Page |1
FIN440 (Corporate Finance) Section: 02
Submitted To: Riyashad Ahmed (RYA) Course Instructor School of Business
Prepared By: Tanvir Rahman Anik
1030413530
Adiba Azad
1030623030
Abdullah Al Rafi
1110129530
Md. Nasimul Islam
1110153030
Saadman Mahmud Khan 1110308030 Md. Azharul Haque
1030048030
Page |2
th
Date of Submission: 12 December, 2012
Letter of Transmittal
December 12, 2012 Riyashad Ahmed Lecturer North South University
Dear Sir, We are submitting to you the term paper entitled „ Financial Report Analysis of Renata Limited’ due on December 12, 2012.The term paper consists of an in-depth analysis of the financial report of Renata Limited which consists of concepts such as ratio analysis, forecasting, market return, company return and intrinsic share price along with notes thereon for your record/necessary measures.
Sincerely, Tanvir Rahman Ra hman Anik
1030413530
Adiba Azad
1030623030
Abdullah Al Rafi
1110129530
Md. Nasimul Islam
1110153030
Saadman Mahmud Khan
1110308030
Md. Azharul Haque
1030048030
Page |3
Executive Summary
The term paper provides a complete in-depth financial analysis of Renata Limited. 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 2011 and 2012 are provided to give a slight insight about Renata Limited'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 Renata Limited‟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 Renata Limiteds Dividend policy is shortly briefed. The complete report gives a thorough analysis of Renata Limited's financial performance over the years.
Page |4
CONTENTS Page Number
Introduction
05
Common size statements
06
Ratio analysis: o o o o o o
Liquidity ratios Asset management ratios Profitability ratios Debt ratios Stock market ratios Du-Pont equation
17
Risk and return analysis
35
Beta calculation
38
Cost of debt financing
43
Calculation of Weighted Average Cost of Capital
43
Optimum capital structure
44
Calculation of intrinsic value of share
46
Dividend policy analysis
49
Appendix
Page |5
INTRODUCTION Renata Limited (formerly Pfizer Limited) is one of the leading and fastest growing pharmaceutical and animal health product companies in Bangladesh. The company started its operations in 1972 as Pfizer (Bangladesh) Limited. In 1993, Pfizer transferred the ownership of its Bangladesh operations to local shareholders and the name of the company was changed to Renata Limited. Renata has five manufacturing facilities on two separate sites. The original 12acre site is located in Mirpur, Dhaka, while the new 19 -acre site located in Rajendrapur, Gazipur began operations in 2009 currently employs about 2300 people in its head office in Mirpur, Dhaka.
Page |6
Common sized Statements: Statements: 2.(a)
Renata Limited Vertical Balance Sheet (all figures divided by Total Assets & expressed as %) As at 31st December Balance Sheet
Standard
2007
2008
2009
2010
2011
Average
36.98%
32.08%
36.26%
49.97%
49.18%
40.89%
8.15%
14.20%
18.03%
19.14%
7.09%
17.82%
15.26%
4.93%
2.93%
1.99%
1.64%
1.23%
0.82%
1.72%
0.81%
Other investment
0.046%
0.27%
0.31%
1.15%
0.15%
0.39%
0.44%
Total non-current assets
54.15%
52.37%
57.34%
59.44%
67.97%
58.25%
6.08%
30.72%
30.34%
27.92%
25.40%
20.61%
27%
4.16%
9.04%
10.90%
8.93%
9.53%
8.32%
9.34%
0.97%
3.86%
2.51%
2.10%
2.16%
1.27%
2.38%
0.94%
2.24%
3.89%
3.72%
3.48%
1.84%
3.03%
0.93%
Total current assets
45.85%
47.63%
42.66%
40.56%
32.04%
41.75%
6.08%
Total Assets
100%
100%
100%
100%
100%
100%
0.00%
Deviation
Assets Non-current Assets
Property, plant and equipment Capital work-in-progress Investment in subsidiaries
Current Assets
Inventories Trade and other receivables Advance deposits & prepayments Cash and cash equivalents
Equity and Liabilities
Page |7
Equity attributable to the equity holders of the company
Share capital
4.47%
3.66%
3.75%
3.52%
2.94%
3.67%
0.55%
Revaluation surplus
7.22%
4.90%
4.01%
3.00%
2.06%
4.24%
1.98%
Tax holiday reserve
2.18%
1.67%
2.16%
2.42%
44.76%
10.64%
19.08%
Retained earnings
45.42%
42.33%
47.38%
48.95%
44.76%
45.77%
2.54%
59.29%
52.56%
57.31%
57.90%
51.47%
55.70%
3.47%
4.13%
3.33%
3.22%
2.70%
1.94%
3.06%
0.81%
3.31%
2.58%
2.86%
2.98%
2.57%
2.86%
0.31%
7.44%
5.91%
6.09%
5.68%
4.51%
5.92%
1.05%
16.77%
26.03%
20.63%
22.01%
31.24%
23.34%
5.52%
Creditors for goods
1.76%
4.02%
0.72%
0.62%
0.65%
1.56%
1.46%
Accrued expenses
4.55%
4.21%
4.46%
4.30%
4.25%
4.36%
0.15%
Other liabilities
5.72%
2.53%
6.16%
5.80%
4.47%
4.93%
1.49%
Unclaimed dividend
0.12%
0.10%
0.10%
0.10%
0.09%
0.10%
0.01%
Provision for taxation
4.36%
4.65%
4.52%
3.61%
3.32%
4.09%
0.59%
Total current liabilities
33.28%
41.53%
36.60%
36.43%
44.02%
38.37%
4.32%
Total liabilities
40.71%
47.44%
42.69%
42.12%
48.53%
44.30%
3.47%
Total equity and
100%
100%
100%
100%
100%
100%
0.00%
Total equity attributable to the equity holders
Liabilities Non-current liabilities
Deferred liability-staff gratuity Deferred tax liabilities Total non-current liabilities Current liabilities
Bank overdraft and short term loan
Page |8
liabilities
Renata Limited Vertical Income Statement (All figures divided by Sales & expressed as %) For the year ended 31 st December Standard
Income Statement
2007
2008
2009
2010
2011
Turnover
100.00%
100.00%
100.00%
100.00%
100.00%
100%
0%
Cost of Sales
(51.26%)
(49.41%)
(46.67%)
(47.25%)
(47.54%)
(48.4%)
1.89%
Gross Profit
48.74%
50.59%
53.33%
52.72%
52.46%
51.6%
1.89%
(27.50%)
(27.35%)
(28.68%)
(27.07%)
(26.12%)
(27.3%)
0.92%
Operating profit
21.71%
23.74%
24.86%
25.65%
26.34%
24.5%
1.82%
Other income
0.46%
0.499%
0.206%
0.118%
0.329%
0.32%
0.16%
0.02%
0.004%
0.024%
0.0117%
0.054%
0.02%
0.02%
Interest on overdraft
(2.27%)
(2.825%)
(2.551%)
(2.307%)
(3.303%)
(2.7%)
0.43%
Other expenses
(0.13%)
(0.191%)
(0.173%)
(0.161%)
(0.142%)
(0.16%)
0.02%
