Sunday, 27 May 2012

Stock valuation: Two-stage Dividend Growth Model (Critical Review)

By Jackie, Researcher
Topic: Education
Area of discussion: Finance
Chapter: Valuation of Assets and Company (Stock valuation model)

The objective of this week’s research is to compare which method is more accurate, faster and consumes lesser time by comparing the table method and the formula method to calculate the two-stage dividend growth model. Step by step tutorial is provided below with clear explanation and workings.

Ideally, many companies will usually experience above normal growth rates for a short period of time before settling in on a lower but stable perpetual growth rate. Thus, it would be inappropriate to calculate the stock’s intrinsic value based on the single-stage dividend growth model. Unlike single-stage dividend growth model, the two-stage dividend growth model formula is often not provided in exam.

Sample question
Compute the value of a share of common stock of a company whose most recent dividend was $2.50 and is expected to grow at 3 percent per year for the next 5 years, after which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10 percent required rate of return.

Therefore, by using the formula method, we can actually save a lot of time (especially during examinations as the time is limited). Besides, it is also more accurate as it minimizes the rounding effect as compared to the table method. Moreover, we can compute it much faster as we do not need to refer to Future Value Interest Factor (FVIF) table as well as Present Value Interest Factor (PVIF) table.

The table is available here for
Future Value Interest Factor (FVIF):
Present Value Interest Factor (PVIF):

The question above is extracted from Principles of Corporate II – FIN326, Session: May 2010, Tutorial 3 at Mr.Lim’s class in INTI College Subang Jaya, Malaysia.

Related links and additional readings:

Dividend growth models

Why a stock valuation process is important in Dividend Growth Model?

Dividend discount model – stock valuation – formula – how to calculate –

Thursday, 17 May 2012

IQ test [Updated, May 2012]

By Jackie, Researcher
Area of discussion: Intelligence Quotient [IQ]
Function of this discussion: To test our brain’s IQ
Requirement(s): Basic Mathematics’ skills involving area calculations

The objective of this post is to share an extremely tricky question related to IQ and see whether could we solve this question together. Besides, it allows us to share the conflicts or perhaps some weaknesses in Mathematics’ theories. By having different comments and opinions from different people will greatly help to solve this problem faster.

Guest what? I saw this on my Facebook, and yet no one can give an accurate or reasonable explanation on why this could happen. So, I took this opportunity to share out to a larger crowd to see whether it could be solved or not?

My arguments:

I know there is a difference of 1 unit² between the first triangle and the second triangle, but I am going to tackle them separately as the confusion already exist if we tackle either one of them even without the existence of the other triangle.

(The triangle at the top)

According to Mathematics’ theory:
Area of a triangle 
= 0.5(length x height)
= 0.5(13x5)
= 32.5 units²

But this is different if we calculate it one-by-one, all the four shapes together:
Red: 0.5(8x3) = 12 units²
Orange: 7 units²
Dark green: 0.5(5x2) = 5 units²
Light green: 8 units²
Total : 32 units²

Why is there a difference of 0.5 unit² exist?

(The triangle at the bottom)

According to Mathematics’ theory:
Area of a triangle 
= 0.5(length x height) – 1                                                                      (note: minus one for the missing unit)
= 0.5(13x5) – 1
= 31.5 units²

But this is different if we calculate it one-by-one, all the four shapes together:
Red: 0.5(8x3) = 12 units²
Orange: 7 units²
Dark green: 0.5(5x2) = 5 units²
Light green: 8 units²
Total : 32 units²

Again, why is there a difference of 0.5 unit² exist?

I know some of you may argue that one of the triangles is concave, and the other is convex (or perhaps the triangles are bend at the hypotenuse, but this is not important anymore if we treat them as a separate IQ question. This is because the difference in calculation of 0.5 unit² already arises even if we did not compare the first triangle at the top with the other triangle at the bottom. Therefore, is the calculation wrong? Or is there a conflict between calculating one-by-one method and calculating by using Mathematics’ formula related to triangle?

Tuesday, 1 May 2012

Export chopsticks to China [Updated, May 2012]

By Jackie, Researcher
Type of business industry: Manufacturing
Product: Disposable chopsticks
Target market: China [major]; Japan & Korea [minor]

The objectives of this research are to identify which commodity can easily penetrate into China’s market successfully, the reasons behind it, the issues involved in this business activity, and demographic analysis of certain locations in order to get the sources of production.

Nowadays everywhere around the globe, you can almost easily spot “made in China’s commodities”. With the population size of 1.3 billion, the Chinese almost manufactures everything and successfully penetrate into every country’s market with its golden formula: low labour cost. However, have you ever thought of some products that are needed by them of which other countries can manufacture it and sold to them? In short, what are those essential products that can penetrate into China’s market?

