Complete Valuation using the FCFE and Relative methods using the information from the following case.

STANDARD CHARTERED BANK: VALUATION AND CAPITAL STRUCTURE

VALUATION

On the London Stock Exchange,20 SCBs adjusted closing share price stood at $13.0821 on March 1, 2006, around the time of Temaseks initial purchase. It hit a peak of $24.35 on March 14, 2013, and was on a downward trend thereafter. The share closed at $14.71 on February 16, 2015. The decline of SCBs share price raised concerns that it might in fact be oversold and under-priced. However, it was obvious that bearish sentiments regarding the share remained.

As far back as October 2011, there were some signals that Temasek might move away from its SCB stake when it raised $502 million by selling a zero-coupon bond that could be exchanged for SCB shares if the bank shares rose beyond the requisite 27 per cent premium to the then share price of $21.98.22 The poor record in 2014 re- ignited speculation that Temasek might offload its stake.

If Temasek decided to sell a part of, or all of, its stake in SCB on February 16, 2015, what would be a reasonable valuation for SCBs shares based on its past financial performance and other relevant market information? Summaries of the historical financial statements are provided in Exhibits 1 and 2.

Some assumptions and projections of the free cash flow to equity for 2014 through to 2024 and beyond are available in Exhibit 3. Corresponding projections with attendant assumptions that would be useful for a dividend discount model valuation are presented in Exhibit 4. This includes information on the required return on equity, and the estimated dividends from 2014 through to 2024 and beyond.

For a relative valuation analysis using a peer comparison, data had been collected, but a suitable peer group had yet to be identified (see Exhibit 5). Stock charts that show the price performance of SCB relative to its competitors are offered in Exhibits 6 and 7.

EXHIBIT 1: INCOME STATEMENT FOR STANDARD CHARTERED BANK (US$)

EXHIBIT 2: BALANCE SHEET FOR STANDARD CHARTERED BANK (US$) 2008 2009 2010 2011 2012

1. EXHIBIT 3: DISCOUNTED CASH FLOW VALUATION ASSUMPTIONS

2. Interest income is expected to grow at the rates shown in the table below. From 2014 to 2016, with SCBs downturn, modest growth using the average growth rate from 2008 to 2013 of 2.48 per cent is projected. From 2017 to 2023, SCB will enter a higher growth phase and a 4.5 per cent growth is assumed. Beyond that, the terminal growth rate is estimated to be 5 per cent. The base interest income at Year -1 (FY2013) is $17,593. Year 0 is FY2014. Discount the free cash flows starting from 2015.

3. Other items are assumed to grow proportionately with interest income. Interest expense, non-interest income, provision for credit losses, and non-interest expense are estimated to be 41.35 per cent, 48.04 per cent, 8.58 per cent and 58.47 per cent of interest income, respectively. Tax is applied at 28.714 per cent on taxable income.

4. As SCBs interest expense is considered a cost of goods sold due to the nature of the banking business, the free cash flows are calculated after deducting interest expense and therefore are essentially cash flows to equity.

5. The valuation assumes that capital spending and net operating working capital are negligible.

6. No adjustments for outstanding warrants and share options are made in calculating value per share.

Year-on-Year Interest Income Growth

Source: Created by the authors based on assumptions stated above.

