Minoan Lines

“Minoan Lines” was established in 1972 with initial capital 40 million drachmas (€117,400). It started business, having in possession 1 ship. Now, however, its fleet has reached the number of 13 ships.

In 1998, the firm started trading public, raising €45,16 million from the IPO.

The company all those years has achieved a high growth and materialized a huge investment plan, renewing its fleet of ships.

CORPORATE GOVERNANCE

The biggest stockholder for Minoan Lines is Attica Group with a share of 22,25%. The remaining 77,75% is spread to the rest of the stockholders. We should mention here that no one of the rest of the stockholders has more than 5% of Minoan’s stocks.

Each of the members of the board holds less than 5% of Minoan stocks. Hence, the power of the board does not come from the stockholdings. The power of the board comes from the fact that Minoan Lines is widely dispersed, which means that it is not easy for the stockholders to put pressure on the managers so as to alter their management ways. This does not mean that the board does not take into consideration what stockholders want. Minoan Lines is a very popular firm with a huge base of stockholders, especially in Crete. This means that the press and the local society exert pressure and criticize Minoan’s board decisions.

(Source: Minoan.gr)

Firm and Financial Markets

Minoan Lines is one of the largest and most famous firms in Greece. Many analysts especially from stock exchange companies and from the bank stock exchange department watch the firm. Hence, much information and estimates about future growth and earnings are available from them.

Apart from that Minoan Lines provides a great amount of information about its financial statement, moves and plans. The fact that there are both internal and external sources of information gives the potential investor the ability for a good decision in investing in the firm.

Firm and Society

Minoan Lines believes that “business has a role in building societies.” In its web site and in its annual report, we can see that the firm is very concerned about its image. Minoan Line’s philosophy is that a business is an inseparable part of the society through which it grows. Hence, every year part of the profits is contributed to society. Some of the fields that Minoan Lines has contributed are: Education (Minoan Scholarships), cultural and artistic events, support to welfare institutions and poor families etc.

(Source:Minoan.gr)

RISK PROFILE

Overall Risk Profile

As we see from the graph above Minoan’s stock price over the past 5 years follows an upward sloping path with some volatile periods in between.

(Source:naftemporiki.gr)

A Market Analysis of Risk and Return

Our next step is to analyze the volatility mentioned above. This aims to explore how much of this volatility is based on market force and how much on the firm itself. To achieve this we ran a regression of Minoan stock prices against the A.S.E index.

(Source:naftemporiki.gr)

From the regression we found that:

• The slope of regression is 1,26. Slope of regression is the beta of Minoan Lines based on the prices from 2002 to 2007.

• Intercept of the regression is 1,59%. The intercept of the regression shows us the firm’s performance compared with Rf(1-ОІ), where Rf is the risk-free rate for the period 2002-2007. So the average risk-free rate is 3,75 in monthly basis.

Hence we have:

Rf(1- Beta) =-0.13% and

Intercept-Rf(1-Beta)=1,72%

,which means than Minoan Lines did 1,72% better than expected according to CAPM.

The annualized excess return can be calculating using the formula below:

Annual Excess Return=(1+monthly excess return)12-1=0,022 (22%)

This means that Minoan Lines did a lot better than expected for that period.

• R2 of the regression is 25,02%. This shows that 25,02% of Minoan Line’s risk comes from market sources and the remaining 74,98% of the risk arises from the firm itself.

Cost of Equity

The cost of equity can be calculated using the formula below:

Cost of Equity= Risk-free rate+ BETA levered (risk premium of stock)

We use as a risk-free rate the long term (10 years) bond rate, which is about 5%. For the risk premium, we use the 3,5% according to ICAP. Our next step, in order to calculate the cost of equity, is to find the market value of debt and the market value of equity.

Levered Beta for Minoan Lines=Beta unleveled [1+(1-marginal tax rate)D/E]

Market Value of Equity= Share Price*Number of Shares=

=5,96* 70.926.000=€422,7 million

For the market value of debt we need the book value of debt, which is €447 million and interest expenses which are €26,9 million. The debt matures on average in 5 years with an interest rate of 6% and a marginal tax rate of 29%.

Market Value of Debt=26.9[1-(1/1,065)/0.06]+447/1,065=€448 million

From the above we have:

Levered Beta for Minoan Lines=Beta unleveled [1+(1-marginal tax rate)D/E]

=1,26[1+(1-0,29)(448/422,7)]=2,19

Knowing now levered Beta, we can calculate cost of equity:

Cost of Equity= Risk-free rate+ BETA levered(risk premium of stock)

=5%+2,19*(3,5%)=12.6%

The interpretation

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