MASINDE MULIRO UNIVERSITY OF SCIENCE AND TECHNOLOGY

(UNIVERSITY OF CHOICE)
SCHOOL OF BUSINESS AND ECONOMICS
DEPARTMENT OF FINANCE AND ACCOUNTING
COURSE CODE: BCF 407
COURSE TITLE: SECURITY ANALYSIS AND SECURITIZATION
TASK: TAKE AWAY CAT II DUE: 20/12/2024
COURSE LECTURER: KITILI
GROUP MEMBERS:

NAME REGISTRATION SIGNATURE

NUMBER
DENNIS MWENDWA BCM/B/01-00280/2021
EMMANUEL MAINA BCM/B/01-00286/2021
NELSON
EZRA LOKAALE BCM/B/01-00287/2021
LOKUSI
VALARIE MORAA BCM/B/01-00289/2021
GEKONDE
MUTINDA DANIEL BCM/B/01-00290/2020
MATHEO
CLIFTON PORIOT BCM/B/01-00294/2021
JOYLINE CHEPTOO BCM/B/01-00298/2021
MARCY CHEPKEMBOI BCM/B/01-00315/2021
ANN ADWENYA KARANI BCM/B/01-00322/2021
PURITY LIHABI ITENYA BCM/B/01-00348/2021

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1. Given the following financial information relating to TelTel Telcom and Glotim Telecom;
Calculate and interpret the following multiples: price to earnings, price to an estimate of
operating cash flow, price to sales, and price to book value. (12 Marks)
Price Multiples for TelTel Telcom and Glotim Telekom
TelTel Telcom Glotim Telekom

2008 2007 2006 2008 2007 2006

(1) Total assets (€ billions) 99.9 105.9 109.0 123.1 120.7 130.2

Asset growth −5.7% −2.8% -- 2.0% −7.3% --

(2) Net revenues (€ billions) 57.9 56.4 52.9 61.7 62.5 61.3

Revenue growth 2.7% 6.6% -- −1.3% 2.0% --

(3) Net cash flow from operating 16.4 15.6 15.4 15.4 13.7 14.2
activities (€ billions)

Cash flow growth 5.1% 1.3% -- 12.4% −3.5% --

(4) Book value of common 19.6 22.9 20.0 43.1 45.2 49.7
shareholders’ equity (€
billions)

Debt ratio: 80.4% 78.4% 81.7% 65.0% 62.6% 61.8%

1 – [(4) ÷ (1)]

(5) Net profit (€ billions) 7.8 9.1 6.6 1.5 0.6 3.2

Earnings growth −14.3% 37.9% -- 150.0% −81.3% --

(6) Weighted average number of 4,646 4,759 4,779 4,340 4,339 4,353
shares outstanding (millions)

(7) Price per share (€) 15.85 22.22 16.22 10.75 15.02 13.84

SOLUTION
■ Price to Earnings Ratio (P/E Ratio);
P/E Ratio = Price per share

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 EPS
Where: EPS= Net profit
No. of outstanding shares
2008:
TelTel Telcom Glotim Telekom
EPS= 7.8 EPS= 1.5
4.646 4.340
= 1.68 =0.35
P/E Ratio = 15.85 P/E Ratio =10.75
1.68 0.35
=9.43 =30.71
2007:
TelTel Telcom Glotim Telekom
EPS= 9.1 EPS= 0.6
4.759 4.339
=1.91 =0.14
P/E Ratio = 22.22 P/E Ratio = 15.02
1.91 0.14
=11.63 =107.29
2006:
TelTel Telcom Glotim Telekom
EPS= 6.6 EPS = 3.2
4.779 4.353
=1.38 =0.73
P/E Ratio = 16.22 P/E Ratio = 13.84
1.38 0.73
=11.75 =18.96

P/E Ratio Summary Table (2006_2008):

Year TelTel P/E Ratio Glotim P/E Ratio
2008 9.43 30.71

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 2007 11.63 107.29
2006 11.75 18.96

