final term paper (pran)

8/20/2019 Final Term Paper (PRAN)

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Financial Analysis of Agricultural Marketing

Company Limited (Pran)

Submitted To:

Riyashad Ahmed

Course Instructor

Corporate Finance (fin440)

Submitted by:

Name Id Section Navila kalam 111 0055 030 2

Shaikh rudaba tahseen 111 0056 030 2

Mohammad mushfoqur rahman 111 0060 030 2

tasnia afrin 111 0093 030 2

S.m.majedul haque Chowdhury 111 0135 030 2

md.nasimul islam 111 0153 030 6

Submission date:

28 th april , 2013.


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LETTER OF TRANSMITTAL

28th April 2013

Riyashad Ahmed

Lecturer,School Of Business

North South University

Sir,

It is an immense gratification for us to put forward the report to you, which you requested us to

put in order to enhance our practical knowledge that you taught us in Corporate finance

(FIN440)

On the process of preparing this report, we learned to take steps as a cluster with each of us

working all the time on this project. It has helped us to expand a lot of knowledge about practice

and implementation of the finance in the corporate world that we learned in the class room with

its real life application. This has farther enforced our confidence that the things we learned will

be truly required in realistic existence, rather than text or definitions to be memorized and then

over and done.

If for whichever cause, you are unable to deduce anything, please do not pause to call us for

clarification. We hope you will forgive any of our mistakes, lacking or inconveniences.

Sincerely yours,

Navila kalam ID: 1110055030

Shaikh Rudaba Tahseen ID: 1110056030

Mohammad Mushfiqur Rahman ID: 1110060030

Tasnia Afrin ID: 1110093030

S.M.Majedul Haque Chowdhury ID:1110135030

Md. Nasimul Islam ID: 1110153030


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ACKNOWLEDGEMENTS

This report would have been impossible without the valuable contributions and limitless help of

several individuals. Our first acknowledge goes to the almighty Allah for giving us the patience

and courage to finish this task within its deadline. Then, we cordially thank our respected course

instructor, Riyashad Ahmed for his continuous guidance and support to make this report

possible. He assisted us whenever we needed any help. His generosity and liberality aid us to go

further with this report without any hazardous situation.

We would like to express our gratitude to our friends and classmates for their friendly and

cordial cooperation and suggestion during working on our project. They have generously

supplied insightful comments, helpful suggestions, and contributions all of which have

progressively enhanced this report.

We would like to thank each individual group member. Last but not the least we are very

thankful to our family. Without their help this report would not be done so successfully, specially

our mothers. We thank them all for their love and trust.


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DECLARATION STATEMENT:

We, the group of FIN440 would like to state following things:

We did not directly copy-paste from any source without giving the reference.

We did not submit the report to any organization or institution previously.

This report is prepared by the enthusiastic co-operation of all members of our group.


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Executive Summary

The term paper provides a complete in-depth financial analysis of AMCL. The term paper starts

by providing the Vertical and Horizontal Balance Sheet and Income Statements so that a clear

idea about the company’s growth is seen. Pro-forma Balance Sheet and Income Statements for

2012 and 2013 are provided to give a slight insight about AMCL's future prospects. Along with

it complete ratio analysis with both time series and cross-sectional analysis has been provided.

The Standard risk is provided to understand the probability of any unfavorable condition that

share holders’ can face. The market returns and AMCL’s returns are analyzed for the same

period to find the market Beta (β) and the Risk free rate of return is taken from the website of

Bangladesh Bank. A detailed calculation of the company’s Cost of capital and weighted average

cost of capital (WACC) is provided to understand the company’s cost of financing and the return

it requires to maintain its share price. Furthermore, the Company’s Optimum Capital Structure,

Intrinsic price of shares is calculated and analyzed. Lastly AMCL’s Dividend policy is shortly

briefed.

The complete report gives a thorough analysis of AMCL's financial performance over the years


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.

Table of ContentsLETTER OF TRANSMITTAL ............................................................................................................................. 1

ACKNOWLEDGEMENTS ................................................................................................................................. 3

DECLARATION STATEMENT: ......................................................................................................................... 4

Executive Summary ....................................................................................................................................... 5

Introduction .................................................................................................................................................. 9

2. Common size Statements: ....................................................................................................................... 10

Vertical Balance sheet ............................................................................................................................. 10

Vertical Income statement ...................................................................................................................... 12

Horizontal Balance Sheet ........................................................................................................................ 13Horizontal Income Statement: ................................................................................................................ 15

Pro-forma Balance sheet ......................................................................................................................... 16

Pro-forma Income Statement .................................................................................................................. 18

3.Ratio Analysis: ......................................................................................................................................... 19

Liquidity Ratio: ....................................................................................................................................... 19

Industry analysis: ................................................................................................................................ 19

AMCL: ................................................................................................................................................ 19

Graphs & Interpretation: ..................................................................................................................... 20

Debt Management Ratio: ........................................................................................................................ 24

Industry Average: ................................................................................................................................ 24

AMCL: ................................................................................................................................................ 24

Graphs & Interpretation: ..................................................................................................................... 25

Asset Management Efficiency: ............................................................................................................... 27

Industry Average ................................................................................................................................. 27

AMCL ................................................................................................................................................. 27Graphs & Interpretation: ..................................................................................................................... 28

Profitability ratio: .................................................................................................................................... 33

Industry Average ................................................................................................................................. 33

AMCL ................................................................................................................................................. 33

Graph &Interpretation: ........................................................................................................................ 34


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Stock Ratio: ............................................................................................................................................. 40

Industry Analysis: ............................................................................................................................... 40

AMCL ................................................................................................................................................. 40

Graphs &Interpretation: ...................................................................................................................... 41

Du-Pont equation: ................................................................................................................................... 44

Extended Du-Pont Equation: .................................................................................................................. 44

4. Risk and Return Analysis ......................................................................................................................... 45

5. Market return for the period .................................................................................................................... 49

Beta for AMCL ....................................................................................................................................... 49

Cost of financing debt: ............................................................................................................................ 51

Weighted Average Cost of Capital: ........................................................................................................ 52

6. Optimal Capital Structure ....................................................................................................................... 53

7. Literature review ..................................................................................................................................... 54

How the CAPM Helps Corporate Managers ............................................................................................ 54

Abstract ............................................................................................................................................... 54

The Manager's Problem ...................................................................................................................... 55

The Classic Solution ............................................................................................................................. 55

The CAPM's Role ................................................................................................................................. 56

Beta coefficient: ...................................................................................................................................... 57

8. Intrinsic Value ......................................................................................................................................... 60

Non-Constant Model ............................................................................................................................... 60

Corporate Valuation Model: ................................................................................................................... 61

Price to Earnings Multiple Approaches: ................................................................................................. 62

Analysis of the Stock price ..................................................................................................................... 62

9. Dividend Policy: ..................................................................................................................................... 63

DIVIDEND PAYOUT PLANS .............................................................................................................. 64

Practice in AMCL ................................................................................................................................... 64

Which dividend policy to follow ............................................................................................................ 64

Appendix ..................................................................................................................................................... 65

Vertical Balance Sheet ................................................................................................................................ 66

Vertical Income Statement ......................................................................................................................... 68

Horizontal Income Statement ..................................................................................................................... 71


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Sales growth rate calculation: ..................................................................................................................... 72

1st method ............................................................................................................................................... 72

2nd method .............................................................................................................................................. 72

Retained Earnings Calculation: ................................................................................................................... 72

Pro-Forma Balance Sheet ............................................................................................................................ 73

Pro-forma Income Statement ..................................................................................................................... 75

Ratio analysis .............................................................................................................................................. 77

Liquidity Ratios ........................................................................................................................................ 77

Industry average ................................................................................................................................. 77

AMCL ................................................................................................................................................... 78

Debt Management ratio: ........................................................................................................................ 79

Industry Analysis: ................................................................................................................................ 79

AMCL: .................................................................................................................................................. 79

Asset Management Efficiency: ................................................................................................................ 80

Industry analysis: ................................................................................................................................ 80

AMCL ................................................................................................................................................... 81

Profitability Ratio: ................................................................................................................................... 82


