Project on Corporate Finance

Comprehensive Analysis

Corporate Finance
Final Project
Submitted to: Sir Kashif Submitted by: Ali Raza 2010-ag-567 Muhammad Faisal 2010-ag-905 Abdul Rehman 2010-ag-626 Anees Ahmed 2010-ag-801

MBA (R) Semester 3rd

University of Agriculture, Faisalabad

Acknowledgements
We find no words at our command to express deepest sense of gratitude of Almighty Allah the most gracious and the most beneficent, who endowed me with potential and ability to make solid contribution to the already existing oceans of knowledge and we feel proud of offering thanks for the Holy Prophet (PBUH) who is, forever a touch of guidance and knowledge for humanity as a whole. It gives us great pleasure to express our gratitude to estimable course co-ordinator Sir Kashif Hameed, IBMS, University of Agriculture Faisalabad whose guidance is always with us whenever we found our self in difficulty, who always encourage us, and his guidance helps us to this manuscript. We would like to record sincerest thanks to our fellows and wish to extend our cordial thanks to each other for excellent co-operation and time-to-time constructive criticism in the executive research work. This work remained incomplete if we dont pay our sense of obligation to our loving parents. They are always there to boost up our morals and give us new vigor to take our work to fruition and accomplished a great deal in our career. Ali Raza Muhammad Faisal Abdul Rehman
Anees Ahmed

Table of Contents

Sr. No

Topics

Page No.

Acknowledgement

Lease v/s Debt 3

Fixed Assets Schedule

24

Capital Budgeting Techniques

26

Leverage Analysis

28

Working Capital Management

30

Projected Cash Flow & Financial Statements, WACC

34

Lease vs. Debt Purchase Decision

Lease:
Lease arrangement is a contract in which the right to use the fixed assets is transfer by the lesser to the lessee against some predefined rental payments.Now we are analyzing the investment of Fuji fertilizer co. whether they are going for lease rental or they going to purchasing their assets focusing on which could be given better benefits to the company. We compute and analyze the 2010 investment to determine that which option is best suitable for company.

Lease Option:
So in this concern we have the following data of Fuji fertilizer co. for computation and analysis. Assets = 1101352000 Tax rate = 35% period = 5 years Nominal Interest rate = 13.8%

Lease Installment = 280599235 All the installment would be paid at the beginning of the year. Effective interest rate = 13.8% * (1-35%) = 8.97% Equal Installment computation: PV = PMT * (1-1/ (1+i)^n)/I * (1+i) PV = PMT * (PVIFAn, i) * (1+i) 1101352000 = PMT * 3.925 PMT = 280599235

PV of cash outflow in case of lease option:

End year 0 1 2 3 4 5

of Lease payment

Tax Shields 98209732 98209732 98209732 98209732 98209732

Tax Shields PV of benefits outflow 280599235 182389503 182389503 182389503 182389503 (98209732) 280599235 167375886 153598133 140954514 129351669 (63917499)

cash

280599235 280599235 280599235 280599235 280599235

Total PV of cash outflow in lease option

===> 807961938

Debt purchase option:

In this option we are focus on to purchasing such assets through our financing for our investment purpose rather than we taking on leasing. In this case we are the owner of such assets after purchasing. So in this concern we are computing and analyzing the debt purchase decision for Fuji fertilizer co. whether it can be a fruitful decision for company or not. We have such type of data through which we are computing the debt purchase option and then compare with the lease option which will for more suitable for us we consider that option for investment purpose. So in this concern we have the following data of Fuji fertilizer co. for computation and analysis.

Data:
=> Assets = 1101352000 => Installment = 280599235 => No of years = 5 => No residual value All the installment would be paid at the beginning of the year. => Nominal Interest rate = 13.8% => => Effective Interest rate = 8.97% Depreciation = Straight line method

Amortization Table
End of year Payment Beginning year Interest principle Principle Ending year principle

0 1 2 3 4

280599235 280599235 280599235 280599235 280599235

1101352000 820752765 653417411 462989778 246283132

113263881 90171602 63892589 33987072

280599235 167335354 190427633 216706646 246233132

820752765 653417411 462989778 246283132 0

PV of cash outflow in case of Debt Purchase option:

a End of year 0 1 2 3 4 5 Payment b A. interest c Depreciation D= E = a-d (b+c)*.35 Tax shield Cash benefits outflow after tax 280599235 116736998 108654701 99457046 88990115 77094640 163862237 171944534 181142189 191609120 (77094640) F = E/(1+i)^n PV of cash out flow after tax 280599235 150373714 144801971 139990563 135890273 (50175237)