(0.92%)
(0.987%)
(1.055%)
(1.109%)
(1.103%)
(1.03%)
0.08%
18.41%
19.74%
21.099%
22.202%
22.069%
20.7%
1.62%
Average
Deviation
Operating expenses
Administrative, selling and distribution expenses
Gain/(loss) on disposal of property, plant and equipment
Contribution to WPPF Profit before tax
Page |9
Tax expenses
Current tax
(4.81%)
(5.387%)
(4.889%)
(4.624%)
(4.615%)
(4.9%)
0.31%
Deferred tax
(0.35%)
(0.334%)
(0.738%)
(0.838%)
(0.771%)
(0.6%)
0.24%
13.26%
14.019%
15.472%
16.74%
16.683%
15.2%
1.57%
-
-
-
(0.023%)
(0.000099%
(0.01%)
0.02%
-
-
-
-
(0.448%)
(0.45)
-
-
-
-
16.718%
16.728%
16.7%
0.01%
0.0000115%
0.0000097%
0.0000086%
0.00000074%
0.00000074%
0.000006 %
0.000005 %
Net Profit after tax for the year
Other Comprehensive Income
Gain/(Loss) on Marketable Securities
)
(unrealized) Exchange differences arising on transaction (unrealized) Total Comprehensive Income for the Year
Basic Earning per share
P a g e | 10
2. (b)
Renata Limited Horizontal Balance Sheet (2007 as Base Year) As at 31 December Balance Sheet
2007
2008
2009
2010
2011
Property, plant and equipment
100%
127.31%
175.23%
321.84%
474.73%
Capital work-in-progress
100%
186.38%
240.85%
118.96%
447.81%
Investment in subsidiaries
100%
100.00%
100.00%
100.00%
100.00%
Other investment
100%
837.78%
1193.10%
5896.51%
1133.39%
Total non-current assets
100%
141.93%
189.24%
261.43%
447.98%
Inventories
100%
144.05%
162.43%
196.92%
239.44%
Trade and other receivables
100%
176.77%
176.59%
251.09%
328.76%
Advance deposits & prepayments
100%
95.41%
96.36%
133.25%
117.41%
Cash and cash equivalents
100%
255.19%
296.84%
369.65%
292.74%
Total current assets
100%
152.42%
166.29%
210.68%
249.38%
Total Assets
100%
146.74%
178.72%
238.16%
356.92%
Share capital
100%
120.00%
150.00%
187.50%
234.38%
Revaluation surplus
100%
99.69%
99.38%
99.08%
101.85%
Tax holiday reserve
100%
112.80%
177.85%
264.96%
280.49%
Retained earnings
100%
136.75%
186.43%
256.69%
351.74%
Assets Non-current Assets
Current Assets
Equity and Liabilities Equity attributable to the equity holders of the company
P a g e | 11
Total equity attributable to the equity 100%
130.09%
172.77%
232.58%
309.85%
Deferred liability-staff gratuity
100%
118.30%
139.61%
155.75%
167.67%
Deferred tax liabilities
100%
114.25%
154.38%
213.98%
277.43%
Total non-current liabilities
100%
116.50%
146.19%
181.67%
216.54%
Bank overdraft and short term loan
100%
227.72%
219.77%
312.45%
664.77%
Creditors for goods
100%
335.12%
73.55%
83.72%
132.27%
Accrued expenses
100%
135.64%
175.32%
225.23%
861.98%
Other liabilities
100%
64.88%
192.68%
241.38%
906.75%
Unclaimed dividend
100%
127.68%
159.39%
207.80%
263.59%
Provision for taxation
100%
156.49%
185.41%
196.98%
271.70%
Total current liabilities
100%
183.16%
196.60%
260.72%
472.18%
Total liabilities
100%
170.98%
187.38%
246.28%
425.47%
Total equity and liabilities
100%
146.74%
178.72%
238.16%
356.92%
holders
Liabilities Non-current liabilities
Current liabilities
P a g e | 12
Renata Limited Horizontal Income Statement (2007 as Base Year) For the year ended 31 December Income Statement
2007
2008
2009
2010
2011
Turnover
100%
121.92%
153.93%
200.87%
257.27%
Cost of Sales
100%
117.52%
140.16%
185.18%
238.61%
Gross Profit
100%
123.55%
168.40%
217.36%
276.89%
100%
121.30%
160.56%
197.86%
244.40%
Operating profit
100%
133.31%
176.21%
237.42%
312.13%
Other income
100%
131.41%
68.61%
51.06%
183.03%
100%
23.75%
187.30%
119.55%
708.17%
Interest on overdraft
100%
151.83%
173.13%
204.37%
374.59%
Other expenses
100%
180.71%
206.34%
250.45%
282.20%
Contribution to WPPF
100%
130.65%
176.30%
241.97%
308.22%
Profit before tax
100%
130.71%
176.38%
242.33%
308.35%
Current tax
100%
136.64%
156.56%
193.31%
247.00%
Deferred tax
100%
116.31%
324.23%
480.76%
565.73%
Net Profit after tax for the year
100%
128.94%
179.66%
253.80%
323.80%
-
-
-
100%
0.599%
Operating expenses
Administrative, selling and distribution expenses
Gain/(loss) on disposal of property, plant and equipment
Tax expenses
Other Comprehensive Income
Gain/(Loss) on Marketable
P a g e | 13
Securities (unrealized) Exchange differences arising on transaction (unrealized)
-
-
-
-
100%
-
-
-
100%
128.09%
100%
103.15%
114.98%
13.00%
16.58%
Total Comprehensive Income for the Year
Basic Earning per share
P a g e | 14
To forecast the income statement of 2012 and 2013, we used the percentage of 2.(c) sales method. The sales growth rate and current tax rate & deferred tax rate has been determined to be 24%, 24% and 3% respectively. The calculations are shown in the Appendix part.
Renata Limited Forecasted Income Statement For the year ended 31 December Income Statement
2012
2013
Turnover
8,084,352,650
10,024,597,286
Cost of Sales
(3,880,489,272)
(4,811,806,697)
Gross Profit
4,203,863,378
5,212,790,589
Administrative, selling and distribution expenses
(2,111,632,912)
(2,618,424,811)
Operating profit
2,092,230,466
2,594,365,778
Other income
26,678,364
33,081,171
(4,042,176)
(5,012,299)
Interest on overdraft
(266,783,637)
(330,811,710)
Other expenses
(11,318,094)
(14,034,436)
Contribution to WPPF
(88,927,879)
(110,270,570)
Profit before tax
1,747,837,043
2,167,317,933
Current tax
(419,480,890)
(520,156,304)
Deferred tax
(52,435,111)
(65,019,538)
Net Profit after tax for the year
1,275,921,041
1,582,142,091
Operating expenses
Gain/(loss) on disposal of property, plant and equipment
Tax expenses
P a g e | 15
Basic Earning per share
59.66
70.17
To forecast the balance sheet of 2012 and 2013, we used the percentage of sales method as well. All the calculations are shown in the appendix. The calculation of retained earnings is shown separately in the appendix. Investment subsidiaries under non-current asset are kept as it is because it is constant over the past 5years.