AMCL ................................................................................................................................................... 83

Stock Market ratio: ................................................................................................................................. 84


Dividend growth rate calculation: .............................................................................................................. 85

1st method: .............................................................................................................................................. 85

2nd method: ............................................................................................................................................. 85

3rd method: ............................................................................................................................................. 85

Dividend Payout Ratio calculation: ..................................................................................................... 85

Retention Ratio calculation: ................................................................................................................ 85

Return on Equity (ROE): ...................................................................................................................... 85

Growth rate: ........................................................................................................................................ 86

FCF Calculation: ........................................................................................................................................... 86

FCF Growth Rate: .................................................................................................................................... 86

2nd method:........................................................................................................................................ 86


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Introduction

PRAN is the largest agro food processor and agro food exporter of Bangladesh. Bangladesh has

an economy based on agriculture. So, their view is to enrich our agriculture sector. Keeping this

view in mind, they look forward to creating more demand for agro product made by our native

farmer and we help to produce more agro products by giving proper training and financial

support to our poor farmers. They want our contract farming to be larger to the largest. Again,

for processing this food, employment is created. By this way, their view is to create more

employment. their view is to make this product available to every hook and corner of our country

so that every consumer gets the right to consume.

Besides this, they are now presenting Bangladesh to more than 77 countries and our view is to

generate more foreign currencies to our country fund. Our view is to thrive into global market

more vigorously. We want our company as the first multinational company from Bangladesh.

We wish thousands of our products to be consumed every second of the day either in our country

or foreign country!


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2. Common size Statements:

Vertical Balance sheet Details 2008 2009 2010 2011 2012 Average Standard

Deviation

ASSETS

Non - Current Assets

Property, Plant and

Equipment

25.45% 43.94% 37.86% 35.46% 31.66% 34.88% 6.90%

Investment at(cost) 1.62% 2.10% 0.00% 0.00% 0.00% 0.74% 1.03%

Current Assets 72.93% 93.51% 62.14% 64.54% 68.34% 72.29% 12.54%

Inventories 52.45% 67.35% 44.08% 43.90% 46.95% 50.94% 9.80%

Account Receivables 4.79% 5.22% 3.70% 4.75% 5.23% 4.74% 0.62%

Advance, Deposit and

Pre-payments

13.93% 15.21% 11.76% 12.89% 12.83% 13.33% 1.31%

Cash and Cash

Equivalents

1.00% 5.73% 25.36% 3.01% 3.33% 7.69% 10.02%

Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0.00%

Financed By

Share Holders Equity 37.12% 50.35% 34.07% 34.22% 37.51% 38.66% 6.73%

Issued Share

Capital

8.67% 11.19% 7.17% 6.82% 7.03% 8.18% 1.84%

Share Premium 4.33% 5.60% 3.59% 3.41% 3.51% 4.09% 0.92%

Reserve & Surplus 21.70% 30.32% 21.16% 21.88% 26.97% 24.40% 4.06%

Proposed Dividend 2.43% 3.25% 2.15% 0.21% 0.00% 1.61% 1.43%

Deferred Tax Liabilities 2.02% 3.11% 2.41% 2.46% 2.45% 2.49% 0.39%Long Term Debt 10.02% 19.08% 17.23% 12.85% 9.93% 13.82% 4.18%

Current Liabilities 50.84% 67.01% 46.29% 50.46% 50.11% 52.94% 8.07%

Current Portion of

Long Term Loans

2.35% 3.12% 1.28% 3.54% 3.31% 2.72% 0.92%

Short term Loans 44.33% 58.07% 38.38% 39.86% 38.08% 43.75% 8.39%


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from Banks(Secured)

Creditors and Other

Payables

1.37% 0.85% 0.55% 0.36% 0.30% 0.69% 0.44%

Accrued Expenses 0.93% 1.63% 0.41% 0.37% 0.71% 0.81% 0.51%

Other Finance 0.00% 0.00% 3.45% 3.10% 2.36% 1.78% 1.67%

Interest Payable 0.04% 0.03% 0.39% 0.54% 0.82% 0.36% 0.34%

Workers profit &

participation &

welfare fund

0.53% 0.96% 0.82% 1.01% 1.39% 0.94% 0.31%

Income Tax Payable 1.05% 1.94% 0.72% 1.36% 2.78% 1.57% 0.81%

Unclaimed Dividend 0.23% 0.40% 0.29% 0.33% 0.36% 0.32% 0.07%

Net Current Assets 22.09% 26.50% 15.84% 14.08% 18.23% 19.35% 5.00%


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Vertical Income statement

Details 2008 2009 2010 2011 2012 Average Standard

Deviation

Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 0.00%

Cost of Goods

Sold

77.26% 77.61% 77.64% 78.21% 77.84% 77.71% 0.31%

Gross Profit 22.74% 22.39% 22.36% 21.79% 22.16% 22.29% 0.31%

Expenses 18.58% 17.85% 17.76% 17.38% 17.42% 17.80% 0.43%

Administrative

& Selling

Expenses

9.39% 8.95% 8.89% 8.75% 8.25% 8.85% 0.37%

Financial

Expenses

9.19% 8.90% 8.87% 8.63% 9.16% 8.95% 0.21%

Operating

Profit

4.16% 4.54% 4.60% 4.41% 4.74% 4.49% 0.20%

Other Income 0.00% 0.00% 0.08% 0.02% 0.03% 0.02% 0.03%

Contribution

to WP&WF

0.21% 0.23% 0.23% 0.22% 0.24% 0.23% 0.01%

Profit BeforeTaxation

3.95% 4.32% 4.45% 4.21% 4.53% 4.29% 0.20%

Provision for

Income Tax

0.30% 0.71% 0.83% 0.75% 1.00% 0.72% 0.23%

Current Tax 0.32% 0.38% 0.44% 0.60% 1.07% 0.56% 0.27%

Deferred Tax 0.02% 0.33% 0.39% 0.15% 0.06% 0.19% 0.14%

Profit After

Taxation

3.65% 3.61% 3.62% 3.46% 3.53% 3.57% 0.07%

Total

comprehensive

income of the

year

18.84% 3.61% 3.62% 3.46% 3.53% 6.61% 6.11%


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Horizontal Balance Sheet

Details 2008 2009 2010 2011 2012

ASSETS

Non - Current AssetsProperty, Plant and

Equipment

100.00% 133.71% 179.82% 177.00% 153.43%

Investment at(cost) 100.00% 100.00% 0.00% 0.00% 0.00%

Current Assets 100.00% 99.29% 102.97% 112.41% 115.54%

Inventories 100.00% 99.43% 101.56% 106.31% 110.38%

Account Receivables 100.00% 84.27% 93.31% 125.89% 134.52%

Advance, Deposit

and Pre-payments

100.00% 84.54% 102.01% 117.46% 113.53%

Cash and Cash

Equivalents

100.00% 444.30% 3068.89% 382.45% 410.56%

Total Assets 100.00% 77.44% 120.85% 127.02% 123.30%

Financed By

Share Holders

Equity

100.00% 105.03% 110.90% 117.10% 124.58%

Issued Share

Capital

100.00% 100.00% 100.00% 100.00% 100.00%

Share Premium 100.00% 100.00% 100.00% 100.00% 100.00%

Reserve & Surplus 100.00% 108.21% 117.86% 128.06% 153.24%

Proposed Dividend 100.00% 103.57% 107.14% 11.07% 0.00%

Deferred Tax

Liabilities

100.00% 119.37% 144.53% 155.13% 149.99%

Long Term Debt 100.00% 147.47% 207.84% 162.94% 122.20%

Current Liabilities 100.00% 102.05% 110.03% 126.08% 121.53%

Current Portion of

Long Term Loans

100.00% 102.90% 65.85% 191.31% 173.54%

Short term Loans

from

Banks(Secured)