280599235 280599235 280599235 280599235 280599235

113263881 90171602 63892589 33987072 -

220270400 220270400 220270400 220270400 220270400

Total PV of cash outflow in debt purchase option ==> 801480519

Comparison and Analysis:

Total PV of cash flow in lease financing option => 807961938 Total PV of cash flow in Debt financing option => 801480519 After computing the both financing option of Fuji fertilizer co. we have seen that debt option will be best for us in any type of assets financing. We have seen that debt financing little bit beneficial for company because in debt financing company has lower present value of cash flow rather than lease financing has more Present value of cash flow. So after comparing both modes company should want to going for debt financing because company has more benefit in debt financing rather than in lease financing.

Fixed Asset schedule

Fixed Assets turnover ratio:
A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. The fixed-asset turnover ratio is calculated as:

Fixed Assets turnover = Net Sales / Fixed Assets Now we compare the particular ratio of Fuji fertilizer for 3 years. 2010 (000) 2009 (000) =44874359/25837214 Ratio 1.74 =36163174/23634126 1.53

2008 (000) =30592806/22209452 1.38

So in this comparison we seen that fixed assets generating more and more sales after year by year. That mean company using their assets more effectively and efficiently to achieving their target. If we considering the 2008 as base year than we see that more than 25% sales are increases by their fixed assets through out the years.

Return on Fixed Assets Ratio:

In this particular ratio we are see that how much profit we generate from our fixed assets. The return on fixed-asset ratio is calculated as: Return on Fixed Assets = NPAT / Fixed Assets Now we compare the particular ratio of Fuji fertilizer for 3 years. 2010 (000) 2009 (000) =11028849/25837214*100 Ratio 43% =8823106/23634126*100 37%

2008 (000) =6525083/22209452*100 30%

So in this comparison we seen that return on fixed assets re increased throughout the years that mean Fuji fertilizer co. was generating the profit every year more and more which indicate that their fixed assets are using very efficiently.

Fixed Assets to Total Assets Ratio:

In this particular ratio we have seen that how much part of Fuji fertilizer co. Fixed assets have in their total assets. The fixed-asset to total assets ratio is calculated as:

Fixed Assets to Total Assets = Fixed Assets / Total Assets Now we compare the particular ratio of Fuji fertilizer for 3 years. 2010 (000) 2009 (000) =25837214/43060856 Ratio 0.60:1 =23634126/38551582 0.61:1

2008 (000) =22209452/31918963 0.70:1

This particular ratio tells us part of fixed assets in our total investment. So in this comparison we seen that Fuji fertilizer co. are decreasing their fixed assets throughout the years that mean they increase their current assets which also indicate to increase liquidity but the management of Fuji fertilizer are manage their assets very efficiently which indicate to increase the sales and profitability. So in this concern they have good portion of fixed assets in their investment.

Capital Budgeting Techniques

Net present value:

Year 2011 2012 2013 2014 2015

Cashflow 310711 0.8787 303461 201296 165063 135351

PVIFi,n

PV

273022 234302.2 136579.3 98410.5 70910.3 -----------813224

0.7721 0.6785 0.5972 0.5239

*Initial investment = 2989318 *Interest rate = 13.8%

Net present value = sum of PV - Initial investment NPV = 813224-2989318 NPV = -2176094

As NPV < 0 So reject the project.

Profitability Index:

Net present value of cash flow Initial investment

813224 2989318

=0.2720

As profitability index < 1 so reject the project

Note: Here we cannot apply the remaining 2 techniques of capital budgeting because the total amount
of projected cash flow of 5 years does not recover the amount of investment.

LEVERAGE ANALYSIS

2008-2009
Degree of operating leverage =% change in EBIT/% change in SALE -173.67 % /-49.87 % 3.482 %

Decision Criteria:
If DOL is > 1 the operating leverage exist. 3.482% > 1 the operating leverage exist.