EXHIBIT 4: DIVIDEND DISCOUNT MODEL VALUATION ASSUMPTIONS AND OTHER SELECTED FINANCIAL DATA

EXHIBIT 1: INCOME STATEMENT FOR STANDARD CHARTERED BANK (US$) 2009 12,926 5,303 7,623 7,561 2010 13,500 5,030 2008 16,378 8,991 7,387 6,581 | 13,968 1,321 12,647 7,611 Interest income Interest expense Net interest income Non-interest income Total income Provision for credit losses Gross income Non-interest expense Others (other impairment and profit from associates) Profit before tax Provision for income taxes 7,592 16,062 883 2011 16,584 6,431 10,153 7,484 17,637 908 16,729 9,917 -37 2012 17,827 7,046 10.781 8,002 18,783 1,196 17,587 10,722 2013 17,593 6,437 11,156 7,621 18,777 1,617 17,160 10,193 2,000 13,184 7,952 15,179 9,023 -468 -81 -34 -14 -903 4,568 1,224 5,151 1,674 6,122 1,708 6,775 1,842 6,851 1,866 6,064 1,864 Net income 3,344 3,477 4,414 4,933 4,985 4,200 EXHIBIT 2: BALANCE SHEET FOR STANDARD CHARTERED BANK (US$) 2008 2009 2010 2011 | 2012 2013 Short-term assets Cash and due from banks Federal funds Other short-term investments Investment securities held available-for-sale Total investment 46,583 50,885 24,161 18,131 92,575 | 67,327 61,849 | 69,040 225,168 205,383 52,058 32,724 79,709 70,967 235,458 65,981 47,364 88,845 79,790 281,980 67,797 60,537 80,422 95,374 304,130 83,702 54,534 93,965 99,888 332,089 3,804 89,817 2,325 47,567 33,097 6,357 98,563 2,523 57,637 36,946 7,008 118,172 | 133,229 2,454 70,662 72,574 46,488 52,676 9,388 10,255 138,733 4,645 72,627 57,790 11,543 149,312 3,967 69,789 60,013 13,630 Customer loans Commercial loans Real estate construction loans Residential mortgages Consumer loans Lease financing (commercial real estate) International loans Total customer loans Impairment provision, customers Loans and advances to customers Other assets Premises and equipment Customer liability on acceptance outstanding Accrued income and prepayments Other assets Total assets 179,163 | 202,677 247,164 | 272,538 4,985 4,385 16,806 5,748 174,178 | 198,292 240,358 266,790 285,338 296,711 5,700 6,003 279,638 | 290,708 3,586 2,574 3,466 26,096 435,068 4,103 3,080 3,241 22,554 436,653 4,507 5,078 4,847 5,485 2,127 2,521 29,263 30,832 516,560 592,686 6,620 6,903 4,957 5,501 2,552 2,510 33,311 36,669 631,208 674,380 EXHIBIT 2: (CONTINUED) Deposits 2011 2008 24,195 93,092 2009 30,572 126,726 2010 40,820 137,255 38,510 153,185 2012 2013 42.230 45,482 173, 103181,159 201,123 200,142 145,206 133,882 162,652 193,035 12,084 4,509 5,249 Non-interest-bearing deposits Saving deposits Customer certificates of deposits Institutional certificates of deposits Total interest-bearing deposits Total deposits Financial liabilities held at fair value through profit or loss Total deposit liabilities 250,382 274,577 265,117 295,689 305, 156 345,976 6,502 352,722 391,232 6,056 8,714 380,282 390,015 422,512 435,497 13,211 10,914 409,301 424,583 8,660 5,984 10,433 335,543 10,210 381,022 265,917 289,705 Other liabilities Short-term borrowings Acceptances outstanding Accruals and deferred income Other liabilities Total liabilities 2,539 4,132 139,785 412,373 2,963 4,113 111,952 408,733 4,774 4,528 132,850 477,695 5,473 4,458 160,358 551,311 4,900 5,501 4,811 4,668 166,141 192,787 585,153 627,539 948 4,743 1,013 4,828 1,174 5,386 