Renata Limited Forecasted Balance Sheet As at 31 December Balance Sheet
2012
2013
Property, plant and equipment
4,688,924,537
5,814,266,426
Capital work-in-progress
1,697,714,057
2,105,165,430
Investment in subsidiaries
63,070,376
63,070,376
Other investment
13,743,400
17,041,815
Total non-current assets
6,463,452,369
7,999,544,047
Inventories
1,940,244,636
2,405,903,349
Trade and other receivables
808,435,265
1,002,459,729
Advance deposits & prepayments
121,265,290
150,368,959
Cash and cash equivalents
177,855,758
220,541,140
Total current assets
3,047,800,949
3,779,273,177
Total Assets
9,511,253,318
11,778,871,224
Assets Non-current Assets
Current Assets
Equity and Liabilities
P a g e | 16
Equity attributable to the equity holders of the company
Share capital
282,952,343
350,860,905
Revaluation surplus
194,024,464
240,590,335
Tax holiday reserve
161,687,053
200,491,946
Retained earnings
4,526,671,327
5,868,757,480
Total equity attributable to the equity holders
5,165,335,186
6,660,700,666
Deferred liability-staff gratuity
185,940,111
230,565,738
Deferred tax liabilities
242,530,580
300,737,919
Total non-current liabilities
428,470,690
531,303,656
Bank overdraft and short term loan
2,991,210,481
3,709,100,996
Creditors for goods
62,249,515
77,189,399
Accrued expenses
404,217,633
501,299,864
Other liabilities
428,470,690
531,303,656
Unclaimed dividend
8,084,353
10,024,597
Provision for taxation
323,374,106
400,983,891
Total current liabilities
4,217,606,778
5,229,832,404
Total liabilities
4,646,077,468
5,761,136,060
Total equity and liabilities
9,811,412,654
12,421,836,726
Proposed Dividend
(300,159,336)
(643,019,502)
Total equity and liabilities
9,511,253,318
11,778,817,224
Liabilities Non-current liabilities
Current liabilities
P a g e | 17
3.
Ratio Analysis Industry Average Ratio
Renata
Beximco
Ambee
Pharma
Limited
Pharma
Pharma
Aid
0.73 times 0.26 times (BDT 921.7 Million)
2.70 times 1.83 imtes BDT 4,500.3 Million
1.12 times 0.53 times BDT 4.89 Million
1.69 times 1.49 times BDT 26.8 Million
214 days
193 days
402 days
167 days
1.95 times
1.79 times
1.03 times
187 days
204 days
0.85 times
GlaxoSmith
Square
Industry
Pharma
Average
1.50 times 0.96 times BDT 2,354.0 Million
1.63 times 1.003 times BDT 1,175.16 Million
32 days
107 days
186 days
8.62 times
2.97 times
3.03 times
1.80 times
354 days
42 days
123 days
121 days
172 days
0.34 times
0.96 times
0.86 times
1.82 times
0.69 times
0.92 times
1.25 times
0.50 times
4.98 times
2.07 times
9.85 times
1.08 times
3.29 times
36 days
45days
63 days
141 days
16 days
21 days
54 days
8 days
56 days
15 days
17 days
107 days
35 days
40 days
0.49 times
0.26 times
0.78 times
0.34 times
0.45 times
0.29 times
0.44 times
Kline Pharma
Liquidity
Current Ratio Quick Ratio Working Capital
2.05 times 0.95 times BDT 1,086.6 Million
Cash Conversion Cycle Asset Management
Inventory Turnover Days in Inventory Total Asset Turnover Fixed Asset Turnover Average Collection Period Average Payment Period Debt Management
Debt to Asset
P a g e | 18
Times Interest Earned
7.98 times
3.50 times
1.86 times
11.15 times
110.91 times
11.23 times
24.43 times
52.46%
47.90%
54.20%
32.52%
28.47%
42.80%
43.06%
26.34%
25.20%
3.93%
21.7%
9.91%
22.42%
18.25%
16.68%
15.10%
2.80%
14.23%
5.96%
18.80%
12.26%
14.14%
5.20%
2.69%
12.29%
10.84%
13.02%
9.70%
22.33%
8.63%
3.77%
18.73%
18.03%
15.53%
14.50%
27.48%
6.70%
15.1%
18.75%
1.98%
18.32%
14.72%
BDT 48.14/ share
BDT 4.76/ share
BDT 3.81/ share
BDT 44.51/ share
BDT 23.42/ share
BDT 129.07/ share
BDT 42.29/ share
25.03
19.66
111.28
57.34
28.37
25.35
44.51
6.88 times
1.38 times
16.83 times
10.75 times
5.57 times
4.65 times
7.68 times
Profitability
Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Asset (ROA) Operating Return on Asset Return on Equity Stock Market
Earnings Per Share Price-Earnings (P/E) Market to Book (M/B)
P a g e | 19
Renata Limited Liquidity Ratio Liquidity Ratio Current Ratio Quick Ratio
Formula
Working Capital
Current Assets – Current Liabilities
Cash Conversion Cycle
Days in Inventory+Average Collection Period-Average Payment Period
2007
2008
2009
2010
2011
IA
1.37 times
1.15 times
1.17 times
1.11 times
0.73 times
1.63 times
0.45 times
0.40 times
0.41 times
0.42 times
0.26 times
0.1003 times
BDT BDT BDT BDT (BDT BDT 271.02 192.68 233.38 212.12 921.72 1,175.16 Million Million Million Million Million) Million 209 days
240 days
243 days
228 days
214 days
Current Ratio:
In 2011, Renata Limited‟s current assets were 0.73 times of their current liabilities.
Current ratio of Renata Limited was 1.37 times in 2007 and decreased a little to 1.15 times for the year 2008. Then it slightly increased to 1.17 times in 2009 and again decreased in 2010 to 1.11 times. And current ratio has continued to decrease by a huge margin in 2011 to 0.73 times which implies that there has been an decreasing trend in current ration of Renata Limited i.e. the performance has gone down. do wn. The industry average was 1.63 times, which was much higher than Renata Limited‟s current ratio and therefore, Renata Limited‟s performance was not satisfactory
in 2011. Renata Limited‟s current ratio was much lower in 2011 than 2010 because, current assets
decreased by a huge margin while current liabilities increased in 2011 from 2010. Quick Ratio:
In 2011, Renata Limited‟s current assets excluding inventories were 0.26 times of their current liabilities.
