 and will mature after 14 years. Interests are payable semi-annually. If
the yield to maturity (YTM) of the bonds is 10%, what is the present value of the bond?
 YTM = 10%, Interests are payable semi-annually => I/Y = 10%/2 = 5%.
 Par value = 1,000,000 VND
 Fixed rate bonds bearing interest at 14% + Interests are payable semi-annually
14%
1, 000, 000( )  70, 000VND
=> the amount of payment = 2 .
 N  14.2  28 years .
 Present value of the bond
28
1  (1  5%)  n  1, 000, 000
PV   70, 000    18368131.2
n 1  5%  (1  5%) 28

Question 5 (1 mark)
Consider a 12 percent convertible bond, redeemable at nominal in five years’ time, which can be
converted at any time in the next three years into 40 ordinary shares. The bond is currently trading
ex-interest at £130 and the current ordinary share price is £3. The market value of the share is
expected to grow by 4 percent per year. Assume that the required rate of return is 14% and the
investor is considering to convert the bond in the year 3 or to redeem it in the year 5. The par value
is £100. Which option is better?
*Option 1: Convert the bond in the year 3.

*Option 2: Redeem it in the year 5.