Supporting Calculation:
Calculation of % change in EBIT: 2008 EBIT 2009 EBIT 601518 1646233= -1044715 -1044715/601518=-1.7367 or -173.67 % Calculation of % change in SALE: 2008 SALE 2009 SALE 3545902 5314538=-1768636 -1768636/3545902=-0.4987 or -49.87 %

Degree of financial leverage= % change in EPS/ % change in EBIT -76.62 %/-173.67 % 0.4411 %

Decision Criteria:
If DFL > 1 the financial leverage exist. 0.4411 % > 1 the financial leverage not exist.

Supporting Calculation:

Calculation of % change in EPS: 2008 EPS -2009 EPS 0.77-1.36=-0.59 -0.59/0.77=-0.7662 or -76.62 %

Degree of total leverage= % change in EPS/ % change in SALES -76.62 %/-49.87 %= 1.5363 % The relationship of OPERATING, FINANCIAL,& TOTAL LEVERAGE: Degree of total leverage= DOL * DFL 3.482 * 0.4411=1.5359 %

2009-2010
Degree of operating leverage=% change in EBIT/% change in SALE 77.76 % /28.33 %=2.7447 %

Decision Criteria:
If DOL is > 1 the operating leverage exist. 2.7447 > 1 the operating leverage exist.

Supporting Calculation:
Calculation of % change in EBIT: 2009 EBIT 2010 EBIT 1646233-366117=1280116 1280116/1646233=0.7776 OR 77.76 % Calculation of % change in SALE: 2009 SALE- 2010 SALE 5314538-3808455=1506083 1506083/5314538=0.2833 or 28.33 % Degree of financial leverage = % change in EPS / % change in EBIT 77.94 %/ 77.76 %= 1.00

Decision Criteria:
If DFL is > 1 the financial leverage exist. 1.0 > 1 the financial leverage exist.

Supporting Calculation:
Calculation of % change in EPS: 2009 EPS 2010 EPS 1.36- 0.30= 1.06 1.06/1.36=0.7794 or 77.94 % Degree of total leverage= % change in EPS / % Change in SALE 77.94% / 28.33%=2.7511 % The RELATIONSHIP of OPERATING, FINANCIAL, & TOTAL LEVERAGE Degree of total leverage =DOL * DFL 2.7447 * 1.00 = 2.7447

Working Capital
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing shortterm debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Return on Investment- ROI

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.

2008
Return on investment= Net profit after tax/total assets 413598/5294083+7160410 413598/12454493=0.0332 or 3.320 %

Comment:
In 2008 the return on investment of FAUJI CEMENT COMPANY LIMITED is 3.320 % as compare to 2009 in which return on investment is 4.4689 %.it means that the company is inefficient to utilize its assets in 2008 thats why the company generate less sale and profit is also less. liquidity of the company is high thats why the return & risk is low.

2009
Return on investment=Net profit after tax / total assets 1007623/1654014+19792487 1007623/21446501=0.04698 or 4.698 %

Comment:
In 2009 the return on investment of the company is 4.698 % as compare to 2008 in which return on investment is 3.320 %. In this circumstances the return on investment is high and liquidity of the company is low and risk & return is high. Now the company is better position and they generate more profit.

2010
Return on investment= Net profit after tax / total assets 250179 / 2070718+24709281 250179 / 26779999= 0.9342 %

Comment:
In 2010 the return on investment of the FAUJI CEMENT COMPANY LIMITED is 0.9342 % is not better position as compare to 2009 in which return on investment is 4.698 %. In 2010 the company have a good strength but not utilize its strength thats why the company not generate the sale. In this circumstances the liquidity of the company is high risk & return of the company is low.

WORKING CAPITAL SHOWN AS GRAPHICALLY

Projected Cash Flows

For the Year Ended June 30, 2011
Years Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Increase/Decrease in Cash & Equivalents Cash & Equivalents at Beginning of Year Cash & Equivalents End of Year 2011 Rupees000 310711 2012 Rupees000 303461 2013 Rupees000 201296 2014 2015 Rupees000 Rupees000 165063 135351

(4165116) 8765869 4911464 125580 5037044

(4984255) 19927742 15246983 5037044 20283992

(5316539) 59783226 54667983 20283992 74951975

(6486178) 105417755 9909664 74951975 174048615

(7545587) 141611184 134200948 174048615 308249563

160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 -20000000 2011 2012 2013 2014 2015 Cash Flow from Investing Activities Cash Flow from Financing Activities Cash Flow from Operating Activities