186 days
P a g e | 20
Quick ratio of Renata Limited was 0.45 times in 2007, and then it decreased to 0.40 times in 2008. It increased by a small margin to till 2010 and again decreased by a huge margin to 0.26 times in 2011. In general, there had been a decreasing trend in Renata Limited‟s quick ratio from year 2007 to 2011 implying that Renata Limited‟s performance has been poor. In 2011, industry
average was 1.003 times, which is much higher than Renata Limited‟s, which is not at all satisfactory for Renata Limited. Renata Limited‟s quick ratio was much lower in 2011 than 2010 because, current assets
excluding inventories decreased by a huge margin while current liabilities increased in 2011 from 2010. Working Capital:
In 2011, Renata Limited‟s working capital was 921 .72 million BDT. In 2007, Renata Limited‟s working capital was 271.02 million BDT; in 2008 it has decreased to
192.68 million BDT. We can see a fluctuating trend in Renata Limited‟s working capital later years. Working Capital of Renata Renata Limited had increased by quite a margin margin in 2009. But it again decreased during 2010. In 2011, the Working Capital fell sharply to a negative 921.72 million BDT. In 2011, industry average was 1,175.16 million BDT while Renata Limited was way below the average, showing that working capital was really unfavorable. Renata Limited‟s working capital was much lower in 2011 than 2010 because, proportionate
increase in current assets was much lower than the increase in current liabilities. Cash Conversion Cycle:
In 2011, on an average, Renata Limited took 214 days to complete the process of converting their invested capital into cash.
Looking at the past few years‟ performance, we can see that there is a fluctuating trend in the
Cash Conversion Cycle of Renata Limited .In 2007 it was 209 days, and increased to 243 till 2009, but fell slightly in 2010 to 228 days. Renata Limited‟s Cash Conversion Cycle followed its
decreasing trend as it fell to 214 days in 2011, which showed sign of improvement. But it is
P a g e | 21
significantly above the Industry average of 186 days. Therefore, Renata Limited is in a poor position regarding the cash conversion cycle. The reason behind Renata Limited‟s improvement from 228 days to 214 days can be attributed to
lower days in inventory period but higher average payment period.
Current Ratio
Current Ratio
1.5
3 s e 2 m i T 1
s 1 e m i T 0.5
Current Ratio
0 Current Ratio
0 2007 2008 2009 2010 2011
Years
Quick Ratio 0.5 0.4 s e 0.3 m i T 0.2 0.1 0
Quick Ratio 2 s1.5 e m 1 i T0.5 Quick…
0 Quick Ratio
2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Working Capital 500
6000
) n o i l 0 l i M n i ( T -500 D B
n 4000 o i l l i M 2000 n i T D B 0
-1000
2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Working Capital
-2000
Working Capital
Working Capital
P a g e | 22
Cash Conversion Cycle
Cash Conversion Cycle 260 240
s y a 220 D
Cash Conversio n Cycle
200 180
500 s400 y300 a200 D 100 0
Cash Conversio n Cycle
Years
Asset Management Ratio Liquidity Ratio Inventory Turnover Days in Inventory Total Asset Turnover Fixed Asset Turnover Average Collection Period Average Payment Period
Formula
2007
2008
2009
2010
2011
IA
1.96 times
1.59 times
1.69 times
1.85 times
1.96 times
1.80 times
186 days
230 days
216 days
197 days
186 days
172 days
1.17 times
0.98 times
1.01 times
0.99 times
0.85 times
0.92 times
2.17 times
1.87 times
1.77 times
1.66 times
1.25 times
3.29 times
28 days 41 days 33 days 36 days
36 days
54 days
6 days
8 days
40 days
31 days
6 days
5 days
Inventory Turnover:
Renata Limited sold out and re-stocked 1.96 times in 2011. In 2007 the Inventory Turnover Ratio was 1.96 times, but in the following year, 2008, it fell sharply. After that there has been an increasing trend in the Inventory Turnover Ratio of Renata Limited. In 2011, it came back to 1.96 times continuing its increasing trend, and that was also
P a g e | 23
above Industry Average of 1.80 times. This shows an excellent performance of Renata Limited in 2011. Renata Limited‟s Inventory Turnover Ratio has climbed up in 2011 because relative change in
COGS was more than relative change in inventory. Days in Inventory:
On an average, it took 186 days to sell out the inventory inve ntory of Renata Limited. Days in inventory increased in 2008, then continued to decreased till 2011. But it is still above the industry average. So the performance is not satisfactory. Total Asset Turnover:
Every one taka worth of total asset of Renata Limited generated around 0.85 taka in sales in 2011. This ratio has followed a decreasing trend from 2007-2011, although it has slightly increased during 2008. The performance is not satisfactory as Renata Limited‟s ratio is below industry
average of 0.92 times, during 2011.. Renata Limited‟s Total Asset Turnover ratio has decreased in 2011 because relative increase in
sales was less than relative increase in total assets. Fixed Asset Turnover:
Every one taka worth of total fixed asset of Renata Limited generated around 1.25 taka in sales in 2011. This ratio experienced a steady decrease between 2007 and 2011. In 2007 Fixed Asset Turnover Ratio of Renata Limited was 2.17 times. In 2008 it fell to 1.87 times, and continued its decreasing trend. In 2011 it fell sharply to 1.25 times, and was also below the Industry Average of 3.29 times, for the same year. This shows poor performance of Renata Limited in 2011.
P a g e | 24
Renata Limited‟s Fixed Asset Turnover ratio decreased in 2011 because relative increase in sales
was less than relative increase in total fixed assets. Average Collection Period:
Renata Limited took on an average 36 days to collect their dues from debtors. Average Collection Period of Renata Limited fluctuated between the years, 2007 and 2011. The period increased during 2007-2008, then again fell in 2009. In 2010 it climbed slightly to 36 days and remained same for the following year, 2011. This value is below the industry average of 54 days, for the same year, indicating the Renata Limited‟s efficiency in 2011.
Average Collection Period of Renata Limited remained same for the last two years. Average Payment Period:
On an average Renata Limited took 8 days to pay its creditors in 2011. This number also fluctuated between 5 days and 31 days from 2007 to 2011. Renata Limited‟s
average payment period lies below that of the Industry Average of 40 days indicating inefficiency and poor performance.