100.00% 101.43% 104.64% 114.22% 105.92%


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Creditors and Other

Payables

100.00% 47.97% 48.79% 33.11% 26.74%

Accrued Expenses 100.00% 135.17% 52.88% 49.77% 93.90%

Other Finance 100.00% 0.00% 123109.76% 116229.29% 73.93%

Interest Payable 100.00% 54.55% 1190.25% 1729.93% 2549.61%

Workers profit &

participation &

welfare fund

100.00% 139.18% 186.05% 240.87% 320.27%

Income Tax Payable 100.00% 143.37% 82.75% 164.20% 326.96%

Unclaimed Dividend 100.00% 136.96% 152.32% 185.12% 196.04%


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Horizontal Income Statement:

Details 2008 2009 2010 2011 2012

Sales 100.00% 112.30% 122.29% 133.58% 150.09%

Cost of Goods

Sold

100.00% 112.81% 122.90% 135.22% 151.23%

Gross Profit 100.00% 110.57% 120.24% 127.99% 146.23%

Expenses 100.00% 107.86% 116.84% 124.93% 140.68%

Administrative

& Selling

Expenses

100.00% 106.96% 115.72% 124.42% 131.90%

Financial

Expenses

100.00% 108.78% 118.00% 125.45% 149.67%

Operating

Profit

100.00% 122.69% 135.38% 141.64% 171.00%

Other Income

Contribution

to WP&WF

100.00% 122.69% 137.62% 141.64% 171.00%

Profit Before

Taxation

100.00% 122.69% 137.62% 142.16% 172.15%

Provision for

Income Tax

100.00% 260.98% 334.19% 329.86% 495.35%

Current Tax 100.00% 132.45% 167.51% 248.79% 497.09%

Deferred Tax 100.00% 1982.23% 2574.79% 1085.03% 525.85%

Profit After

Taxation

100.00% 111.18% 121.26% 126.54% 145.25%


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2. (c) To forecast the Balance sheet of 2013 and 2014; we used the percentage of sales method.

The sales growth rate is determined to be 10.69% calculation is shown in the appendix. The

calculation of retained earnings is shown separately in the appendix.

Pro-forma Balance sheetDetails 2012 2013 2014

ASSETS 2012 2013 2014

Non - Current Assets

Property, Plant and

Equipment360436499.00 360436499.00 360436499.00

Investment at(cost)

Current Assets777882302.00 861046476.79 953101816.67

Inventories534462767.00 591602715.88 654851553.84

Account Receivables59516831.00 65879834.92 72923113.95

Advance, Deposit and

Pre-payments146045134.00 161658965.32 178942086.96

Cash and Cash

Equivalents37857570.00 41904960.67 46385061.92

Total Assets1138318801.00 1221482975.79 1313538315.67

Financed By

Share Holders Equity426965832.00 426965832.00 426965832.00

Issued Share Capital80000000.00 80000000.00 80000000.00

Share Premium40000000.00 40000000.00 40000000.00

Reserve & Surplus306965832.00 351833714 438889952

Proposed Dividend

Deferred Tax Liabilities27912119.00 27912119.00 27912119.00

Long Term Debt113025000.00 113025000.00 113025000.00

Current Liabilities570415850.00 631399578.94 698903139.32

Current Portion of

Long Term Loans37675000.00 41702871.93 46161367.67

Short term Loans

from Banks(Secured)433509429.00 479856355.56 531158278.39

Creditors and Other3386997.00 3749104.24 4149924.72


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Payables

Accrued Expenses8092634.00 8957825.59 9915515.69

Other Finance26848332.00 29718714.02 32895971.46

Interest Payable9300352.00 10294661.93 11395274.53

Workers profit &

participation &

welfare fund 15812132.00 17502622.84 19373845.76

Income Tax Payable31692006.00 35080230.05 38830692.53

Unclaimed Dividend4098968.00 4537192.77 5022268.58


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To forecast the income statement of 2013 and 2014, we used the percentage of sales method.

Pro-forma Income Statement

Details 2012 2013 2014

Sales 1,479,083,463 1637213755 1812249915

Cost of Goods Sold 1,151,350,648 1277026729 1413554934

Gross Profit 327,732,815 360,187,026 398,694,981

Expenses 257,636,014 266,515,032 280,517,925

Administrative &

Selling Expenses

122,098,082 130977100.4 144979993.2

Financial Expenses 135,537,932 135,537,932 135,537,932

Operating Profit 70,096,801 93,671,994 118,177,056Other Income 445290 445290 445290

Contribution to

WP&WF

3,504,840 3,504,840 3,504,840

Profit Before Taxation 67,037,251 90,612,444 115,117,506

Provision for Income

Tax

14,819,644 20,025,350 25,440,969

Current Tax 15,775,841 21293924.27 27052613.93

Deferred Tax 956197 1268574.212 1611645.085

Profit After Taxation 52,217,607 70,587,094 89,676,537

Total comprehensive

income of the year

52,217,607 70,587,094 89,676,537


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3.Ratio Analysis:

Liquidity Ratio:

Industry analysis:

Ratios Formula Bangas.

Rahima

Foods Apex

Foods

Meghna

Condens

ed Milk

CVO

Petroch

emical

Pran IA

Current

Ratio

1.95times

1.00times

1.39times

0.70times

0.40times

1.36times

1.13

times

Acid Test

Ratio

0.85times

1.00times

0.58times

0.42times

0.39times

0.43times

0.62

times

Working

Capital

BDT18.75Mil

BDT3.32Mil

BDT344.90

Mil

BDT-237.96

Mil

BDT-89.53

BDT207.47

Mil

BDT

41.16Mil

Cash

Conversion

Ratio

161days

Days 11 days361days

10days

183days

146days

AMCL:

Ratios Formula 2008 2009 2010 2011 2012 IA.

Current

Ratio

1.43times

1.40times

1.34times

1.28times

1.36times

1.13

times

Acid Test

Ratio

0.40times

0.39times

0.39times

0.41times

0.43times

0.62times

Working

Capital

BDT203.89

Mil

BDT189.45

Mil

BDT176.78

Mil

BDT165.07

Mil

BDT207.47

mil

BDT41.16

Mil

Cash

Conversion

Cycle

243days

216days

216days

197days

183days

146days


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Graphs & Interpretation:

In 2012, AMCL’s current assets were 1.36 times of its current liabilities.

Current ratio of AMCL was 1.43 times in 2008 and decreased a little to1.40 times for the year

2009. Then it again decreased slightly to 1.34 times in 2010 and again decreased in 2011 to 1.28

times. After this current ratio has increased by a small margin in 2012 to 1.36 times which

implies that there has been an increasing trend in current ration of AMCL i.e. the performance

has gone up. The industry average was 1.13 times, which was a bit lower than AMCL

maintained in 2012 and therefore, AMCL’s performance was satisf actory in 2012.

AMCL’s current ratio was higher in 2012 than 2011 because, current assets increased by quite a

margin while current liabilities decreased in 2012 from 2011.

0

0.5

1

1.5

2

2.5

Current Ratio

Current Ratio

1.2

1.25

1.3

1.35

1.4

1.45

2008 2009 2010 2011 2012

Current Ratio

Current Ratio


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In 2012, AMCL’s current assets excluding inventories were 0.43 times of its current liabilities.

Quick ratio of AMCL was 0.40 times in 2008, then it decreased to 0.39 times in 2009. It

remained constant, as in 2010 it was also 0.39 times. It increased by a small margin to 0.41 times

in 2011 and again increased by a slight margin to 0.43 times in 2012. In general, there had been

an increasing trend in AMCL’s quick ratio from year 2008 to 2012 implying that AMCL’s

performance has been good. In 2012, industry average was 0.62 times, which is much higher

than AMCL’s, which is not at all satisfactory for AMCL.

AMCL’s quick ratio was higher in 2012 than 2011 because, current assets excluding inventories

increased by a huge margin while current liabilities decreased in 2012 from 2011 .

0

0.2

0.4

0.6

0.8

1

1.2

Bangas Rahima

Foods

Apex

Foods

Meghna

Condensed

Milk

CVO

Petrolium

Pran

(AMCL)

I/A

Quick Rato

Quick Rato

0.37

0.38

0.39

0.4

0.41

0.42

0.43

0.44

2008 2009 2010 2011 2012

Quick Ratio

Quick Ratio


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In 2012, AMCL’s working capital was BDT 207.47 million.