Interpretation:
The P/E ratio is a key financial metric used to evaluate a company's valuation by comparing
stock price to its earnings per share, indicating how much investors are willing to pay per € of
earnings. A high P/E ratio may suggest that a company is overvalued or that investors are
expecting significant growth in the future, while a low P/E ratio could indicate undervaluation or
lower growth expectations.
Analysis of TelTel's P/E Ratios:
TelTel's P/E ratio decreased from 11.75 in 2006 to 11.63 in 2007, which suggests a slight decline
in investor confidence or earnings growth expectations. The most significant change occurred in
2008, where the P/E ratio dropped to 9.43. This considerable decline indicates that either the
company’s earnings increased, or its stock price decreased significantly, leading to a lower
valuation in the eyes of investors. A P/E ratio below 10 often raises concerns about potential
issues within the company or the market, suggesting that TelTel may be perceived as
undervalued or facing challenges.
Analysis of Glotim's P/E Ratios:
Glotim's P/E ratio shows a more volatile trend. The P/E ratio rose dramatically from 18.96 in
2006 to 107.29 in 2007. This sharp increase indicates that investors were highly optimistic about
Glotim’s future earnings potential, possibly due to significant growth, new product launches, or
favorable market conditions. However, such a high P/E ratio may also suggest that the stock was
overvalued relative to its earnings. In 2008, Glotim’s P/E ratio decreased substantially to 30.71,
indicating a correction in the valuation. While still relatively high, this decrease suggests that
investor optimism has tempered, possibly due to changes in market conditions, a decline in
earnings, or increased competition.

Comparative Insights
When comparing both companies, several insights emerge:
▪︎Valuation Differences:

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In 2006, Glotim had a higher P/E ratio than TelTel, suggesting a greater expectation of growth or
a premium valuation. However, by 2008, TelTel had a significantly lower P/E ratio, indicating a
possible undervaluation, while Glotim's ratio remained higher, suggesting continued optimism
despite the decline from its peak.
▪︎Market Sentiment:
The data reflects changing market sentiments towards both companies over the years. TelTel's
declining P/E may imply weakening investor confidence, while Glotim's volatile P/E suggests a
market that reacts strongly to changes in potential growth prospects.
▪︎Investment Considerations:
Investors might view TelTel as a potential value opportunity given its low P/E ratio in 2008,
while Glotim, despite its high P/E, may be seen as a riskier investment due to the significant
fluctuations and the potential for overvaluation.

Overall, these P/E ratios provide a snapshot of each company's valuation and investor
expectations over the specified years, highlighting the importance of analyzing these metrics in
the context of broader market trends and company performance.

■ Price to an estimate of operating cash flow (P/OCF Ratio);

P/OCF Ratio = Price per share
OCF per share
Where: OCF/share = Operating cash flow
No. of outstanding shares

2008:
TelTel Telcom Glotim Telekom
OCF/share = 16.4 OCF/share = 15.4

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 4.646. 4.340
= 3.53 = 3.55
P/OCF Ratio = 15.85 P/OCF Ratio = 10.75

3.53 3.55

= 4.49 = 3.03

2007:

TelTel Telcom Glotim Telekom

OCF/share = 15.6 OCF/share = 13.7

4.759 4.339

= 3.28 = 3.16

P/OCF Ratio= 22.22 P/OCF Ratio= 15.02

3.28 3.16
= 6.77 = 4.75

2006:
TelTel Telcom Glotim Telekom
OCF/share = 15.4 OCF/share = 14.2
4.779 4.353
= 3.22 = 3.26

P/OCF Ratio = 16.22 P/OCF Ratio = 13.84

3.22 3.26
= 5.04 = 4.25

P/OCF Ratio Summary Table (2006_2008):