Inventory Turnover Ratio
Inventory Turnover Ratio 2.5 2 s e 1.5 m i T 1
Inventory Turnover Ratio
0.5 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
10 8 6 4 2 0
s e m i T
Inventory Turnover Ratio
P a g e | 25
Days in Inventory
Days in Inventory 250 200 s 150 y a D100
Days in Inventory
400 s300 y a200 D 100 0 Days in Inventory
50 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Total Asset Ass et Turnover
Total Asset Turnover 1.5
s e m i T
2
1 Total Asset Turnover
0.5
s1.5 e m 1 i T0.5
0
Total Asset Turnover
0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Fixed Asset Turnover
Fixed Asset Turnover 2.5
15
2 s e 1.5 m i T 1
Fixed Asset Turnover
s e 10 m i T 5
0
0.5 0
Fixed Asset Turnover
2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Average Collection Period
Average Average Collection Period 50
150
40 s 30
y a D20
Average Collection Period
10 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
s100 y a D 50
0
Average Collection Period
P a g e | 26
Average Collection Period
Average Payment Period 40
150
30 s y a 20 D
Average Collection Period
10
s100 y a D 50
0
Average Collection Period
0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Debt Management Raio Liquidity Ratio Debt Ratio Times Interest Earned
Formula
) (
2007
2008
2009
2010
2011
IA
0.41 times
0.47 times
0.42 times
0.42 times
0.49 times
0.44 times
8.40 times
9.74 times
11.12 times
7.98 times
24.43 times
9.75 times
Debt Ratio:
In the year 2011, 49% of Renata Limited‟s total assets were financed by de bt. There is a fluctuating trend in using debt to finance the assets of the company all throughout years, 2007 to 2011. The ratio increased from 2007 to 2008. The company had stable Debt Ratio for the next two years i.e. 2009 and 2010. In 2011 it again jumped to 0.49, which is above Industry Average in 2011. This shows that Renata Limited‟s recent performance is poor. In 2011 49% of Renata Limited‟s total assets assets were financed by debt, while in 2010 it was 42%.. The reason for this is, debts contributed more to Renata Limited‟s total assets, while total assets
did not increase proportionately. Times Interest Earned:
In 2011, the Renata Limited‟s EBIT was 7.98 times of their interest expense.
P a g e | 27
We can see a fluctuating trend in this ratio and it has both increased and decreased during years 2007 and 2011. In 2007 it was 9.75 times, then it fell slightly to 8.40 times. In 2009 it again jumped to 9.74 times, and contiued to increasing to 11.12 times in 2010. In 2011 it fell again to 7.98 times, and was way below the industry average of 24.43 times. So Renata Limited is in a healthy position. It had a poor poo r performance. In 2011, Renata Limited‟s Times Interest Earned Ratio was only 7.98 times, while in 2010 it was 11.12 times. The reason for this is Renata Limited‟s interest expense increased; while it‟s EBIT
(Operating Profit) did not increase proportionately.
Debt to Asset Ratio
Debt to Asset Ratio 0.5
1
0.45
s e m i T
Debt to Asset Ratio
0.4
s0.8 e0.6 m0.4 i T0.2
0
Debt to Asset Ratio
0.35 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Times Intereset Earned
Times Interest Earned 12
150
10 8
s e m 6 i T
Times Interest Earned
4
s e100 m i T 50
0
Times Intereset Earned
2 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Profitability Ratio Liquidity Ratio Gross Profit Margin
Formula
) (
2007
2008
48.7%
50.6%
2009
2010
53.33% 52.75%
2011
IA
52.46%
43.06%
P a g e | 28
Operating Profit Margin Net Profit Margin Return on Assets Operating Return on Assets Return on Equity
) ( ) ( ) ( ( ) ) (
21.71% 23.73% 24.85% 25.66%
26.34%
18.25%
13.25% 14.02% 15.47% 16.75%
16.68%
12.26%
15.58% 13.70% 15.67% 16.61%
14.14%
9.70%
25.53%
25.17% 2 5.17% 25.45%
22.33%
14.50%
26.29% 26.06% 27.34% 28.69%
27.48%
14.72%
23.2%
Gross Profit Margin
In 2011, Renata Limited‟s gorss profit margin was 52.46%. This infers that for every BDT100 of
sales, BDT 52.46 of gross profit was generated. Throuhout the last five years, 2007 to 2011 Renata Limited has maintained an increasing trend in Gross Profit Margin. In 2007 it was 48.70%. It maitained a steady growth throughout the following years, as it rose to 50.60% in 2008. In 2009 it jumped to 53.33%, though after that it started to decline slightly. In 2010 it fell to 52.75% and fell again in 2011 to 52.46%. Though the Gross Profit Margin of Renata fell in 2011, it was still above Industry Average of 43.06%, for the same year, indicating a strong performance. p erformance. The reason as to why the gross profit margin increased was because the relative increase in Gross Profit of Renata Limited was more than its relative rise in net sales. Operating Profit Margin
In 2011, the Renata Limited‟s operating profit margin was 26.34%. Thus, for every BDT100 o f
sales, BDT 26.34 of Operating Profit was generated. There is an increasing trend in the Operating Profit Margin of Renata Limited between the years 2007 to 2011. In 2007 it was 21.71%. It continued to increase in 2008 to 23.73%, followed by another slight rise to 24.84% in 2009. In 2010 it rose again to 25.66%, and carried on its steady
P a g e | 29
growth in 2011, as it climbed to 26.34%. This value is placed well above Industry Average of 18.25%, showing a promising performance of Renata Ren ata Limited in 2011. In 2011, Operatin Profit Margin of Renata Limited rose to 26.34%, from that of 25.66% in 2010. The reason for this increase can be expalined by fact that Renata Limited experienced a larger relative increase in its EBIT, than the relative increase in N et Sales. Net Profit Margin
Renata Limited‟s Net Profit Margin in 2011 was 16.68%. Thus, for every BDT100 of sales,
BDT 16.68 of net profit was generated. This has been a steady increase throughout the five years, 2007n to 2011. The Industry average stands at 12.26% 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 an increasing rate of the Net Profit Margin of Renata Limited. In 2011 the Net Profit Margin decreased slightly to 16.68%, from that of 16.75% in 2010. This decrease in Net Profit Margin ratio is due to the relative fall in net profit, followed by a proportionate rise in net sales.
Return on Asset
In 2011 Renata Limited‟s Return On Assets was 14.14%, thus for every BDT100 worth of total
assets, BDT 14.14 was generated. Ren ata Limitrd It is in a This is a little fall from 2010‟s 16.61%. When compared to the industry, Renata strong state in terms of its Return On Assets; as the average of the rival firms in the industry is comparatively less at the 9.70%. Trend analysis of Renata Limited shows there were slight fluctuations (around 15%) from 2007-2009. It then increased to 16.61% in 2010 and fell again rising to 14.14% in 2011. The Return On Assets Assets of Renata Limited decreased from 16.61% of 2010 to 14.14% in 2011, as the relative rise in the net income was significantly lower compared to the proportionate rise in total assets.