In 2008, AMCL’s working capital was BDT 203.89 million; in 2009 it has decreased to BDT

189.45 million. We can a decreasing trend in AMCL’s working capital later years. Working

Capital of AMCL had decreased by quite a margin in 2010, BDT 176.78 million. And it again

decreased to BDT 165.07 million in 2011, i.e. AMCL’s performance was not satisfactory during

the years 2008 to 2011. Surprisingly the Working Capital jumped to BDT 207.47 million in

2012. In 2012, industry average was BDT41.16 million while AMCL was well above, showing

that working capital was really favorable.

AMCL’s working capital was much higher in 2012 than 2011 because, current assets increased

by a huge margin while current liabilities decreased in 2012 from 2011.

-300

-200

-100

0

100

200

300

400

Working Capital (Mil)


0

50

100

150

200

250

2008 2009 2010 2011 2012




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In 2012, AMCL on average took 183 days to complete the process of converting invested capital

into cash.

Looking at the past few years’ performance, we can see that there is a decreasing trend in the

Cash Conversion Cycle of AMCL .In 2008 it was 243 days, and decreased to 216 days in 2009.

It remained same i.e. 216 days in 2010, but fell slightly in 2011 to 197 days. AMCL’s Cash

Conversion Cycle followed its decreasing trend as it fell to 183 days in 2012, which showedsigns of improvement. But it is significantly below the Industry average of 146 days. Therefore,

AMCL is in a poor position regarding the cash conversion cycle.

AMCL’s cash conversion cycle improved from 243 days to 183 days, the reasons for this can be

attributed to lower average collection period but same average payment period.

050

100150200

250300350400

Cash Conversion Cycle (Days)


0

50

100

150

200

250

300

2008 2009 2010 2011 2012




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Debt Management Ratio:

Industry Average:

Ratios FormulaBangas Rahima

Foods ApexFoods

Meghna

Condens

ed Milk

CVO

Petroch

emical

Pran

IA

Debt

Ratio

0.59times

0.92times

0.65 times

1.22times

0.39times

0.60times

0.73

times

Times

Interest

Earned

3.50times

3.36times

0.21 times

-0.23times

67.30times

1.52times

12.61

times

AMCL:


Debt

Ratio

0.61times

0.62times

0.64times

0.63Times

0.60times

0.73times

Times

Interest

Earned

1.45times

1.51times

1.52times

1.50times

1.52times

12.61

times


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25 | P a g e


In the year 2012, 60% of AMCL’s total assets were financed by debt.

There is a fluctuating trend in using debt to finance the assets of the company all throughout

years, 2008 to 2012. In 2008 the Debt Ratio was 0.61, but it increased to 0.62 in 2009. The

company had an increased Debt Ratio of 0.64 for the next year i.e. 2010. In 2011 it again fell to

0.63. Finally in 2012 the debt ratio was 0.60 which is below the Industry Average of 0.73 that

year. This shows that AMCL’s recent performance is poor.

In 2012 60% of AMCL’s total assets were financed by debt, while in 2011 it was 63%.. The

reason for this is, debts contributed less to AMCL’s total assets, while total assets increased

proportionately.

00.20.40.60.81

1.21.4

Debt Ratio

Debt Ratio

0.58

0.59

0.6

0.61

0.62

0.63

0.64

0.65

2008 2009 2010 2011 2012

Debt Ratio

Debt Ratio


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In 2012, the AMCL’s EBIT was 1.52 times of their interest expense.

We can see a increasing trend in this ratio and it has constantly increased during years 2008 and

2012. In 2008 it was 1.45 times, and then it jumped to 1.51 times in 2009. In 2010 it again

jumped to 1.52 times, but slightly to, 1.50 times in 2011. In 2012 it increased again to 1.52 times,

but was way below the industry average of 12.61 times. So AMCL was not in a healthy position.

It had a poor performance.

In 2012, AMCL’s Times Interest Earned Ratio was 1.52 times, while in 2011 it was 1.50 times.

The reason for this is AMCL’s interest expense increased; while it’s EBIT (Operating Profit)

increased more.

-100

10203040

50607080

Times Interest Earned


1.4

1.42

1.44

1.46

1.48

1.5

1.52

1.54

2008 2009 2010 2011 2012




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27 | P a g e

Asset Management Efficiency:

Industry Average

Ratio

name Formula Bangas

Rahima

Foods Apex

Foods

Meghna

Condens

ed Milk

CVO

Petroch

emical

Pran IA

Inventory

Trunover

Ratio

3.15times

3304.50times

5.07times

1.08times

98.80times

2.15times

569.13

times

Total

Asset

Trunover

Ratio

1.54times

1.10times

2.50times

0.24times

0.54times

1.30times

1.20

times

Fixed

Asset

trunover

Ratio

4.37times

11.50times

11.27times

0.49times

0.64times

4.10times

5.40

times

AverageCollection

Period

56 days 298

days8 days 26

days11

days15

days69 days

Average

Payment

Period

11 days 1 day3

days5 days 2 days

5days

AMCL


Inventory

Turnover

Ratio

1.57times

1.78times

1.82times

2.00times

2.15times

569.13times

Total Asset

Turnover

Ratio

1.07times

1.11times

1.08times

1.12times

1.30times

1.2times

Fixed Asset

turnover

Ratio

3.94times

3.36times

2.85times

3.17times

4.10times

5.40times

Average

Collection

Period

17 days 13 days 17 days 16 days 15 days

69days


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AMCL sold out and re-stocked 2.15 times in 2012.

In 2008 the Inventory Turnover Ratio was 1.57 times. In the following year i.e. 2009, it jumped

sharply to 1.78 times. After that there has been an increasing trend in the Inventory TurnoverRatio of AMCL. In 2010 it was 1.82 times, and 2.00 times in 2011. In 2012, it increased again to

2.15 times continuing its increasing trend, but that was surprisingly below Industry Average of

569.13 times. This shows a very poor performance of AMCL in 2012.

AMCL’s Inventory Turnover Ratio has climbed up in 2012 because relative change in COGS

was more than relative change in inventory.

0

500

1000

1500

2000

2500

3000

3500

Inventory Turnover Ratio

Inventory Turnover Ratio

0

0.5

1

1.5

2

2.5

2008 2009 2010 2011 2012

Inventory Turnover

Inventory Turnover


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Every one taka worth of total asset of AMCL generated around 1.30 taka in sales in 2012.

This ratio has followed a increasing trend from 2008-2012. In 2008, AMCL’s Total Asset

Turnover was 1.07 times. After this year it has been continuously rising, as in 2009 it was 1.11

times, but it fell slightly, to 1.08 times in 2010, but it again rose to 1.12 times in 2011. In 2012 it

rose further, to 1.30 times, and was also above Industry Average of 1.20 times, for the same year.

This shows satisfactory performance of AMCL in 2012.

AMCL’s Total Asset Turnover ratio has increased in 2012 because relative increase in sales was

more than relative increase in total assets.

0

0.5

1

1.52

2.5

3

Bangas Rahima

Foods

Apex

Foods

Meghna

Foods

CVO

Petrolium

Pran

(AMCL)

I/A

Total Asset Turnover


0

0.2

0.4

0.6

0.8

1

1.2

1.4

2008 2009 2010 2011 2012




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AMCL had generated BDT 4.10 taka of sales for every taka of their fixed asset.

This ratio experienced a fluctuating trend between 2008 and 2012. In 2008 Fixed Asset Turnover

Ratio of AMCL was 3.94 times. In 2009 it fell to 3.36 times, and continued its decreasing trendin 2010, as the ratio was 2.85 times that year. In 2011 it jumped to 3.17 times. In 2012 it rose

sharply to 4.10 times, but was below the Industry Average of 5.40 times, for the same year. This

shows poor performance of AMCL in 2012.

0

2

4

68

10

12

14

Fixed Asset Turnover


0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2008 2009 2010 2011 2012




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AMCL took around 15 days to collect their dues from debtors in 2012.