Year TelTel P/OCF Ratio Glotim P/OCF Ratio
2008 4.49 3.03

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 2007 6.77 4.75
2006 5.04 4.25
Interpretation:
The P/OCF ratio is a financial metric that compares a company's stock price to its operating cash
flow per share, providing insight into how much investors are willing to pay for each € of cash
generated from operations. A lower P/OCF ratio may indicate that a company is undervalued
relative to its cash flows, while a higher ratio can suggest overvaluation or strong growth
expectations.
Analysis of TelTel's P/OCF Ratios
TelTel's P/OCF ratio increased from 5.04 in 2006 to 6.77 in 2007, indicating that investors were
willing to pay more for each € of operating cash flow during that period. This increase could
suggest a growing confidence in the company’s operational efficiency or future cash flow
potential. However, in 2008, TelTel's P/OCF ratio dropped significantly to 4.49. This decline
indicates that the company's market valuation relative to its operating cash flow decreased, which
may suggest that its stock price fell, or its operating cash flow improved significantly. A P/OCF
ratio below 5 can indicate that investors see the company as undervalued, potentially making it
an attractive investment opportunity.
Analysis of Glotim's P/OCF Ratios
Glotim's P/OCF ratios reflect a different trend. The ratio increased from 4.25 in 2006 to 4.75 in
2007, indicating a slight increase in the valuation relative to its operating cash flow. This could
suggest moderate growth expectations or improving investor sentiment. In 2008, Glotim's P/OCF
ratio dropped significantly to 3.03. This substantial decrease indicates that investors are valuing
Glotim much more favorably relative to its operating cash flow, potentially pointing to a
significant improvement in cash flows or a decline in market price that has made the shares
cheaper relative to cash generated from operations. A P/OCF ratio below 4 can imply that Glotim
is undervalued, presenting a potential buying opportunity for investors.

Comparative Insights
When comparing the P/OCF ratios of both companies over the specified years, several
insights emerge:

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▪︎Valuation Trends:
In 2006, Glotim had a lower P/OCF ratio than TelTel, indicating that it was perceived as more
favorably valued relative to its cash flow. However, by 2008, Glotim's P/OCF ratio had
improved significantly, while TelTel's ratio indicated a more pronounced decline.
▪︎Investor Sentiment:
The data suggests differing investor sentiments. TelTel experienced a decline in its P/OCF ratio
over the years, particularly in 2008, which could imply concerns regarding its future cash flow
generation. In contrast, Glotim's P/OCF ratio saw a significant drop in 2008, which may indicate
an improved outlook or operational performance that boosted investor confidence.
▪︎Investment Considerations:
For investors, TelTel's lower P/OCF ratio in 2008 could signal a potential value investment
opportunity, while Glotim’s low ratio may suggest it is undervalued compared to its cash flow,
making it attractive as well.

Overall, these P/OCF ratios provide valuable insights into the operating performance and market
valuation of both companies over the years, highlighting the importance of analyzing cash flow
metrics to understand investor sentiment and potential investment opportunities.

■ Price to sales (P/S Ratio);

P/S Ratio = Price per share
Revenue per share
Where: Revenue per share = Net revenue
No. of outstanding shares

8
2008:
TelTel Telcom Glotim Telekom
Revenue per share = 57.9 Revenue per share = 61.7
4.646 4.340
= 12.46 = 14.22
P/S Ratio = 15.85 P/S Ratio = 10.75
12.46 14.22
= 1.27 = 0.76

2007:
TelTel Telcom Glotim Telekom
Revenue per share = 56.4 Revenue per share = 62.5
4.759 4.339
= 11. 85 = 14.40
P/S Ratio = 22.22 P/S Ratio = 15.02
11.85 14.40
= 1.88 = 1.04
2006:
TelTel Telcom Glotim Telekom
Revenue per share = 52.9 Revenue per share = 61.3
4.779 4.353
= 11.07 = 14.08
P/S Ratio = 16.22 P/S Ratio = 13.84
11.07 14.08
= 1.47 = 0.98

P/S Ratio Summary Table (2006_2008):

Year TelTel P/S Ratio Glotim P/S Ratio
2008 1.27 0.76
2007 1.88 1.04
2006 1.47 0.98