P a g e | 30
Operating Return on Asset
In 2011, Renata Limited‟s O perating Return on Assets was 22.33%. This infers that for every
BDT100 of sales, BDT 22.33 of operating income (EBIT) was generated. This was a fall from2007‟s 25.53%. The Industry average stands at 14.50% which shows that Renata Limited is in a satisfactory position with what the average company in the industry has achieved in terms of the operating op erating return on assets ratio. The trends over the last 5 years show that the Operating ROE was constant from 2007-2010 (about 25%). It then fell in 2011 to 22.33%. Over the 5 years there was a slight decrease in the rate. The operating return on assets decreased as the relative rise in operating income was relatively less compared to the increase in the total assets from 2010 to 2011. Return on Equity
In 2011, the shareholder‟s return on equity 0f Renata Limited was 27.48%. Thus, shareholders
have earned BDT 27.48 for every BDT 100 investment in the company. This was a slight increase from 2007‟s 26.29%. The Industry average stands at 14.72% which
shows that the shareholders are getting a fruitful return on their investments in comparison of the shareholders of Renata Limited‟s rival firms in the industry which the Return on Equity ratio
shows. The 5 year trend from 2007 to 2011 shows that, the Return on Equity was constant at around 27%. It rose slightly in 2008 to 28.69% in 2010 before finally reaching the 27.48% mark in 2011. The decrease in the ROE of Renata Limited in 2011 from that of 2010 was due to the fact that the relative increase in net income was less than the relative increase in the total assets.
P a g e | 31
Gross Profit Margin
Gross Profit Margin 54
60
52
40
%
20
%50
Gross Profit Margin
48
0
Gross Profit Margin
46 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Operating Profit Margin
Operating Profit Margin 30
30
25
20
20
%
10
%15
Operating Profit Margin
10
0
Operating Profit Margin
5 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Net Profit Margin
Net Profit Margin 20 15 %10
Net Profit Margin
5
20 15 %10 5 0 Net Profit Margin
0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Return on Asset
Return on Asset 20
15
15
10
%
%10
Return on Asset
5 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
5 0 Return on Asset
P a g e | 32
Operating Return on Asset
Operating Return on Asset 26 25 24 Operating Return on Asset
%23
22
25 20 15 %10 5 0
Operating Return on Asset
21 20 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Return on Equity
Return on Equity
29
30
28
20
%
27
10
%
Return on Equity
26
0 Return on Equity
25 24 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Stock Market Ratio Liquidity Ratio Earnings Per Share PriceEarning Ratio Market to Book Ratio
Formula
( )
) ( ) (
Earnings per Share
2007
2008
2009
BDT BDT BDT 290.39/ 299.55/ 333.90/ share share share
2010
2011
IA
BDT 37.74/ share
BDT 48.14/ share
BDT 42.29/ share
25.83
20.83
36.09
34.29
25.03
44.51
6.78 times
6.80 times
9.90 times
9.84 times
6.68 times
7.68 times
P a g e | 33
In 2011, the shareholders of Renata Limited earned BDT 48.14 for each share they hold. Renata Limited‟s EPS has been fluctuating over the year. It increased during 2007 to 2009, in
2010 the EPS dropped significantly to BDT37.74/share due to the share price correction during the period. In 2011, it‟s EPS increased again. Overall, it‟s EPS is quite satisfactory and above the
industry average. Their number went up due to their increase in their bottom line. P/E ratio
In 2011 the shareholders of Renata Limited was willing to pay BDT 25.03 for every TK of reported earnings. From 2008, shareholders tend to become less confident about Renata Limited. 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 44.51. So performance of Renata Limited in 2011 was poor. Renata Limited‟s P/E ratio has significantly decreased in 2011 (BDT 25.03) from that of 2010
(34.09) because relative increase in market price per share was much less than relative increase in EPS. Market to Book Value Ratio
In 2011, the market to book ratio of Renata Limited was 6.88 times, whereas it was 9.84, 9.90, 6.80 & 6.78 times for the year 2010, 2009, 2008, and 2007 respectively. From 2007 to 2011, their market to book ratio fluctuated unsteadily. Overall, a decreasing trend has been observed in Renata Limited‟s market-to- book value ratio. Besides, Renata Limited‟s
M/B ratio is slightly less than the Industry Average i.e. overall performance of Renata Limited was not quite satisfactory in the year 2011. The market value of Renata Limited shares in 2011 has decreased significantly from that of 2010, which results lower value in terms of their market value of shares to book value of share.
P a g e | 34
Earnings per Share
Earnings per share 400
150
e r 300 a h s r e 200 p T D B100
EPS
e r a100 h s r 50 e p 0 T D B
Earnings per Share
0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
P/E Ratio
P/E Ratio 40
150
30
100 50
20
0
P/E Ratio
10
P/E Ratio
0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
M/B Ratio
M/B Ratio 12
20
10
s 15 e m10 i T 5
8
s e m 6 i T
0
M/B Ratio
4
M/B Ratio
2 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Years
Du- Pont Analysis Return on Asset (ROA) = Net Profit Margin*Total Asset Turnover
ROA
=
) (
P a g e | 35
2010
16.61 %
= 16.75%
*
0.99%
2011
14.14 %
= 16.68%
*
0.85%
From 2010 to 2011, both net profit margin and total asset turnover decreased. This resulted in a decrease in Return on Asset. The net profit couldn‟t increase to the proportionate increase to sales. Again, the sales couldn‟t increase to the proportionate increase to total assets. This two
scenario is responsible for bring down the return on asset.
Modified Du- Pont Analysis
Return on Equity (ROE) = Net Profit Margin*Total Asset Turnover*Equity Multiplier ROE
=
2010
28.69%
= 16.75%
*
0.99% *
1.73
2011
27.48%
=
*
0.85% *
1.94
16.68%
The Extended Du Pont analysis was similar to the Du Pont analysis as in this case both the total assets turnover and net profit margin both fell, whereas, equity multiplier was slightly increased but not to any significant amount to increase the ROE. As a result, ROE has decreased.
4. Risk & Return Analysis Here, we have calculated the monthly returns from January, 2007 till December, 2011. Based on the monthly returns, average monthly return is calculated for both DSE General Index & Renata Limited. We used Microsoft Excel to calculate the monthly returns which is attached in the appendix section.