Average Collection Period of AMCL fluctuated between the years, 2008 and 2012. In 2008 it

took AMCL 17 days to collect its receivables. Though it slightly fell to 13 days in 2009, it

quickly rose to 17 days again in 2010. In 2011 it fell slightly to 16 days and fell again to 15 days

for the following year, 2012. This value is well below the industry average of 69 days, for the

same year, indicating the AMCL’s efficiency in 2012.

Average Collection Period of AMCL fell in 2012 than in 2011 because proportionate increase in

receivables was less than proportionate increase in sales.

0

50

100

150200

250

300

350

Average Collection Period (Days)

Average Collection Period

(Days)

0

5

10

15

20

2008 2009 2010 2011 2012

Average Collection Period (Days)

Average Collection Period

(Days)


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On an average AMCL took 2 days to pay its creditors in 2012.

This number also fell gradually between the years 2008 to 2012. It was 7 days in 2008. Then it

experienced a rather sharp decrease in 2009, as the period became 3 days. It remained same i.e.2days for the following years. Average Payment Period for AMCL was 2 days in 2012, and lies

below that of the Industry Average of 5 days indicating efficiency and good performance.

Average Payment Period of AMCL remained same for the last 3 years.

0

2

4

6

8

10

12

Average Payment Period (Days)


0

1

2

3

4

5

6

7

8

2008 2009 2010 2011 2012


Average Payment Period

(Days)


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Profitability ratio:

Industry Average:

Ratio

name Formula Bangas

Rahima

Foods Apex

Foods

Meghna

Condense

d Milk

CVO

Petroch

emical

Pran IA

GrossProfit

Margin

23.01 % 2.47% 7.72% 17.73%28.87

%22.16

%

16.99%

Operating

Profit

Margin 8.57% 1.84% 3.20% -7.57% 25.68%

13.90%

7.60%

Net Profit

Margin

7.23% 1.07% 4.05% -39.11%22.65

%3.50%

-0.10%

Operating

Return on

Assets

13.20% 2.03% 8.02% -1.84%

13.96

%

18.06

%8.91%

Return on

Assets

11.13% 1.18%10.14

%-9.51%

12.31%

4.59%4.97%

Return on

Equity

44.45%13.95

%28.90

%-42.44%

20.01%

12.23%

12.85%

AMCL

Ratio

name Formula

2008 2009 2010 2011 2012 IA

Gross

Profit

Margin

22.27% 22.39% 22.36% 21.97% 22.16% 16.99%

Operating

Profit

Margin 13.35% 13.44% 13.47% 13.04% 13.90%

7.60%

Net Profit

Margin

3.65% 3.61% 3.62% 3.46% 3.50%-0.10%

Operating

Return on

Assets

14.25% 14..92% 14.55% 14.64% 18.00%

8.91%

Return on

Assets

3.79% 4.01% 3.90% 3.90% 4.59%4.97%

Return on

Equity

10.49% 11.10% 11.47% 11.83% 12.23%12.85%


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Graph &Interpretation:

In 2012, AMCL’s gross profit margin was 22.16%. This infers that for every BDT100 of sales,

BDT 22.16 of gross profit was generated.

Throughout the last five years, 2008 to 2012 AMCL has maintained a fluctuating trend in Gross

Profit Margin. In 2008 it was 22.27%. It maintained a steady growth in the following year i.e.

2009, as it rose to 22.39% in 2009. In 2010 it fell slightly to 22.39%, and again declined to

21.97% in2011. But it again jumped up to 22.16% in 2012.The Gross Profit Margin of AMCL

rose in 2012; it was also above Industry Average of 16.99%, for the same year, indicating a

strong performance.

The reason as to why the gross profit margin increased was because the relative increase in Gross

Profit of AMCL was more than its relative rise in net sales.

0

5

10

15

2025

30

35

Gross Profit Margin (%)


21.7

21.8

21.9

22

22.1

22.2

22.3

22.4

22.5

2008 2009 2010 2011 2012




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35 | P a g e

In 2012, the AMCL’s operating profit margin was 13.90%. Thus, for every BDT100 of sales,

BDT 13.90 of Operating Profit was generated.

There is an increasing trend in the Operating Profit Margin of AMCL between the years 2008 to

2012. In 2008 it was 13.35%. It continued to increase in 2009 to 13.44%, followed by another

slight rise to 13.47% in 2010. In 2011 it fell slightly to 13.04%, but carried on its steady growth

in 2012, as it climbed to 13.90%. This value is placed well above Industry Average of 7.60%,

showing a promising performance of AMCL in 2012.

In 2012, Operating Profit Margin of AMCL rose to 13.90%, from that of 13.04% in 2011. The

reason for this increase can be explained by fact that AMCL experienced a larger relative

increase in its EBIT, than the relative increase in Net Sales.

-10

-5

0

5

10

15

20

25

30

Operating Profit Margin (%)


12.6

12.8

13

13.2

13.4

13.6

13.8

14

2008 2009 2010 2011 2012




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36 | P a g e

AMCL’s Net Profit Margin in 2012 was 3.65%. Thus, for every BDT100 of sales, BDT 6.65 of

net profit was generated.

This has been a steady decrease throughout the five years, 2008 to 2012. The Industry average

stands at -0.10% which shows that the company has performed very well compared to its rival

firms in the industry, concerning the Net Profit Margin ratio. Over the 5 years there was a

decreasing rate of the Net Profit Margin of AMCL.

In 2012 the Net Profit Margin decreased slightly to 3.50%, from that of 3.46% in 2011. This

decrease in Net Profit Margin ratio is due to the relative fall in net profit, followed by a

proportionate rise in net sales.

-50

-40

-30

-20

-10

0

10

20

30

Net Profit Margin (%)


3.35

3.4

3.45

3.5

3.55

3.6

3.65

3.7

2008 2009 2010 2011 2012




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In 2012, AMCL’s O perating Return on Assets was 18.00%. This infers that for every BDT100

worth of assets, BDT 22.33 of operating income (EBIT) was generated.

This was a rise from2008’s 14.25%. The Industry average stands at 8.91% which shows that

AMCL is in a satisfactory position with what the average company in the industry has achieved

in terms of the operating return on assets ratio.

The trends over the last 5 years show that the Operating ROA fluctuated between 14.25% -

14.64% from 2008-2011. It then rose in 2012 to 18%. Over the 5 years there was a huge increase

in the rate.

The operating return on assets increased as the relative rise in operating income was relatively

more compared to the increase in the total assets from 2011 to 2012.

-5

0

5

10

15

20

Operating Return on Assets (%)


0

5

10

15

20

2008 2009 2010 2011 2012


Operating Return on Assets

(%)


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38 | P a g e

In 2012 AMCL’s Return on Assets was 4.59%, thus for every BDT100 worth of total assets,

BDT 4.59 was generated.

This is a little rise from 2011’s 3.90%. When compared to the industry AMCL is in a poor state

in terms of its Return On Assets; as the average of the rival firms in the industry is comparatively

more at the 4.97%. Trend analysis of AMCL shows there were slight rises (around 0.20%) from

2008-2011. It then increased to 4.59% in 2012.

The Return on Assets of AMCL increased from 3.90% of 2011 to 4.59% in 2012, as the relative

rise in the net income was significantly higher compared to the proportionate rise in total assets.

-15

-10

-5

0

5

10

15

Bangas Rahima

Foods

Apex

Foods

Meghna

Foods

CVO

Petrolium

Pran

(AMCL)

I/A

Return on Assets (%)


0

1

2

3

4

5

2008 2009 2010 2011 2012




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39 | P a g e

In 2012, the shareholder’s return on equity of AMCL was 12.23%. Thus, shareholders have

earned BDT 12.23 for every BDT 100 investment in the company.

This was a slight increase from 2008’s 10.49%. The Industry average stands at 12.85% which

shows that the shareholders are getting a fruitful return on their investments in comparison of the

shareholders of AMCL’s rival firms in the industry which the Return on Equity ratio shows. The

5 year trend from 2008 to 2012 shows that, the Return on Equity was constant at around 11.50%.

It rose slightly in 2011 to 11.83% and in 2012 it finally rose to 12.23%.The increase in the ROE of AMCL in 2012 from that of 2011 was due to the fact that the relative

increase in net income was more than the relative increase in the total equity.

