What-If Analysis

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Ashutosh
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Joined: 05/Apr/2009
Location: South Africa
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Posts: 226

Topic: What-If Analysis
Posted: 16/Jun/2009 at 6:24pm

Hi All members,

Many a times we come across situation where we don't get answer to below questions with regard to a company.
It is also because some member don't have experience and some don't know how a similar situation was dealt in past.

1. What-if this happens
2. Pros/Cons of an event in future without speculation
3. What will happen if this happens and a few more of such questions.

Would like some help from senior members to answer to the queries fundamentally.

I am putting this new topic subject to approval of senior members/admin-group and if its not relevant it can be deleted also.

My tastes are simple: I am easily satisfied with the best

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Ashutosh
Senior Member

Joined: 05/Apr/2009
Location: South Africa
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Posts: 226

Posted: 16/Jun/2009 at 6:31pm

I have some questions below.

1. What happens if the face value of stock becomes 1 Rs .Does the company still gives for split/Bonus to shareholders?

2. What happens if the company is trading below its face value and what pointer does it give to investor?

For E.g. Cals refinery.

3. Taking cals refinery into consideration . Its book value is 9.9 .Buying anything less than P/BV means buying the companies asset.What will happen to investors if the company scraps the refinery project ?

Edited by Ashutosh - 16/Jun/2009 at 6:32pm

My tastes are simple: I am easily satisfied with the best

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rapidriser
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Joined: 18/Nov/2007
Location: India
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Posts: 966

Posted: 16/Jun/2009 at 7:31pm

Ashutosh - I have some questions below.

1. What happens if the face value of stock becomes 1 Rs .Does the company still gives for split/Bonus to shareholders?

There is no restriction on bonus, no matter what the face value. I haven't heard of any company splitting shares to a face value below Rs.1. It probably makes sense to issue a bonus instead of splitting the share to such a low face value.

2. What happens if the company is trading below its face value and what pointer does it give to investor?
For E.g. Cals refinery.

Market Price is a function of Book Value, past earnings and expected furture performance. Share price quoting below Face Value could be due to a deterioration in any of these three factors.

3. Taking cals refinery into consideration . Its book value is 9.9 .Buying anything less than P/BV means buying the companies asset.What will happen to investors if the company scraps the refinery project ?
[/QUOTE]

Book Value is a historic figure based on the cost paid for the assets. If the assets fall in value due to obsolesence (e.g. machinery, software, goodwill) or market factors (e.g. land prices, market price of investments), then Book Value indicated in balance sheet is irrelevant.

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Ashutosh
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Joined: 05/Apr/2009
Location: South Africa
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Posts: 226

Posted: 16/Jun/2009 at 9:52pm

Hi rapidriser sir,

Thanks for your comments.Some more help is needed on blue lines.

1. What happens if the face value of stock becomes 1 Rs .Does the company still gives for split/Bonus to shareholders?

There is no restriction on bonus, no matter what the face value.

I haven't heard of any company splitting shares to a face value below Rs.1. It probably makes sense to issue a bonus instead of splitting the share to such a low face value.

2. What happens if the company is trading below its face value and what pointer does it give to investor? For E.g. Cals refinery.

Market Price is a function of Book Value, past earnings and expected furture performance. Share price quoting below Face Value could be due to a deterioration in any of these three factors.

w.r.t to Cals there is no earnings in past so its 0 and
expected future earnings can't be quantified currently and can be assumed 0,So can it be assumned that its book value is driving its price right now.

So does that mean that book value of any company is not re-rated every year with annual results.Is it not deceiving to consider BV ratios?

My tastes are simple: I am easily satisfied with the best

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j2eeprofessiona
Senior Member

Joined: 13/Sep/2008
Online Status: Offline
Posts: 968

Posted: 16/Jun/2009 at 10:15pm

Originally posted by Ashutosh

I have some questions below.

1. What happens if the face value of stock becomes 1 Rs .Does the company still gives for split/Bonus to shareholders?

2. What happens if the company is trading below its face value and what pointer does it give to investor? For E.g. Cals refinery.

Its a very subjective issue. You should not dismiss the company just because its trading below its face value. Its quite possible that there's not much trading interest in this script and the reason could be that its still an undiscovered gem. Case in point is something like Avon Corp...You should always look at the potential, earnings etc of the company before taking a decision and simply not dismiss it because its trading below its face value...

Originally posted by Ashutosh

3. Taking cals refinery into consideration . Its book value is 9.9 .Buying anything less than P/BV means buying the companies asset.What will happen to investors if the company scraps the refinery project ?

its book value is 0.99 and not 9.9 (because its face value is rs 1)...It seems you are rally interested in Cals refinery...why dont you buy the stock...In case of Cals refinery since there's no other business other than the refinery project, if the project does not happen then all your money goes into drain....

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Ashutosh
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Joined: 05/Apr/2009
Location: South Africa
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Posts: 226

Posted: 16/Jun/2009 at 10:37pm

In ICICI direct I saw it to be 9.9 and thanks for correcting me that it changes based on face value.

I am more interested in learning to filter out companies with the example in hand than in buying speaking frankly.

If the company scraps the project will it not sell the assets and return the money to shareholders by that?

I have done mistakes in past while buying so I want to take calculated risk from now onwards

My tastes are simple: I am easily satisfied with the best

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j2eeprofessiona
Senior Member

Joined: 13/Sep/2008
Online Status: Offline
Posts: 968

Posted: 16/Jun/2009 at 10:42pm

Originally posted by Ashutosh

In ICICI direct I saw it to be 9.9 and thanks for correcting me that it changes based on face value.

I am more interested in learning to filter out companies with the example in hand than in buying speaking frankly.

If the company scraps the project will it not sell the assets and return the money to shareholders by that?

I have done mistakes in past while buying so I want to take calculated risk from now onwards

We all do mistakes...in stock market ppl with money gain experience and ppl with experience gain money...nothing bad with that..and to answer your question...it depends on the company...many companies just vanish...by the way cals refinery is promoted by spice group so that may not happen but you never know.....

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rapidriser
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Joined: 18/Nov/2007
Location: India
Online Status: Offline
Posts: 966

Posted: 16/Jun/2009 at 10:58pm

[
w.r.t to Cals there is no earnings in past so its 0 and
expected future earnings can't be quantified currently and can be assumed 0,So can it be assumned that its book value is driving its price right now.

You can not assume future earnings to be 0 just because past earnings were zero and you can not quantify future earnings. People investing in the company must be having some expectation of earnings. Investing on the basis of Book Value alone is usually done only if Market Price per share is well below Book Value per share, and that too only if you are reasonably certain that the Book Value is a reliable indicator of the actual value of assets.

So does that mean that book value of any company is not re-rated every year with annual results.Is it not deceiving to consider BV ratios?

As I said earlier, BV is an indicator of the cost of the asset rather than its present value. This is not a decption and it works both ways. Old companies like ITC have large real estate holdings which are shown on their Balance sheet at a small fraction of their current market value, because they were acquired decades ago at very low prices. Most companies do give the market price of their highly liquid investments like equities, MFs etc, but for other assets it is not always possible to do so.

One final comment - I have no idea about Cals Refineries, so my comments above should not in any way influence your decision to buy/sell/hold the company.

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