P a g e | 36
Year 2007- 2011 January'07 February'07 March'07 April'07 May'07 June'07 July'07 August'07 September'07 October'07 November'07 December'07 January'08 February'08 March'08 April'08 May'08 June'08 July'08 August'08 September'08 October'08 November'08 December'08 January'09 February'09 March'09 April'09 May'09 June'09 July'09 August'09 September'09 October'09 November'09 December'09
DSE (market) Monthly Returns 14.03% -1.92% -1.85% 0.34% 13.69% 7.09% 8.84% 2.55% 1.26% 8.52% 4.75% 4.81% -3.38% 1.42% 3.44% 1.56% 2.13% -6.47% -8.85% 3.76% 5.18% -8.42% -8.04% 11.06% -5.63% -3.41% -6.83% 4.55% 1.30% 15.91% -5.06% 0.01% 4.53% 7.72% 29.15% 2.52%
Renata Limited Monthly Returns 9.34% -1.75% 1.24% 9.57% -1.52% 5.17% 24.10% 1.26% 3.76% 4.12% 12.09% 20.11% -13.57% 4.15% 17.00% -1.14% -12.94% -8.97% -2.52% 1.78% 7.01% -3.86% 1.98% 2.81% 1.51% -5.83% 0.94% 1.50% -17.62% 5.42% -2.77% 5.99% 7.12% 12.82% 8.10% 22.43%
P a g e | 37
17.48% 2.01% 0.27% 1.08% 8.46% 0.02% 2.02% 3.44% 4.76% 10.16% 8.24% -4.96%
November'11
-9.88% -28.54% 13.40% -6.14% -3.89% 7.91% 4.91% -2.44% -4.57% -14.66% 1.22%
10.10% -9.91% 6.25% 6.49% -2.25% -13.29% 9.52% -1.56% -1.24% 11.89% 0.71% -3.20% -4.81% -15.67% 21.45% -6.64% -16.70% 0.53% 8.24% 3.94% 10.42% -2.77% 2.24%
December'11
0.40%
-6.88%
Average Return
1.85%
2.09%
Standard Deviation
8.55%
9.35%
Coefficient Variance
4.62
4.46
January'10 February'10 March'10 April'10 May'10 June'10 July'10 August'10 September'10 October'10 November'10 December'10 January'11 February'11 March'11 April'11 May'11 June'11 July'11 August'11 September'11 October'11
The average monthly return for Renata Limited is 2.09% whereas it is 1.85% in the market. In comparisons, the average return is favorable for the company. But, the variability of Renata‟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, Renata Limited has
P a g e | 38
lower risk per unit than that of other companies in the market. So, Renata Limited is considered to be a better investment than that of other companies in the market. ma rket.
Scatter Diagram for Renata Limited And DSE General G eneral Index 30.00%
d e t i m i L a t a n e R
y = 0.535x + 0.0111 R² = 0.2392
25.00% 20.00% 15.00% 10.00%
Renata Limited
5.00%
-40.00%
0.00% -20.00% 0.00% -5.00%
Linear (Renata Limited) 20.00%
40.00%
-10.00% -15.00% -20.00%
DSE General Index
5. (a) The beta for Renata Limited is,
= 0.535
The monthly risk free return, R F is determined to be 0.833%. Justification: We have taken the latest 91 Days T-Bill rate on December, 2011 which is 10%. Dividing this value by 12, we got the monthly risk free rate for the period. Now, R M (monthly) = 1.85% R F (monthly) = 0.833%
P a g e | 39
= 0.535
So the monthly Required Rate of Return, K e would be K E = R M + (R M – R F) * = 0.0185 + (0.0185 – 0.00833) * 0.535 = 0.023957 = 2.396% So the annual K E would be K E = 2.396% * 12 = 28.75% So the Required Rate of Return, K E is 28.75%
P a g e | 40
SUMMARY OUTPUT Regression Statistics
Multiple R
0.4890668
R Square
0.2391864
Adjusted R Square
0.2260689
Standard Error
0.0822586
Observation s
60
ANOVA df
Regression
SS
MS 0.1233 8 0.0067 7
F 18.2341 7
Significance F 7.33543E05
1
0.123381
Residual
58
0.392456
Total
59
0.515837
Coefficient s
Standard Error
t Stat
P-value
Lower 95%
0.011056
0.010869
1.0171 7
0.31329 7
-0.01070139
0.5349811
0.125284
4.2701 5
7.34E05
0.28419807 5
Intercept X Variable 1
RESIDUAL OUTPUT
Observation
Predicted Y
Residual s
1
0.0861138
2
0.0007843
0.00728 0.018285
3
0.0011588
0.011244
4
0.0128749
5
0.0842949
0.082817 0.099446
6
0.0489861
0.002684
Upper Lower Upper 95% 95.0% 95.0% 0.0328 0.010 0.032 1 7 8
0.7857 6
0.284 2
0.785 8
P a g e | 41
7
0.0583483
8 9
0.024698 0.0177967
10
0.0566364
0.182619 0.012094 0.019763 0.015465
11
0.0364676
0.084445
12
0.0367886
13
-0.0070264
0.164262 0.128659
14 15
0.0186527 0.0294593
16
0.0194017
17
0.0224511
18
-0.0235573
19
-0.0362899
20
0.0311713
0.011119 0.013382
21
0.038768
0.031366
22
-0.0339894
-0.00462
23
-0.0319565
24
0.0702249
0.051783 0.042077
25
-0.0190635
26 27
-0.0071869 -0.0254832
28
0.0353976
29
0.0180107
30
0.0961715
31
-0.0160141
0.034196 0.051152 0.034879 0.020396 0.194212 0.041978 0.011677
32 33
0.0111095 0.0352906
0.048823 0.035925
34
0.0523565
35
0.167003
0.075835 0.086039
36
0.0245375
37
0.1045707
0.022865 0.140562 0.030771 -0.15184 0.066105
0.199773 0.003569
P a g e | 42
0.120932
38
0.0218091
39 40
0.0125004 0.0168338
41
0.0563154
0.049989 0.048085 0.078851
42
0.011163
-0.14406
43
0.0218626
44
0.0294593
45
0.0365211
0.073303 0.045066 0.048876
46
0.0654101
0.053525
47
0.0551384
48
-0.0154791
49
-0.0418002
50
-0.1416276
-0.04801 0.016567 0.006338 0.015032
51
0.0827434
52
-0.0217919
53
-0.0097548
54
0.053373
0.131781 0.044601 0.157286 0.048062
55
0.0373235
0.045056
56
-0.0019976
0.041433
57
-0.0133927
0.117558
58
-0.0673723
0.039672
59
0.0175827
60
0.0131959
0.004784 0.081975
P a g e | 43
5. (b) Cost of Financing of Debt: Interest on overdraft in the year 2011 = BDT 215,315,416 Bank Overdraft and Short-term Loan in the year 2011 = BDT 2,402,992,758 So, Before-Tax Cost of Debt =
= = 0.0896 So, K D = 8.96%
After-Tax Cost of Debt, K D =
0.0896 * (1 - 0.24)
= 6.81%
5. (c) Weighted Average Cost of Capital (WACC): Price of Share as at 31st December, 201
= 1205.00
Market Value of Share Capital, (225935000 * 1205.00)
= BDT 27,225,167,500
Retained Earnings
= BDT 3,442,795,036
Bank Overdraft and Short Term Loan
= BDT 2,402,992,758
Total Capital
= BDT 33,070,955,294
Now, Weight of Share Capital, WCS Weight of Retained Earnings, WR/E
= =
= 82.32% = 10.41%
Weight of Bank Overdraft and
Short Term Load, WD
=
Tax Rate
= 24%
= 7.27%
P a g e | 44
Since the flotation cost is unknown, the required rate of return, K E 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) = (WD * K D) D) + (WCS * K E) + (W R/E * K E) = (0.0727 * 0.0681) + (0.8232 * 0.2875) + (0.1041 * 0.2875) = 0.005 + 0.237 + 0.030 = 0.272 WACC = 27.20%
6. Optimal Capital Structure A Firm‟s Value, V* = EBIT (1-T) / WACC
As at 31st December, 2011, Renata‟s EBIT = BDT 1,717,370,007
WACC
= 27.20%
Tax Rate
= 24%
So, Renata‟s Value
= 1717370007*(1-0.24) / 0.2720 = BDT 4,798,533,843
As at 31st December, 2011, Renata‟s Capital Structure consists of 7.27% Debt and (1-0.0727) or 92.73% Equity.