1,192 5,432 18 18 - 18 18 1,207 5,476 18 12,421 478 81 18 18 5,450 12,421 Share capital Share premium account Capital and capital redemption reserve Merger reserve Available-for-sale reserve Cash flow hedge reserve Translation reserve Retained earnings Parent company shareholders' equity Non-controlling interest Total equity Total equity and liabilities -109 1,214 5,493 18 12,421 446 15 -2,106 28,745 7,284 -93 15 -1,185 15,460 -83 -1,784 12,853 12,421 306 57 -412 19,260 -13 -1,394 23,167 -885 26.566 22,140 27,340 38,212 555 580 27,920 436,653 40,714 661 41,375 592,686 653 38,865 516,560 22,695 435,068 45,362 46,246 693 595 46,055 46,841 631,208 674,380 Source: Standard Chartered PLC, "Standard Chartered PLC Annual Report 2013: Driving Investment, Trade and the Creation of Wealth across Asia, Africa and the Middle East," 2014, http://reports.standardchartered.com/annual-report-2013/pdf/2013- Annual Report.pdf, accessed February 16, 2015. EXHIBIT 4: DIVIDEND DISCOUNT MODEL VALUATION ASSUMPTIONS AND OTHER SELECTED FINANCIAL DATA Financial Year End: Ordinary Shares Outstanding: Equity Beta: U.K. Government Bond Yield: Market Risk Premium: Dividend per Share in 2014 (Year O): Book Value per Share: December 31 2.427 billion 1.23 2.62% 6.35% US$0.86 US$19.05 Dividends are expected to grow at the rates shown in the table below. From 2015 to 2017, with SCB still working towards recovery, modest growth of 3 per cent is expected. From 2018 to 2023, SCB will have rebounded and with its retail banking growth potential, a higher growth of 5 per cent is assumed. The terminal growth rate is estimated to be 7 per cent. Year-on-Year Dividend Growth Year (estimates) 2014 Dividend growth rate (%) Dividend per share ($) 2015 3 0.89 2016 3 0.91 2017 3 0.94 2018 5 0.99 2019 5 1.04 2020 5 1.09 2021 5 1.14 2022 5 1.20 2023 5 1.26 2024 7 1.35 0.86 EXHIBIT 5: KEY FINANCIAL FIGURES AND MARKET-COMPARABLE MULTIPLES OF SELECTED PUBLICLY TRADED FIRMS SCB STAN London 956.40* 23.21B 86,000 -9.20 Ticker Stock exchange Share price Market capitalization Employees Qtrly revenue growth (yoy) (%) Revenue (ttm**) Gross profit (ttm): EBITDA (ttm) Operating margin (ttm) (%) Net income (ttm) EPS (ttm, diluted) P/E (ttm, forward) P/S (ttm) P/B (mrq***) Total cash Total debt Royal Bank of Scotland Barclays HSBC UBS | ING Deutsche RBS BARCHSBAUBSING DB London London London New York New York New York 385.60* 257.87* 602.2* 17.19 14.03 3 2.29 43.73B 53.80B 121.52B 64.53B | 54.08B 44.52B 110,800 139,600 254,000 60,205 84,718 98,138 58.90 9.10 11.30 7.00 14.90 23.80 14.3B 24.19B 58.36B 30.23B | 29.02B 35.14B 11.43B 24.87B 58.96B N/A 3.89B N/A N/A N/A N/A N/A N/A -14.71 26.93 32.25 9.55 34.47 16.01 -6.43B 1.03B 15.32B 3.84B 3.03B 1.90B -0.57 | 0.06 0.81 0.99 0.37 1.49 0.12 0.10 6.69 11.16 10.02 21.77 3.08 2.212.072 .11 3.39 1.24 16.18B 17.03B 35.63 4.17B 1.70 9.23 2.23 0.74 0.71 0.89 0.62 1.17 0.92 0.55 146.8B 143.8B 486.5B 463.4B 717.2B 964.52B 647.7B 541.46B N/A N/A 178.26B 205.87B 1,170B 918B Note: SCB's balance sheet and income statements are in USD, but the share prices are quoted in GBP. Use exchange rate of 1 USD = 0.65 GBP on February 16, 2015. + Earnings Before Interest, Taxes, Depreciation and Amortization. *share price quoted in GBP (pence). **ttm = trailing 12 month ***mrq = most recent quarter EXHIBIT 1: INCOME STATEMENT FOR STANDARD CHARTERED BANK (US$) 2009 12,926 5,303 7,623 7,561 2010 13,500 5,030 2008 16,378 8,991 7,387 6,581 | 13,968 1,321 12,647 7,611 Interest income Interest expense Net interest income Non-interest income Total income Provision for credit losses Gross income Non-interest expense Others (other impairment and profit from associates) Profit before tax Provision for income taxes 7,592 16,062 883 2011 16,584 6,431 10,153 7,484 17,637 908 16,729 9,917 -37 2012 17,827 7,046 10.781 8,002 18,783 1,196 17,587 10,722 2013 17,593 6,437 11,156 7,621 18,777 1,617 17,160 10,193 2,000 13,184 7,952 15,179 9,023 -468 -81 -34 -14 -903 4,568 1,224 5,151 1,674 6,122 1,708 6,775 1,842 6,851 1,866 6,064 1,864 Net income 3,344 3,477 4,414 4,933 4,985 4,200 EXHIBIT 2: BALANCE SHEET FOR STANDARD CHARTERED BANK (US$) 2008 2009 2010 2011 | 2012 2013 Short-term assets Cash and due from banks Federal funds Other short-term investments Investment securities held available-for-sale Total investment 46,583 50,885 24,161 18,131 92,575 | 67,327 61,849 | 69,040 225,168 205,383 52,058 32,724 79,709 70,967 235,458 65,981 47,364 88,845 79,790 281,980 67,797 60,537 80,422 95,374 304,130 83,702 54,534 93,965 99,888 332,089 3,804 89,817 2,325 47,567 33,097 6,357 98,563 2,523 57,637 36,946 7,008 118,172 | 133,229 2,454 70,662 72,574 46,488 52,676 9,388 10,255 138,733 4,645 72,627 57,790 11,543 149,312 3,967 69,789 60,013 13,630 Customer loans Commercial loans Real estate construction loans Residential mortgages Consumer loans Lease financing (commercial real estate) International loans Total customer loans Impairment provision, customers Loans and advances to customers Other assets Premises and equipment Customer liability on acceptance outstanding Accrued income and prepayments Other assets Total assets 179,163 | 202,677 247,164 | 272,538 4,985 4,385 16,806 5,748 174,178 | 198,292 240,358 266,790 285,338 296,711 5,700 6,003 279,638 | 290,708 3,586 2,574 3,466 26,096 435,068 4,103 3,080 3,241 22,554 436,653 4,507 5,078 4,847 5,485 2,127 2,521 29,263 30,832 516,560 592,686 6,620 6,903 4,957 5,501 2,552 2,510 33,311 36,669 631,208 674,380 EXHIBIT 2: (CONTINUED) Deposits 2011 2008 24,195 93,092 2009 30,572 126,726 2010 40,820 137,255 38,510 153,185 2012 2013 42.230 45,482 173, 103181,159 201,123 200,142 145,206 133,882 162,652 193,035 12,084 4,509 5,249 Non-interest-bearing deposits Saving deposits Customer certificates of deposits Institutional certificates of deposits Total interest-bearing deposits Total deposits Financial liabilities held at fair value through profit or loss Total deposit liabilities 250,382 274,577 265,117 295,689 305, 156 345,976 6,502 352,722 391,232 6,056 8,714 380,282 390,015 422,512 435,497 13,211 10,914 409,301 424,583 8,660 5,984 10,433 335,543 10,210 381,022 265,917 289,705 Other liabilities Short-term borrowings Acceptances outstanding Accruals and deferred income Other liabilities Total liabilities 2,539 4,132 139,785 412,373 2,963 4,113 111,952 408,733 4,774 4,528 132,850 477,695 5,473 4,458 160,358 551,311 4,900 5,501 4,811 4,668 166,141 192,787 585,153 627,539 948 4,743 1,013 4,828 1,174 5,386 1,192 5,432 18 18 - 18 18 1,207 5,476 18 12,421 