projected cash flows

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Project on Corporate FinanceComprehensive Analysis


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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


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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


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Table of Contents

Sr. No Topics Page No.

1 Acknowledgement 1

2 Lease v/s Debt

3

3 Fixed Assets Schedule 24

4 Capital Budgeting Techniques 26

5 Leverage Analysis 28

6 Working Capital Management 30

7 Projected Cash Flow & Financial Statements, WACC 34


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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 period = 5 years

Tax rate = 35% 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


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PV of cash outflow in case of lease option:

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 whichwill 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 => Nominal Interest rate = 13.8%

=> Installment = 280599235 => Effective Interest rate = 8.97%

=> No of years = 5 => Depreciation = Straight line method

=> No residual value

All the installment would be paid at the beginning of the year.

End of

year

Lease payment Tax

Shields

Tax Shields

benefits

PV of cash

outflow

0 280599235 - 280599235 280599235

1 280599235 98209732 182389503 167375886

2 280599235 98209732 182389503 153598133

3 280599235 98209732 182389503 140954514

4 280599235 98209732 182389503 129351669

5 98209732 (98209732) (63917499)


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Amortization Table

End

of

year

Payment Beginning year

principle

Interest Principle Ending year

principle

0 280599235 1101352000 - 280599235 820752765

1 280599235 820752765 113263881 167335354 653417411

2 280599235 653417411 90171602 190427633 462989778

3 280599235 462989778 63892589 216706646 246283132

4 280599235 246283132 33987072 246233132 0

PV of cash outflow in case of Debt Purchase option:

a b c D=

(b+c)*.35

E = a-d F = E/(1+i)^n

End

of

year

Payment A. interest Depreciation Tax shield

benefits

Cash

outflow

after tax

PV of cash

out flow after

tax

0 280599235 - - - 280599235 280599235

1 280599235 113263881 220270400 116736998 163862237 150373714

2 280599235 90171602 220270400 108654701 171944534 144801971

3 280599235 63892589 220270400 99457046 181142189 139990563

4 280599235 33987072 220270400 88990115 191609120 135890273

5 - 220270400 77094640 (77094640) (50175237)

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


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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.


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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) 2008 (000)

=44874359/25837214 =36163174/23634126 =30592806/22209452

Ratio 1.74 1.53 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 areincreases by their fixed assets through out the years.

Return onFixed 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 onFixed Assets = NPAT / Fixed Assets

Now we compare the particular ratio of Fuji fertilizer for 3 years.

2010 (000) 2009 (000) 2008 (000)

=11028849/25837214*100 =8823106/23634126*100 =6525083/22209452*100

Ratio 43% 37% 30%


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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) 2008 (000)

=25837214/43060856 =23634126/38551582 =22209452/31918963

Ratio 0.60:1 0.61:1 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 andprofitability. So in this concern they have good portion of fixed assets in their investment.


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Capital Budgeting Techniques

Net present value:

Year Cashflow PVIFi,n PV

2011 310711 0.8787 273022

2012 303461 0.7721 234302.2

2013 201296 0.6785 136579.3

2014 165063 0.5972 98410.5

2015 135351 0.5239 70910.3

------------

813224

*Initial investment = 2989318

*Interest rate = 13.8%

Net present value = sum of PV - Initial investment

NPV = 813224-2989318

NPV = -2176094


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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 amountof projected cash flow of 5 years does not recover the amount of investment.


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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 EBIT2009 EBIT

6015181646233= -1044715

-1044715/601518=-1.7367 or -173.67 %

Calculation of % change in SALE:

2008 SALE2009 SALE

35459025314538=-1768636

-1768636/3545902=-0.4987 or -49.87 %

Degree of financial leverage= % change in EPS/ % change in EBIT

-76.62 %/-173.67 %

0.4411 %


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Decision Criteria:

If DFL > 1 the financial leverage exist.

0.4411 % > 1 the financial leverage not exist.


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.