P a g e | 45
Now, we‟ll we ‟ll assume another 4 different combination of Debt and Equity portion p ortion of the company co mpany
and calculate the WACC for those different combinations. The after-tax cost of Debt and the cost of Equity will remain the same, (6.81% and 28.75% 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
%
2%
98%
(0.02*0.0681)+(0.98*0.2875) (0.02*0.0681)+(0.98*0.2 875)
28.31%
5%
95%
(0.05*0.0681)+(0.95*0.2875) (0.05*0.0681)+(0.95*0.2 875)
27.65%
15%
85%
(0.15*0.0681)+(0.85*0.2875) (0.15*0.0681)+(0.85*0.2 875)
25.46%
25%
75%
(0.25*0.0681)+(0.75*0.2875) (0.25*0.0681)+(0.75*0.2 875)
23.27%
BDT
1717370007*(1-0.24) / 0.2831 1717370007*(1-0.24) / 0.2765 1717370007*(1-0.24) / 0.2546 1717370007*(1-0.24) / 0.2327
4,610,389,281 4,720,438,356 5,126,477,633 5,608,943,727
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.
From our assumed combination of Debt and Equity, we can see that for the combination of 25% Debt and 75% equity, the firm‟s value is maximized.
So we can conclude that, 25% of Debt and 75% of Equity is the optimal capital structure for Renata Limited.
P a g e | 46
7. Intrinsic Value Non-Constant Model
We assumed that Renata Limited will follow a non-constant no n-constant super-normal growth till 2013, and then it will gauge using a 5% constant growth rate. The super-normal growth rate till 2013 is 25%. (This Dividend Growth Rate calculation is shown in appendix part. Given, D2011 = BDT 8.50
[As given in Renata Limited Annual Report 2011]
K e = 28.75% g = 5% D2012 = 8.50 * (1+0.25)
= BDT 10.625
D2013 = 10.625 * (1+0.25)
= BDT 13.281
D2014 = 13.281 * (1+0.05)
= BDT 13.945
Now, PV2013 = D2014 / (K e – g) = 13.945 / (0.2875-0.05) = BDT 58.72
Po
= D2012 / (1+K e) + D2013 / (1+K e)2 + PV2013 / (1+K e)2 = {10.625 / (1+0.2875)} + {13.281 / (1+0.2875)2} + {58.72 / (1+0.2875)2} = 8.25 + 8.01 + 35.42
Po
= BDT 51.69
P a g e | 47
Corporate Value Model
We assumed that Renata Limited will follow a non-constant no n-constant super-normal growth till 2013, 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 2013 is 35%. FCF2011 = BDT 1,211,135,079 K e = 28.75% g = 5% FCF2012 = 1211135079 * (1+0.35)
= BDT 1,635,032,357
FCF2013 = 1635032357 * (1+0.35)
= BDT 2,207,293,681
FCF2014 = 2207293681 * (1+0.05)
= BDT 2,317,658,366
Now, PV2013 = FCF2014 / (K e – g) = 2317658366 / (0.2875-0.05) = BDT 9,758,561,539
Po
= FCF2012 / (1+K e) + FCF2013 / (1+K e)2 + PV2013 / (1+K e)2 = {1635032357/(1+0.2875)}+{2207293681/(1+0.2875)2}+{9758561539/(1+0.2875)2} = 1269928044 + 1331575036 + 5886963319 = BDT 8,488,466,399
So, Total Intrinsic Intrinsic Value of the Corporation = BDT 8,488,466,399 Less: Total Debt
= BDT (2,402,992,758)
P a g e | 48
Total Intrinsic Value of Equity
= BDT 6,085,473,641
Total Number of Common Stock outstanding = 22,593,500 shares Intrinsic Value of Stock
= (6085473641/22593500) = BDT 269.35
P/E Multiple Approach
Intrinsic Value of Share
= Industry Average P/E Ratio * EPS2012
Industry Average P/E Ratio is 44.51 as calculated in Ratio Analysis section of this report. EPS2012 is BDT 55.66 as calculated in Forecasted Income Statement section. So, Intrinsic Value of Share = 44.51 * 55.66 = BDT 2,477.43
Analysis of the Stock price The market price of Singer Bangladesh was BDT 1205.00 on 31st December, 2011. If the investors gauge the fair price of the share only considering future expected flow of dividend, then the fair price is BDT 51.69. As compared, the market price is much higher than that of its fair value, which is the market price is i s overvalued. 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 269.35. On other hand, the market price was BDT 1205.00. In comparison, the stock priced is overvalued. On the contrary, if the investors measure the fair value based on P/E multiple approach, then the fair value is BDT 2,477.43, which is higher than the market price of BDT 1205.00. In this case, the market price is undervalued.
P a g e | 49
8. 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 in dependent 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
P a g e | 50
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. dividen ds. Therefore, T herefore, 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 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 rising the prices as well. So we can conclude that low dividends increase stock value.
DIVIDEND PAYOUT PLANS
1) Stable Dollar Dividend: Usually companies try to represent their dividend in a partial basis in a dollar format and also try to maintain a stable and steady dividend each and every year. For example: $0.5/share,$2/share,$1.5/share.
2) Percentage Dividend Payment: The companies usually give cash dividend payment only. Such as 20% cash dividends, this is usually converted to dollar value by multiplying the cash percentage with the face value.
P a g e | 51
3) Stable/small Regular and Year End Extra: Companies usually try to give regular but small size dividends every year. Any year if companies get higher profit they try to give some year end extra premium.
Practice in RENATA Limited
From the year 2007 onwards Renata Limited paid a stable and steady sum of dividend to its stockholders. Renata Limited has provided considerably a high percentage of dividend to its stockholders of 50% cash dividend in 2007 and 2008 and 60% cash dividend from 2009 onwards. So it can be referred that they followed the stable dollar dividend and percentage dividend payment. Along with it Renata Limited also gave stock dividends of (4:1) as in for every 4 shares held they gave one bonus share from 2008 onwards except 2007 when they gave (5:1).Looking the market to book ratio we can also refer that the market price has increased continuously through out from 2007 onwards o nwards except falling a lit bit in 2011.
Which dividend policy to follow
If observed from 2007 it can be inferred that Renata Limited has been giving quite a high percentage of dividend to their shareholders and it can be concluded that they have considered the view of “High dividend increases the share price” as along with the high amount of dividend
paid the share price has also risen throughout the years. “High dividend increase the share price”