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Interpretation:
The P/S ratio is a financial metric that compares a company's stock price to its total revenue per
share, providing insight into how much investors are willing to pay for each € of sales. A higher
P/S ratio may indicate that investors expect strong growth or perceive the company as having a
competitive advantage, while a lower ratio could suggest undervaluation or weaker growth
prospects.
Analysis of TelTel's P/S Ratios
TelTel's P/S ratio increased from 1.47 in 2006 to 1.88 in 2007, suggesting that investors were
becoming more optimistic about the company's ability to generate sales, possibly due to
improved market conditions, increased revenue, or positive growth expectations. However, in
2008, TelTel's P/S ratio fell to 1.27. This decline indicates that either the company’s stock price
decreased or its sales did not meet investor expectations, leading to a lower valuation relative to
sales. A P/S ratio below 1.5 can often suggest that the company is undervalued compared to its
sales, which may present a potential opportunity for investors.
Analysis of Glotim's P/S Ratios
Glotim's P/S ratios show a different trend. The ratio increased slightly from 0.98 in 2006 to 1.04
in 2007, indicating a modest improvement in investor perception regarding its revenue
generation relative to its market capitalization. However, in 2008, Glotim's P/S ratio dropped
significantly to 0.76. This substantial decline suggests that Glotim's stock may be undervalued
relative to its sales, possibly due to decreased investor confidence, a significant drop in sales
revenue, or broader market challenges. A P/S ratio below 1 typically signals that investors are
paying less than one € for each € of sales, which can indicate a bargain or a potential risk
depending on the underlying business performance.

Comparative Insights
When comparing the P/S ratios of TelTel and Glotim over the specified years, several
insights can be drawn:
▪︎Valuation Trends:
In 2006, both companies had P/S ratios around 1.5 or lower, with Glotim slightly below 1,
indicating a more favorable valuation. By 2007, TelTel's P/S ratio surpassed 1.5, reflecting
increased investor optimism, while Glotim's ratio remained modest. The decline in both

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companies' P/S ratios in 2008, particularly Glotim's drop below 1, suggests a significant shift in
market sentiment.
▪︎Investor Sentiment:
TelTel's initial increase and subsequent decline in its P/S ratio may indicate fluctuating investor
confidence, possibly linked to changes in revenue growth or market perceptions. In contrast,
Glotim's drop to a P/S ratio of 0.76 in 2008 could signal a lack of investor confidence or
concerns about its ability to generate sales in a challenging environment, making it potentially
undervalued.
▪︎Investment Considerations:
For investors, TelTel’s lower P/S ratio in 2008 may indicate a potential buying opportunity, as it
suggests an undervaluation relative to sales. Meanwhile, Glotim’s significantly low P/S ratio
could also imply a bargain, but it warrants caution as it might reflect underlying issues affecting
revenue generation.

Overall, these P/S ratios highlight the varying perceptions of market valuation relative to sales
for both companies over the years. They serve as crucial indicators for investors assessing the
potential value and growth prospects of TelTel and Glotim.

■ Price to book value (P/B Ratio);

P/B Ratio = Price per share
Book value per share
Where: Book value per share = Book value of common shareholders' equity
No. of outstanding shares
2008:
TelTel Telcom Glotim Telekom

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Book value per share= 19.6 Book value per share = 43.1
4.646 4.340
= 4.22 = 9.93
P/B Ratio = 15.85 P/B Ratio = 10.75
4.22 9.93
= 3.76 = 1.08
2007:
TelTel Telcom Glotim Telekom
Book value per share = 22.9 Book value per share = 45.2
4.759 4.339
= 4.81 = 10.42
P/B Ratio = 22.22 P/B Ratio = 15.02
4.81 10.42
= 4.62 = 1.44
2006:
TelTel Telcom Glotim Telekom
Book value per share = 20.0 Book value per share = 49.7
4.779 4.353
= 4.18 = 11.42
P/B Ratio = 16.22 P/B Ratio = 13.84
4.18 11.42
= 3.88 = 1.21

P/B Ratio Summary Table (2006_2008):

Year TelTel P/B Ratio Glotim P/B Ratio
2008 3.76 1.08
2007 4.62 1.44
2006 3.88 1.21