-60

-40

-20

0

20

40

60

Return on Equity (%)


9.5

10

10.5

11

11.5

12

12.5

2008 2009 2010 2011 2012




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40 | P a g e

Stock Ratio:

Industry Analysis:

Stock

Market

Ratio

Formula BangasRahima

Foods Apex

Foods

Meghna

Condense

d Milk

CVO

Petroch

emical

Pran IA

Earnings

Per

Share

(EPS)

BDT4.44/share

BDT0.62

/share

BDT27.95/share

BDT-6.88

/share

BDT3.19

/share

BDT6.53

/share

BDT5.98

/share

Price-

Earnings

Ratio

(P/E)

26.85 32.25 2.28 -2.01 78.15 19.61 26.19

Market-

to-Book

Ratio

7.20times

4.48times

0.66

times

0.85times

15.94times

2.40times

5.26times

AMCL


Earnings

Per Share

BDT/44.94share

BDT/49.96share

BDT/54.49share

BDT/56.86share

BDT/6.53share

BDT/5.98share

Market toBook Value 2.67times 3.03times 3.49times 3.04times

2.40times

5.26times

Price to

earnings

ratio

25.41 27.28 30.42 26.86 19.61 26.19


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Graphs &Interpretation:

In 2012, shareholders of AMCL earned BDT 6.53 for each stock they hold.

AMCL’s EPS were BDT 44.94, 49.96, 54.49, and 56.86 respectively for the years 2008, 2009,

2010 and 2011. Shareholders earning per share have increased significantly over the period. But

in 20101 shareholders of AMCL earned a very less amount (BDT 6.53) for each stock they hold.

Overall there had been an increasing trend in EPS. Even, shareholders of AMCL had earned

pretty much more than the industry average of 5.98 for the same year, i.e. overall performance of

was quite satisfactory.

Their number went down due to their increase of shares as it was converted from BDT100/share

to BDT 10/share.

-10

-5

0

5

10

1520

25

30

Earnings Per Share (Taka)

Earnings Per Share (Taka)

0

10

20

30

40

50

60

2008 2009 2010 2011 2012

Earnings Per Sahre (Taka)

Earnings Per Sahre (Taka)


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42 | P a g e

In 2012 the shareholders of AMCL were willing to pay BDT 19.61 for every Taka of reported

earnings.

From 2008, shareholders tend to become less confident about AMCL. As a result the numbers

came down. It is also noticeable that they also have lower confidence form shareholders in terms

of the industry average, which is BDT 26.19. So performance of AMCL in 2012 was poor.

AMCL’s P/E ratio has significantly decreased in 2012 (BDT 19.61) from that of 2011 (BDT

26.86) because relative increase in market price per share was much less than relative increase in

EPS.

-100

1020304050

60708090

Price to Earnings Ratio


0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012




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In 2012, the market to book ratio of AMCL was 2.40 times, whereas it was 2.67, 3.03, 3.49 &

3.04 times for the year 2008, 2009, 2010, and 2011 respectively.

From 2007 to 2011, their market to book ratio fluctuated unsteadily. Overall, a decreasing trend

has been observed in AMCL’s market-tobook value ratio. Besides, AMCL’s M/B ratio is lessthan the Industry Average of 5.26, i.e. overall performance of AMCL was not quite satisfactory

in the year 2012.

The market value of AMCL shares in 2012 has decreased significantly from that of 2011, which

results lower value in terms of their market value of shares to book value of share

0246810

12141618

Market to Book Ratio


0

0.5

1

1.5

2

2.5

3

3.5

4

2008 2009 2010 2011 2012




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44 | P a g e

Du-Pont equation:

Extended Du-Pont Equation:

Return On Asset (ROA)= Net Profit Margin*Total Asset Turnover

=

Bangas Rahima Foods Apex Foods MeghnaCondensed Milk

CVO

PetrochemicalPran

7.23*1.54 1.07*1.10 4.05*2.50-39.11*0.24

22.65*0.54 3.5*1.30

Return On Equity (ROE)= Net Profit Margin*Total Asset Turnover*Equity Multiplier

=

Bangas Rahima Foods Apex Foods MeghnaCondensed Milk

CVO

PetrochemicalPran

7.23 * 1.54 *3.93

1.07 * 1.10* 11.80

4.05*2.50*2.85

-39.11*0.24*3.

92

22.65*0.54*1.63

3.5*1.30*2.67


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45 | P a g e

4. Risk and Return Analysis

Here, we have calculated the monthly returns from January 2008 till December, 2012. Based on

the monthly returns, average monthly return is calculated for both DSE General Index & AMCL.

We used Microsoft Excel to calculate the monthly returns which is attached in the appendix

section

Year DSE(Market) AMCL

2008-2012 Monthly Return% Monthly return%

January’08 -3.38% -0.47%

February’08 1.42% -0.35%

March ’08 3.44% 45.88%

April’08 1.56% 28.35%

May’08 2.13% 27.54%

June’08 -6.47% -7.63%

July’08 -8.85% -17.52%

August’08 3.76% 2.69%

September’08 5.18% 10.54%

October’08 -8.42% -9.16%

November’08 -8.04% -11.14%

December’08 11.06% 14.87%

January’09 -5.63% 8.85%

February’09 -3.41% 8.21%

March’09 -6.83% 14.76%

April’09 4.55% -11.80%

May’09 1.30% -11.80%

June’09 15.91% 5.29%

July’09 -5.06% 11.25%

August’09 0.01% -0.09%

September’09 4.53% 1.52%

October’09 7.72% 8.38%


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November’09 29.15% 6.27%

December’09 2.52% 3.50%

January’10 17.48% -7.45%

February’10 2.01% 9.83%

March ’10 0.27% -5.27%

April’10 1.08% 1.78%

May’10 8.46% 13.33%

June’10 0.02% -2.14%

July’10 2.02% -5.04%

August’10 3.44% 7.50%

September’10 4.76% 8.51%

October’10 10.16% -3.50%

November’10 8.24% -3.53%

December’10 -4.96% 6.44%

January’11 -9.88% -11.34%

February’11 -28.54% -8.27%

March ’11 13.40% -28.17%

April’11 -6.14% 36.78%

May’11 -3.89% -0.47%

June’11 7.91% -5.70%

July’11 4.91% 4.73%

August’’11 -2.44% 3.59%

September’11 -4.57% -4.69%

October’11 -14.66% 0.62%

November’11 1.22% -15.75%

December’11 0.40% -0.74%

January’12 -22.38% -1.59%

February’12 20.79% 17.23%

March ’12 9.59% 12.36%


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47 | P a g e

April’12 -0.27% -2.10%

May’12 -8.93% -9.09%

June’12 -5.82% 1.83%

July’12 -5.09% -1.53%

August’12 7.98% 3.90%

September’12 2.06% 10.28%

October’12 -2.08% -3.87%

November’12 -6.12% -4.74%

December’12 1.49% -0.08%

Average Return 0.853% 1.575%

Standard Deviation 9.31% 12.65%

Coefficient of Variance 10.92 8.03

The average monthly return for AMCL is 1.575% whereas it is 0.853% in the market. In

comparisons, the average return is favorable for the company. But, the variability of AMCL’s

return is higher than the market return, which satisfies that investors has to take higher risk to

take advantage of its higher return from that of the market risk. However, AMCL has lower risk

per unit than that of other companies in the market. So, AMCL is considered to be a betterinvestment than that of other companies in the market.