Projected Income Statement

For the Year Ended June 30, 2011
Particulars Net Sales Cost of Goods Sold Gross Profit Other Income Distribution Expense Administration Expense Other Operating Expense Finance Cost Net profit before Taxation Taxation Net profit After Taxation Preferred Share Dividend Earnings Available for Common Shareholders Earning Per Share Rupees000 4087742 (3188439) 899303 30568 (50919) (118082) (27157) (33240) 700473 (245166) 455307 (66885) 388422 0.56 Description Based on Average growth rate of 3 years Based on average C.G.S/Sales ratio of 3 years Balancing Figure Based on Average growth rate of 3 years Based on Average growth rate of 3 years Based on Average growth rate of 3 years Based on Average growth rate of 3 years Based on Projected Debts Balancing Figure 35% of EBT Balancing Figure Projected Dividend Balancing Figure EACS/No. of Shares

Projected Balance Sheet

As at June 30, 2011
Liabilities
2010 Rs.000 7419887 2190798 9610685 11909030 788363 1698674 349130 865727 1071384 26779999 Change Rs.000 -----883622 883622 4188249 302206 (1503326) 230426 681039 674972 4970182 2011 Rs.000 7419887 3074420 10494307 16097279 1090569 195348 579556 1546766 1746356 31750181

Share Capital & Reserves Reserves Non-Current Liabilities: Long Term Financing Deferred Liability Current Liabilities: Trade & Other Payable Markup Accrued Short-term Borrowing Current Portion of Long Term Financing Total Liabilities & Shareholders Equity

Assets
2010 Rs.000 Non-Current Assets: Property, Plant & Equipment Long Term Advance Long Term Deposits Current Assets: Stores Spares & Loose tools Stock in Trade Trade Debts Advances Trade deposits, short term prepayments & balances with statutory authority Interest Accrued Other Receivables Cash & Bank balances Total Assets 23819040 5400 884841 1060533 96684 24514 46981 601364 567 47858 192217 26779999 Change 2011 Rs.000 27796819 4725 778660 1449395 158314 31541 59081 799507 1085 25205 645849 31750181

3977779 (675) (106181) 388862 61630 7027 12100 198143 518 (22653) 453632 4970182

Weighted Average Cost of Capital

Cost of Debt
Kd Before Tax = Interest Paid/Long Term Debts For 2008 = 129928/325000 = 0.40 For 2009 = 82672/6224224 = 0.013 For 2010 = 13389/11909030= 0.00112 Kd After Tax = Kd Before Tax (1-Tax) For 2008 = 0.40(1-0.35) = 26% For 2009 = 0.013(1-0.35) = 0.845% For 2010 = 0.00112(1-0.35) = 0.007%

Cost of Common Stock

Kc = Dc/Vc For 2008 = 0.5/10 = 5% For 2009 = 55/6932895 = 0.0008% For 2010 = 7/6932895 = 0.0001%

Cost of Preferred Stock

Kp = Dp/Vp For 2008 = 0.17/10 = 1.7% For 2009 = 0.34/10 = 3.4% For 2010 = 0.68/10 = 6.8%

Partial Balance Sheet

2008 Rs.000 325000 6932895 486992 7744887 2009 Rs.000 6224227 6932895 486992 13644114 2010 Rs.000 11909030 6932895 486992 193289917

Long Term Debts Common Stock Preferred Stock

Weighted Average Cost of Capital

WACC-2008 Cost of Debt Cost of Common Stock Cost of Preferred Stock Cost 26% 5% 1.7% Weight 0.04 0.90 0.06 1.00 WACC 1.04% 4.50% 0.102% 5.642%

WACC-2009 Cost of Debt Cost of Common Stock Cost of Preferred Stock

Cost 0.845% 0.0008% 3.4%

Weight 0.46 0.50 0.04 1.00

WACC 0.3887% 0.0004% 0.136% 0.5251%

WACC-2010 Cost of Debt Cost of Common Stock Cost of Preferred Stock

Cost 0.07% 0.0001% 6.8%

Weight 0.62 0.36 0.02 1.00

WACC 0.0434% 0.000036% 0.136% 0.1794%