478 81 18 18 5,450 12,421 Share capital Share premium account Capital and capital redemption reserve Merger reserve Available-for-sale reserve Cash flow hedge reserve Translation reserve Retained earnings Parent company shareholders' equity Non-controlling interest Total equity Total equity and liabilities -109 1,214 5,493 18 12,421 446 15 -2,106 28,745 7,284 -93 15 -1,185 15,460 -83 -1,784 12,853 12,421 306 57 -412 19,260 -13 -1,394 23,167 -885 26.566 22,140 27,340 38,212 555 580 27,920 436,653 40,714 661 41,375 592,686 653 38,865 516,560 22,695 435,068 45,362 46,246 693 595 46,055 46,841 631,208 674,380 Source: Standard Chartered PLC, "Standard Chartered PLC Annual Report 2013: Driving Investment, Trade and the Creation of Wealth across Asia, Africa and the Middle East," 2014, http://reports.standardchartered.com/annual-report-2013/pdf/2013- Annual Report.pdf, accessed February 16, 2015. EXHIBIT 4: DIVIDEND DISCOUNT MODEL VALUATION ASSUMPTIONS AND OTHER SELECTED FINANCIAL DATA Financial Year End: Ordinary Shares Outstanding: Equity Beta: U.K. Government Bond Yield: Market Risk Premium: Dividend per Share in 2014 (Year O): Book Value per Share: December 31 2.427 billion 1.23 2.62% 6.35% US$0.86 US$19.05 Dividends are expected to grow at the rates shown in the table below. From 2015 to 2017, with SCB still working towards recovery, modest growth of 3 per cent is expected. From 2018 to 2023, SCB will have rebounded and with its retail banking growth potential, a higher growth of 5 per cent is assumed. The terminal growth rate is estimated to be 7 per cent. Year-on-Year Dividend Growth Year (estimates) 2014 Dividend growth rate (%) Dividend per share ($) 2015 3 0.89 2016 3 0.91 2017 3 0.94 2018 5 0.99 2019 5 1.04 2020 5 1.09 2021 5 1.14 2022 5 1.20 2023 5 1.26 2024 7 1.35 0.86 EXHIBIT 5: KEY FINANCIAL FIGURES AND MARKET-COMPARABLE MULTIPLES OF SELECTED PUBLICLY TRADED FIRMS SCB STAN London 956.40* 23.21B 86,000 -9.20 Ticker Stock exchange Share price Market capitalization Employees Qtrly revenue growth (yoy) (%) Revenue (ttm**) Gross profit (ttm): EBITDA (ttm) Operating margin (ttm) (%) Net income (ttm) EPS (ttm, diluted) P/E (ttm, forward) P/S (ttm) P/B (mrq***) Total cash Total debt Royal Bank of Scotland Barclays HSBC UBS | ING Deutsche RBS BARCHSBAUBSING DB London London London New York New York New York 385.60* 257.87* 602.2* 17.19 14.03 3 2.29 43.73B 53.80B 121.52B 64.53B | 54.08B 44.52B 110,800 139,600 254,000 60,205 84,718 98,138 58.90 9.10 11.30 7.00 14.90 23.80 14.3B 24.19B 58.36B 30.23B | 29.02B 35.14B 11.43B 24.87B 58.96B N/A 3.89B N/A N/A N/A N/A N/A N/A -14.71 26.93 32.25 9.55 34.47 16.01 -6.43B 1.03B 15.32B 3.84B 3.03B 1.90B -0.57 | 0.06 0.81 0.99 0.37 1.49 0.12 0.10 6.69 11.16 10.02 21.77 3.08 2.212.072 .11 3.39 1.24 16.18B 17.03B 35.63 4.17B 1.70 9.23 2.23 0.74 0.71 0.89 0.62 1.17 0.92 0.55 146.8B 143.8B 486.5B 463.4B 717.2B 964.52B 647.7B 541.46B N/A N/A 178.26B 205.87B 1,170B 918B Note: SCB's balance sheet and income statements are in USD, but the share prices are quoted in GBP. Use exchange rate of 1 USD = 0.65 GBP on February 16, 2015. + Earnings Before Interest, Taxes, Depreciation and Amortization. *share price quoted in GBP (pence). **ttm = trailing 12 month ***mrq = most recent quarter