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Calculation of % change in EBIT:

2009 EBIT2010 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 EPS2010 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


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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 short-

term 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 ideaas 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 %
http://www.investopedia.com/terms/r/returnonassets.asphttp://www.investopedia.com/terms/r/returnonassets.asp


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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


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Projected Cash Flows

For the Year Ended June 30, 2011

Years 2011

Rupees000

2012

Rupees000

2013

Rupees000

2014

Rupees000

2015

Rupees000

Cash Flow from Operating

Activities

310711 303461 201296 165063 135351

Cash Flow from Investing

Activities

(4165116) (4984255) (5316539) (6486178) (7545587)

Cash Flow from Financing

Activities

8765869 19927742 59783226 105417755 141611184

Increase/Decrease in Cash &

Equivalents

4911464 15246983 54667983 9909664 134200948

Cash & Equivalents at

Beginning of Year

125580 5037044 20283992 74951975 174048615

Cash & Equivalents End of

Year

5037044 20283992 74951975 174048615 308249563

-20000000

0

20000000

40000000

60000000

80000000

100000000

120000000

140000000

160000000

2011 2012 2013 2014 2015

Cash Flow from

Operating Activities

Cash Flow from

Investing Activities

Cash Flow from

Financing Activities


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Projected Income Statement

For the Year Ended June 30, 2011Particulars Rupees000 Description

Net Sales 4087742 Based on Average growth rate of

3 years

Cost of Goods Sold (3188439) Based on average C.G.S/Sales

ratio of 3 years

Gross Profit 899303 Balancing Figure

Other Income 30568 Based on Average growth rate of

3 years

Distribution Expense (50919) Based on Average growth rate of

3 yearsAdministration Expense (118082) Based on Average growth rate of

3 years

Other Operating Expense (27157) Based on Average growth rate of

3 years

Finance Cost (33240) Based on Projected Debts

Net profit before Taxation 700473 Balancing Figure

Taxation (245166) 35% of EBT

Net profit After Taxation 455307 Balancing Figure

Preferred Share Dividend (66885) Projected Dividend

Earnings Available for Common

Shareholders

388422 Balancing Figure

Earning Per Share 0.56 EACS/No. of Shares


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Projected Balance Sheet

As at June 30, 2011Liabilities

2010

Rs.000

Change

Rs.000

2011

Rs.000

Share Capital & Reserves 7419887 ------ 7419887

Reserves 2190798 883622 3074420

9610685 883622 10494307

Non-Current Liabilities:

Long Term Financing 11909030 4188249 16097279Deferred Liability 788363 302206 1090569

Current Liabilities:

Trade & Other Payable 1698674 (1503326) 195348

Markup Accrued 349130 230426 579556

Short-term Borrowing 865727 681039 1546766

Current Portion of Long Term Financing 1071384 674972 1746356

Total Liabilities & Shareholders Equity 26779999 4970182 31750181


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Assets

2010

Rs.000

Change 2011

Rs.000

Non-Current Assets:

Property, Plant & Equipment 23819040 3977779 27796819

Long Term Advance 5400 (675) 4725

Long Term Deposits 884841 (106181) 778660

Current Assets:

Stores Spares & Loose tools 1060533 388862 1449395

Stock in Trade 96684 61630 158314Trade Debts 24514 7027 31541

Advances 46981 12100 59081

Trade deposits, short term prepayments

& balances with statutory authority

601364 198143 799507

Interest Accrued 567 518 1085

Other Receivables 47858 (22653) 25205

Cash & Bank balances 192217 453632 645849

Total Assets 26779999 4970182 31750181


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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%


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Partial Balance Sheet2008

Rs.000

2009

Rs.000

2010

Rs.000

Long Term Debts 325000 6224227 11909030

Common Stock 6932895 6932895 6932895

Preferred Stock 486992 486992 486992

7744887 13644114 193289917

Weighted Average Cost of Capital

WACC-2008 Cost Weight WACC

Cost of Debt 26% 0.04 1.04%

Cost of Common Stock 5% 0.90 4.50%

Cost of Preferred Stock 1.7% 0.06 0.102%

1.00 5.642%


Cost of Debt 0.845% 0.46 0.3887%

Cost of Common Stock 0.0008% 0.50 0.0004%Cost of Preferred Stock 3.4% 0.04 0.136%

1.00 0.5251%


Cost of Debt 0.07% 0.62 0.0434%

Cost of Common Stock 0.0001% 0.36 0.000036%

Cost of Preferred Stock 6.8% 0.02 0.136%

1.00 0.1794%

projected cash flows

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