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Interpretation:
The P/B ratio is a financial metric that compares a company's stock price to its book value per
share, which is the difference between total assets and total liabilities. This ratio helps investors
assess whether a stock is overvalued or undervalued relative to the company's net assets. A P/B
ratio greater than 1 may indicate that the market values the company more highly than its book
value, suggesting expectations for growth or profitability, while a ratio less than 1 may indicate
undervaluation.
Analysis of TelTel's P/B Ratios
TelTel's P/B ratio increased from 3.88 in 2006 to 4.62 in 2007, indicating that investors were
willing to pay a premium for each € of book value. This rising ratio may reflect growing investor
confidence in the company's future profitability, potential for growth, or strong market position.
However, in 2008, TelTel’s P/B ratio decreased to 3.76. This decline suggests a reduction in
investor sentiment or expectations regarding growth, possibly due to market conditions or
operational challenges. Despite the drop, a P/B ratio above 3 still indicates that investors
maintain a positive outlook on TelTel, valuing it significantly above its book value.
Analysis of Glotim's P/B Ratios
Glotim's P/B ratios reveal a different trajectory. The ratio rose from 1.21 in 2006 to 1.44 in 2007,
suggesting that investor confidence in Glotim's valuation was improving, possibly due to
enhanced financial performance or growth prospects. However, in 2008, Glotim's P/B ratio
decreased to 1.08, indicating that investors were willing to pay only slightly more than the book
value of the company. This decline could imply a loss of confidence in Glotim’s growth potential
or concerns about its financial stability, resulting in a lower market valuation relative to its book
assets.

Comparative Insights
When comparing the P/B ratios of TelTel and Glotim, several insights can be drawn:
▪︎Valuation Trends:
TelTel consistently maintained a higher P/B ratio compared to Glotim over the years, indicating
that investors viewed TelTel as having greater growth potential or a stronger competitive
position. The peak in TelTel's ratio in 2007 reflects significant investor optimism, while the
subsequent decline in 2008 suggests a reassessment of that optimism.

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▪︎Investor Sentiment:
The trends in P/B ratios indicate diverging investor sentiments. TelTel's higher P/B ratios signify
a strong market perception of its value, even during periods of decline. In contrast, Glotim's
decline below 1.1 in 2008 suggests that investors may have become more cautious, valuing it
closer to its book value, which can indicate concerns about future profitability or growth.
▪︎Investment Considerations:
For investors, TelTel’s P/B ratio, even after its decline in 2008, suggests it may still be viewed as
a growth stock despite potential challenges. On the other hand, Glotim's lower P/B ratio in 2008
may indicate that it is undervalued, presenting a potential buying opportunity, but it also raises
caution regarding the company's future growth prospects.

Overall, these P/B ratios provide important insights into market perceptions of the relative value
of TelTel and Glotim, highlighting differences in investor confidence and growth expectations
over the specified years.

2. As the manager of a large, broadly diversified portfolio of stocks and bonds; you realize that
changes in certain macroeconomic variables may directly affect the performance of your
portfolio. You are considering using an arbitrage pricing theory (APT) approach to strategic
portfolio planning and want to analyze the possible impacts of industrial production, inflation,
risk premiums and yield curve shifts. Explain how unanticipated changes in each of these four
factors could affect portfolio returns. (8 Marks)
SOLUTION

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To analyze the possible impacts of industrial production, inflation, risk premiums, and yield
curve shifts on portfolio returns using the Arbitrage Pricing Theory (APT), consider the
following:

■Industrial Production:

An unanticipated increase in industrial production signals economic growth which can lead to
higher interest rates, increased corporate profits and rising stock prices hence benefiting the
stock portion or returns of the portfolio from growth-oriented sectors.

Conversely, an unanticipated decrease in industrial production signals economic downturns or

slowdown which may lead to lower interest rates, reduced or decreased corporate profits and
falling stock prices, negatively impacting the stock portion or returns of the portfolio.