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48 | P a g e

y = 0.2269x + 0.0221R² = 0.0289

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

-0.4 -0.2 0 0.2 0.4

A x i s T i t l e

Axis Title

Scatter Diagram

Stock Return

Linear (Stock Return)


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49 | P a g e

5. Market return for the period

Beta for AMCL

The beta of AMCL is 0.1266

β =0.1266

=0.66% Monthly

=7.92% Annually

=5%, as per course instructor suggested

So the required rate of return would be

=+ (-)*β

=.05+ (.0792-.05)*.1266

=.05+ (.0292)*.1266

=.05+.003697

=.053697

=5.37% Annually


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50 | P a g e

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.169859

R Square 0.028852Adjusted RSquare 0.012108StandardError 0.12369Observations 60

ANOVA

df SS MS F

Significan

ce F

Regression 1 0.0263620.02636

21.72313

4 0.194461

Residual 58 0.8873490.01529

9

Total 59 0.913711

Coefficients

Standard Error t Stat P-value

Lower95%

Upper95%

Lower95.0%

Upper95.0%

Intercept 0.022082 0.016011.37929

2 0.1731 -0.00996 0.05413-

0.00996 0.05413

X Variable1 0.226917 0.172865

1.312682

0.194461 -0.11911

0.572943

-0.11911

0.572943


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Cost of financing debt:

Interest Expenses=134,778,793

Total Debt from Bank and Others=584,209,429

Before tax cost of debt=

=

=0.2307

=23.07%

After Tax Cost of Debt,

=Before Tax Cost of Debt*(1-T)

= 0.2307*(1-0.24)

=0.2307*0.76

=0.1753

=17.53%


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Weighted Average Cost of Capital:

Price of Share at 30th June = 128

Number of Common Share Outstanding = 8,000,000

Market Value of Share Capital = (128*8000000)

= 1,024,000,000

Retained Earnings = 306,952,832

Total debt of Bank & Others = 584,209,429

Total Capital = 1,915,162,261

= = 0.0535 = 53.60%

= = 0.16 = 16%

= = 0.305 =30.5%

Tax Rate = 24%

Since the flotation cost is unknown, the required rate of return, KE is equivalent to the cost of

issuing share capital.

Market Value for the Retained Earnings and Debt is equivalent to their Book Value

WACC = (Weight of Debt * After-Tax Cost of Debt) + (Weight of Share Capital * Cost of

Issuing Share Capital) + (Weight of Retained Earnings * Cost of Retained Earnings)

= (*) + (*) + ( = (0.305*0.1753) + (0.535*0.0537) + (0.16*.0537)

=0.091 =9.10%


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6. Optimal Capital Structure

A Firm’s Value, V* = EBIT (1-T) / WACC

As at 31st December, 2011,

AMCL’s EBIT = BDT 205,634,733

WACC = 9.10%

Tax Rate = 24%

So, AMCL’s Value = {205634733*(1-0.24) }/ 0.0910

= BDT 1,717,388,979

As at 30th June AMCL’s Capital Structure consists of 60.04% Debt and (1-0.6024) or 39.96%

Equity.

Now, we’ll assume another 4 different combination of Debt and Equity portion of the company

and calculate the WACC for those different combinations. The after-tax cost of Debt and the cost

of Equity will remain the same, (17.53% and .0537% respectively) as the previous WACC

calculation. With those 4 different WACC for 4 different combinations, we’ll analyze the best

combination for which the firm’s value is maximized. The analysis is shown below.

Combination WACC Firm’s value

Debt Equity Calculation % EBIT*(1-T)/ WACC BDT

50% 50% .50*.1753+.50*.0537 11.45% 205634733*.76/.1145 136491176555% 45% .55*.1753+.45*.0537 12.06% 205634733*.76/.1206 1295873939

65% 35% .65*.1753+.35*.0537 13.27% 205634733*.76/.1327 1177713111

70% 30% .70*.1753+.30*.0537 13.88% 205634733*.76/.1388 1125953869

Here, we can observe that the cost of financing debt is much lower than the cost of equity. So,

the more the debt portion of the capital structure, the less the WACC. But too much debt can also

incur addition interest expense. So it’s better for the firm not to rely too much on debt.

We can see that for the combination of 60.04% Debt and 39.96% equity, the firm’s value is

maximized. So company should stick their current capital structure.


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7. Literature review

How the CAPM Helps Corporate Managers

AbstractIn the article of The CAPM Debate by Ravi Jagannathan & Ellen R. McGrattan, it is stated that

the CAPM was developed, at least in part, to explain the differences in risk premium across

assets. According to the CAPM, these differences are due to differences in the riskiness of the

returns on the assets. The model asserts that the correct measure of riskiness is its measure —

known as beta — and that the risk premium per unit of riskiness is the same across all assets.

Given the risk-free rate and the beta of an asset, the CAPM predicts the expected risk premium

for that asset. In this section, we will derive a version of the CAPM. The CAPM is actually

consistent with the average return differences Models like the capital asset pricing model (the

CAPM) help corporate managers by providing them with a practical way to learn about how

investors judge the riskiness of potential investment opportunities. This helps managers use the

resources of their firms more efficiently. Models like the capital asset pricing model (the CAPM)

help corporate managers by providing them with a practical way to learn about how investors

judge the riskiness of potential investment opportunities. This helps managers use the resources

of their firms more efficiently.


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The Manager's Problem

In modem industrial economies, managers don't easily know what the firm's owners want them

to do. Ownership and management are typically quite separate. Managers are hired to act in the

interests of owners, who hold stock in the corporation but are otherwise not involved in the

business. Owners send some general messages to managers through the stock market. If

stockholders do not like what managers are doing, they sell their stocks, and the market value of

the firm's stock drops. The representatives of stockholders on the firm's board of directors notice

this and turn to the managers for corrective action. In this way, therefore, stock prices act like an

oversight mechanism. They monitor the activities of managers by aggregating the opinions of the

stockholders. However, stock prices don't act fast enough. They don't give managers specific

directions ahead of time about which projects to pursue and which to avoid. Managers must

make these capital expenditure decisions on their own and then later find out, by the stock

market's reaction, whether or not the firm's owners approve.

Disapproval can be costly. In the United States in 1992, for example, capital expenditures by the

corporate business sector (excluding farming and finance) totaled $397 billion (or 6.6 percent of

the annual gross domestic product). These expenditures usually cannot be recovered if

stockholders disapprove of them.

The Classic Solution

In view of this, capital budgeting has a central role in both the theory and the practice of

managerial finance. Theory suggests one simple rule for corporate managers to follow when

making capital expenditure decisions: Maximize the value of the firm. Then, if some

stockholders disagree with management decisions, they can sell their stock and be at least as well

off as if management had made different decisions. This idea is the basis for the classic

theoretical recommendation that managers only invest in those projects which have a positive net

present value.

In practice, however, following that simple rule is not simple. It requires, among other things,

estimating the net present value of every project under consideration. Corporations thus spend a

substantial amount of resources evaluating potential projects.


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A key input to that process is the cost to the firm of financing capital expenditures, known more

simply as the cost of capital. This is the expected rate of return that investors will require for

investing in a specific project or financial asset. The cost of capital typically depends on the

particular project and the risk associated with it. To be able to evaluate projects effectively,

managers must understand how investors assess that risk and how they determine what risk

premium to demand.

The CAPM's Role

Providing such an understanding is the focus of most research in the area of asset pricing. An

asset pricing model provides a method of assessing the riskiness of cash flows from a project.

The model also provides an estimate of the relationship between that riskiness and the cost of

capital (or the risk premium for investing in the project).

According to the CAPM, the only relevant measure of a project's risk is a variable unique to this

model, known as the project's beta. In the CAPM, the cost of capital is an exact linear function of

the rate on a risk-free project and the beta of the project being evaluated. A manager who has an

estimate of the beta of a potential project can use the CAPM to estimate the cost of capital for the

project.

If the CAPM captures investors' behavior adequately, then the historical data should reveal a

positive linear relation between the average return on financial assets and their betas. Also, noother measure of risk should be able to explain the differences in average returns across financial

assets that are not explained by CAPM betas. Empirical studies of the CAPM have supported this

model on both of those points — until recently, as the accompanying article describes.


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Beta coefficient:

Numerous studies have been done in the field of market risk management. The measure of risk is

one of the most prominent topics in the investment community and it is because of the curiosity

among academicians and the investors concern of the degrading performance of previously

favored funds. Risk management of investing in corporate securities is under active and

extensive discussion among capital market operators. Risks being a integral part of business exist

everywhere from owning a company to owning a few common stocks of it.