Answer: Chopstick

When I said this to my colleagues, 6 out of 6 roll on floor laughing and saying back to me, “Jackie, you are crazy”. Oh well, this basically indicates that most of the people are still not concern and aware of this type of business. I got this idea through reading National Geographic’s magazine few months ago and because the information given was restricted, I have to do my own research by searching other business journals and magazines as well. After months of analyzing it, I have successfully identified this type of business’ potential too.

Sushi King : "This chopsticks are made from natural wood and are not processed with any bleaching agent"

True, but strange!
Did you know that even now, China is importing chopstick from other countries? I know how you feel now [same as mine when I was first introduced to this matter]: strange. The first reason is simple and straight-forward. China uses 45 billion disposable wooden chopsticks a year, but the country has a very low lumber resource (CBS Evening News, 2011). Well, this point is arguable because chopsticks are not necessary have to be made using timber. Bamboos can be used as its substitute [and China is rich in bamboos]. Another strong reason is due to China’s National Logging Ban [issued in 1998] to preserve and conserve their natural forests from being over use. They actually observed and know that their forests were slowly degrading and deteriorating which are mainly resulted from unsuitable and unsustainable management strategies and methodologies. [See reference 1] 

A brief summary of real case study on Georgia’s Chopsticks Company:
Georgia Chopsticks Company manufactures roughly four millions of chopsticks daily and exports them to China and Japan. The main idea is China and Japan have insufficient wood to produce their own chopsticks, but Georgia has. The owner, Lee started the business when he heard that China has a moratorium on domestic tree cutting in order to protect its dwindling lumber resources. The abundant poplar and sweet gum trees in Georgia were found to be ideal for producing straight, pliable, and light coloured chopsticks. Each pair of chopstick is less than a penny to be made. Georgia Chopsticks is the only one, America’s chopsticks manufacturer in the United States. The owner is planning to produce 10 million chopsticks daily by the end of 2012.

Tee Kendrick, left, and Toriano Jenkins roll up chopped wood for further cutting.
Esteban Fabela peels away the bark from a steaming log.
Chopsticks are moved on a conveyor belt.
A worker loads boxes of chopsticks onto a shipping container.

Issues and threat to set-up such business
1. Law constraints
    For example, China’s National Logging Ban [issued in 1998] to preserve and conserve their natural   
    forests from being over use whereas some countries require tree loggers to apply ‘logging license’ before 
    logging process starts. Normally tree cutting restrictions apply. However, not all type of trees can be cut 
    down because some trees are protected species.

2. Type of wood used 
    Ideally, the wood should have pleasant colour, texture and appearance: milky white. Based on my 
    observation, although country like Malaysia has high quality timber [as it is located in equator line] but the 
    wood is not suitable to make chopsticks as the colour of those wood are usually darker as compared to 
    Georgia [Malaysia’s timber are usually used to make furniture and outdoor landscape design]. 

3. Plastic, bamboo, or metal chopsticks as substitute
 This is the most worrying threat to this industry. However, some chopsticks users have commented that 
 using plastic chopsticks to eat hot food will somehow triggers the plastic’s chemical reaction which is 
 harmful to our body, resulting in food poisoning. Meanwhile, using bamboo is quite troublesome as it is 
 mandatory to remove its stingers first, and hence extra steps are needed before turning them into 
 chopsticks. Finally, it is very unlikely that the Chinese, Japanese nor the Korean will use metal chopsticks 
 to eat their food. The reason is simple. It is heavier and it is a heat conductor; it will transfer the heat from 
 the food to the users' fingers.

4. Environment factor
 As the business goes on, it will require more and more trees to be cut down. Thus, this is not a 
 environmental friendly business. Besides, the present of non-government organization (NGO) as well as 
 environmental conservation and protection groups will pose additional threat too.

Business Potential
According to Economics’ theories, this type of business has an extremely bright future whereby you can actually see the Georgia Chopsticks Company being the only one chopsticks manufacturer in America. This is so called: monopoly. The demand for chopsticks will rise in the future due to the increase in demand mainly in China, Japan and Korea. Eating using chopsticks are part of their culture and tradition. It is clearly noticeable that disposable chopsticks are often used in restaurant like Sushi King, Teppanyaki, and Chinese restaurant as well. This is however; very seldom people will go into this type of business as the work is too tedious. 

Additional readings and references:
Challenging the national logging ban in China: An Experience of community-based natural forest management in Sichuan province.

China’s large-scale afforestation projects, importing timber from west and central Africa, combating illegal logging, implementing new laws and customs monitoring.

Georgia’s Hottest Export: Chopsticks!

Fox News Channel: GA Chopstick Company exporting products oversea to Asia.

[CBS Evening News with Scott Pelley] Mark Strassman reports on how South Georgia, with its lush forests of sweet gum trees, has built a factory manufacturing and selling chopsticks to China.

US factory exports chopsticks to China.

Notes: Pictures courtesy from google search.
All information is accurate at the time of posting.