An Appropriate Method of Calculating Return for the Pharmaceutical Companies Enlisted under FTSE all-share index

Mohammad Rabiul, Hossain (2006) An Appropriate Method of Calculating Return for the Pharmaceutical Companies Enlisted under FTSE all-share index. [Dissertation (University of Nottingham only)] (Unpublished)

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Over the last several decades, a substantial body of research has been done to determine the most suitable method of calculating shareholders rate of return. Rate of return is a fundamental concept in any kind of investment decision. There are several useful methods to calculate the shareholders rate of return, namely the Capital Asset Pricing Model, Discounted Cash Flow Model, Arbitrage Pricing Theory and Three factor Model. Each of these models has its own advantages and disadvantages, proponents and opponents. Which method to use depends on the assumptions made, industry practice and also on the evidence from the established literature.

This dissertation commences by presenting an overview of the literature in the area relevant to the calculation of stock return. Essentially this section addresses different methods of estimating the stock return, their underlying assumptions, examples and uses and their advantages and disadvantages over the others based on the published literature. Subsequently methodological approach has been undertaken to apply different procedures of estimating return to selected Pharmaceutical companies enlisted under FTSE all-share index. Findings are then analyzed in line with the published literature.

A number of models to calculate the return (CAPM, APT, Three factor models and Discounted Cash Flow Model) have been discussed and three models (DCF with consistent growth rate, DCF with inconsistent growth rate and CAPM) have been applied on 14 firms operating in Pharmaceutical & Biotechnology sector enlisted under FTSE all-share index. According to the analysis, the DCF with consistent growth cannot be applied simply because most of these firms do not have any consistent growth rate. It has been also found that the linear relationship of risk-return (which is the core concept of CAPM) was absent for these firms during period 2000 - 2005. So a conclusion has been made that the only acceptable method found is the Discounted Cash Flow model which considers capital appreciation and dividend yield in calculating the return. This can be justified by the evidence observed from the companies operating in real world. It has been shown that all the fourteen companies included in this study use share price appreciation/ depreciation to calculate the shareholders return.

Item Type: Dissertation (University of Nottingham only)
Keywords: Rate of return, Pharmaceutical industry
Depositing User: EP, Services
Date Deposited: 21 Dec 2006
Last Modified: 16 Feb 2018 00:24

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