■Inflation:
An unanticipated increase in inflation or inflationary shock can erode the real value of fixed
income securities such as bonds hence likelihood in interest rates increase, leading to a
decrease in bond prices and negatively impacting the bond portion of the portfolio.
However, stocks may benefit from inflation during deflationary shock if companies can pass on
increased costs to consumers, leading to higher revenues and potentially higher stock prices
hence making fixed income securities such as bonds attractive due to their lower interest rates.
Hence, during this period investors may opt them as reliable alternative investment vehicles.

■Risk Premiums:
An unanticipated increase in risk premiums, indicates that investors perceive increased risk in
the market. This causes them to demand a higher return for holding risky assets.
This in result leads to higher returns for portfolios that are heavily invested in risky
assets such as stocks.
However, an unanticipated decrease in risk premiums, suggests that investors perceive
decreased risk in the market. In this case, they are willing to accept a lower return for holding
risky assets. This in result leads to lower returns for portfolios that are heavily invested in risky
assets.

■Yield Curve Shifts:

Unanticipated changes in the yield curve can significantly affect portfolio returns, particularly
for fixed-income investments. The yield curve, which plots the interest rates of bonds with
different maturities, can shift due to various economic factors, including changes in monetary
policy, inflation expectations, and economic growth projections. When the yield curve shifts
unexpectedly, it impacts the value of bonds and, consequently, the overall performance of a
portfolio that includes such assets.

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Unanticipated increase in Yield Curve Shifts: An unanticipated increase in the yield curve
typically indicates rising interest rates. When interest rates rise, the prices of existing bonds fall
because new bonds are issued at higher rates, making them more attractive to investors. As a
result, the market value of bonds in a portfolio decreases.

For example, consider a bond with a fixed interest rate of 3%. If the yield curve shifts upward
and new bonds are issued at 4%, the existing bond becomes less appealing. Investors will
demand a discount on the older bond to match the higher yields available in the market. This
leads to a capital loss on the bond holdings, which can significantly impact the portfolio's total
return. The extent of the impact on portfolio returns depends on the duration of the bonds held
within the portfolio. Duration measures a bond's sensitivity to interest rate changes. The longer
the duration, the more sensitive the bond is to changes in interest rates. Therefore, portfolios
with longer-duration bonds will experience larger declines in value compared to those with
shorter-duration bonds.

Unanticipated decrease in Yield Curve Shifts: Conversely, an unanticipated decrease in the

yield curve typically signifies falling interest rates. In this scenario, the prices of existing bonds
rise because they offer fixed interest payments that become more attractive compared to new
bonds issued at lower rates. As a result, the market value of bonds in a portfolio increases.

For instance, if a bond has a fixed interest rate of 3% and the yield curve shifts downward,
causing new bonds to be issued at 2%, the existing bond becomes more valuable. Investors are
willing to pay a premium for the higher yield, leading to capital gains for the bondholder. This
increase in bond prices positively affects the portfolio's total return. Similar to the previous
case, the impact of a yield curve decrease on portfolio returns is influenced by the duration of
the bonds. Longer-duration bonds will generally see a more pronounced increase in value due
to their greater sensitivity to interest rate changes.

In summary, unanticipated changes in the yield curve can lead to significant fluctuations in
portfolio returns. An unanticipated increase in the yield curve results in falling bond prices and
potential capital losses, particularly for portfolios with longer-duration bonds. In contrast, an
unanticipated decrease in the yield curve leads to rising bond prices and potential capital gains.
Investors must manage these risks by considering the duration of their bond holdings and
adjusting their portfolios accordingly to navigate the complexities of yield curve movements.

By considering these factors, you can assess how unanticipated changes in industrial
production, inflation, risk premiums, and yield curve shifts may affect the performance of
your portfolio, allowing for strategic portfolio planning using the APT approach.

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 REFERENCES

1. Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments. McGraw-Hill Education.

2. Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2014). Modern Portfolio Theory and
Investment Analysis. John Wiley & Sons.

3. Reilly, F. K., & Brown, K. C. (2011). Investment Analysis and Portfolio Management. Cengage Learning.

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