Risk may be defined in terms of the uncertainty of rates of return. One characteristic that

measures risk in quantative terms is the variability of return (Robert A Levy, 1971). Evidence

collected over the years indicate that common stock investors demand and receive increasedvariability of return which indicates that variability and risk are related. Works by Breeden,

Grossman and Shiller (1979), and others emphasizes the joint nature of the consumption decision

and the portfolio allocation decision. But regardless to portfolio allocation or diversification one

risk cannot minimized is the systematic risk of market or the beta coefficient.

It is agreed that the systemic risk or beta coefficient of a market is stationary but still there are

some theory which suggests the non-stationary assumes of beta. Betas are non-linear functions of

their market weights through which they are linked to the market return process. (T. Ziemba,

1983). This systematic risk or default risk serves as a deciding factor for numerous other

variables. One of which is the price and return from common stocks.

Minimizing the risks in investing is one of the biggest concern. It can be done with a few basic

steps. Investors should not to buy unlisted shares, as Stock Exchanges do not permit trading in

unlisted shares. (Grewal S.S & Grewall, 1984). They presented some basic rules of selling

shares. Rule that they specify is not to buy inactive shares, ie, shares in which transactions take

place rarely. The main reason why shares are inactive is because there are no buyers for them.

They are mostly shares of companies, which are not doing well. A third rule according to them is


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not to buy shares in closely-held companies because these shares tend to be less active than those

of widely held ones since they have a fewer number of shareholders. They caution not to hold the

shares for a long period, expecting a high price, but to sell whenever one earns a reasonable

reward.

Avijit Banerjee28 (1998) reviewed Fundamental Analysis and Technical Analysis to analyze the

worthiness of the individual securities needed to be acquired for portfolio construction. The

Fundamental Analysis aims to compare the Intrinsic Value (I..V) with the prevailing market

price (M.P) and to take decisions whether to buy, sell or hold the investments. The fundamentals

of the economy, industry and company determine the value of a security. If the 1.V is greater

than the M.P., the stock is under priced and should be purchased. He observed that the

Fundamental Analysis could never forecast the M.P. of a stock at any particular point of time.

Technical Analysis removes this weakness. Technical Analysis detects the most appropriate time

to buy or sell the stock. It aims to avoid the pitfalls of wrong timing in the investment decisions.

He also stated that the modern portfolio literature suggests 'beta' value p as the most acceptable

measure of risk of a scrip. The securities having low P should be selected for constructing a

portfolio in order to minimize the risks.

David.L.Scott and William Edward4 (1990) reviewed the important risks of owning common

stocks and the ways to minimize these risks. They commented that the severity of financial risk

depends on how heavily a business relies on debt. Financial risk is relatively easy to minimise if

an investor sticks to the common stocks of companies that employ small amounts of debt. They

suggested that a relatively easy way to ensure some degree of liquidity is to restrict investment in

stocks having a history of adequate trading volume. Investors concerned about business risk can

reduce it by selecting common stocks of firms that are diversified in several unrelated industries.

Carter Randal7 (1992) offered to investors the underlying principles of winning on the stock

market. He emphasized on long-term vision and a plan to reach the goals. He advised the


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investors that to be successful, they should never be pessimists. He revealed that though there

has been a major economic crisis almost every year, it remains true that patient investors have

consistently made money in the equities market. He concluded that investing in the stock market

should be an un-emotional endeavor and suggested that investors should own a stock if they

believe it would perform well. He observed that risk measurement and estimation problems

constrain the speed of up-gradation. Also, inadequate availability of skills in using quantitative

risk management models and lack of risk hedging investments for the domestic investors are

major constraints. He concluded that with the beginning of a derivative market, new instruments

of risk hedging would become available


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8. Intrinsic Value

Non-Constant ModelWe assumed that AMCL will follow a non-constant super-normal growth till 2014, and then it

will gauge using a 5% constant growth rate.

The super-normal growth rate till 2013 is 4.67%. (This Dividend Growth Rate calculation is

shown in appendix part.)

Given,

= = BDT 3.07

= 5.37%

g=5%

=3.07*(1+.0467) =4.50=4.50*(1+.0467) =6.60=6.60*(1+.0467) =9.68 Now,

=

=

= 2616.32

= +

+

=+

+

=4.29+5.99+2372.99

=2383.27


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Corporate Valuation Model:

We assumed that AMCL will follow a non-constant super-normal growth till 2014, and then it

will gauge using a 5% constant growth rate as well.

Free Cash Flows or FCFs are given below. The calculation and growth rate are shown in

appendix.

The super-normal growth till 2014 is 6.15%.

=115482341*(1+0.0615) = 122584505=122584505*(1+0.0615) = 130123452=130123452*(1+0.0615) = 138126044 Now,

= =

=3733136330

= +

+

=

=116337198+117198382+33623265540

=33856801120

So, Total Intrinsic value of the corporation =33856801120

Total Debt from bank and others = 584209429

Total intrinsic value equity =33272591690

Total number of common share outstanding= 8000000

Intrinsic value of stock = 4159


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Price to Earnings Multiple Approaches:

= *EPS

=Industry PE ration* Company EPS

=26.19*6.53

=174.29

Analysis of the Stock price

The market price of AMCL was BDT 138.00 on 30th June, 2012. If the investors gauge the fair

price of the share only considering future expected flow of dividend, then the fair price is BDT

2383.27. As compared, the fair price is much higher than that of its market value, so the market

price is undervalued.

However, if investors measure the fair value based on the free cash flow that the company is

expected to generate, then the fair value is BDT 4159. On other hand, the market price was BDT

138. In comparison, the stock priced is undervalued.

On the contrary, if the investors measure the fair value based on P/E multiple approach, then thefair value is BDT 174.2857, which is higher than the market price of BDT 138. In this case, the

market price is undervalued.


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9. Dividend Policy:

Dividend policy is a significant decision taken by the financial managers of any company and is

crucial in deciding keeping shareholders happy along with retaining the required income for

farther investment. For any company to be successful they have to make the right blend of how

much to give as dividend and how much to keep as retained earnings for farther investment. Till

date, researches have not drawn any one just conclusion for dividend policy. However,

researchers tend to follow 3 popular views about this matter.

View 1: “Dividend Policy is Irrelevant”:

Dividend irrelevancy theory asserts that a firm's dividend policy has no effect on its market value

or its cost of capital. When shareholders count their total income, they do not take into account

how much of their total income has come from capital gain yield or from dividend yield as they

only care how much they have received. However, this is on the assumption that

1) Perfect Capital markets exists and that there are no taxes, (corporate or personal), no

transaction costs on securities, investors are rational, information is symmetrical - all investors

have access to the same information and share the same expectations about the firm's future as its

manager.

2) The firm's investment policy is fixed and is independent of its dividend policy

Total Return= Capital Gain Yield +Dividend Yield

View 2: “High Dividend Increases Stock Value”:

This position is based on “bird-in-the-hand theory”, which argues that investors may prefer

“dividend today” as it is less risky compared to uncertain future capital gains. This implies a

higher required rate for discounting a dollar of capital gain than a dollar of dividend. Hence

investors are more concerned about the dividend yield of the total return and want to be certain

about it. When a company promises a particular dividend to be paid, then usually the dividend is

actually paid according to the promise. Also, it is possible for the investors to check for the

possibility of the dividends. Therefore, in the market, those shares with more dividend yield are

often the ones with higher prices, as they are more in demand by investors because more value is

put on the return that has more certainty.

View 3: Low Dividends Increase Stock Value:

The first propriety of people in any business is always to maximize their “after tax income”.

Dividend tax rate is quite high compared to that of capital gain. Therefore it is the capital gain


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yield that ends up with higher income and is preferred by the investors. Along with it when

dividend is paid to investors it is actually devoid the tax meaning the tax is cut off from the

amount immediately. Whereas in capital gain yield the investor can actually defer the tax until

the yearly taxpaying date. Hence investors who are more concerned about after tax income are

more attracted to companies giving low dividends. This in return creates demand for shares with

higher capital gain and thereby raising the prices as well. So we can conclude that low dividends

increase stock value.

DIVIDEND PAYOUT PLANS

1) Stable Dol

final term paper (pran)

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