thesis

RESEARCH REPORTON

Linkage between Information disclosure and cost of capital: Evidence from Dhaka Stock Exchange

SUPERVISED BY

Mostafa Saidur Rahim KhanLecturer

Department of Business Administration

Stamford University, Bangladesh

PREPARED BY: Md. Ahsanuzzaman

ID:00405311Batch: 21st (A)

Stamford University, Bangladesh

Date of Submission:

STAMFORD UNIVERSITY BANGLADESH

CERTIFICATE

This is to certify that the internship on “Linkage between Information disclosure and cost of capital: Evidence from Dhaka Stock Exchange ” has been submitted for the award of the degree of Bachelor of Business Administration major in Finance from Stamford University Bangladesh, carried out by Md. Ahsanuzzaman of 21st (A) batch bearing ID: BBA 00405311, under my supervision. To the best of my Knowledge and as per his declaration, any part of this report has not been submitted for any degree before.

He has been permitted to submit the Internship report.

----------------------------Mostafa Saidur Rahim Khan

LecturerDepartment of Business AdministrationStamford University Bangladesh

DECLARATION

I, the student of Bachelor of Business Administration batch 21st (A) bearing ID:00405311 major in Finance from Stamford University Bangladesh, would like to declare here the declaration on An Internship report on “Linkage between Information disclosure and cost of capital: Evidence from Dhaka Stock Exchange” in Bangladesh which I have not submitted for any other degree before.

_______________________ BBA (Major in Finance)21st (A)BatchID: 00405311Stamford University Bangladesh.

Letter of Submission

Date-

ToMr. Mostafa Saidur Rahim KhanLecturerDepartment of Business AdministrationStamford University Bangladesh

Sub: Submission of Internship Report

Dear Sir,

It is my great pleasure to submit you my internship report on the project title of “Linkage between Information disclosure and cost of capital: Evidence from Dhaka Stock Exchange”. I tried my best to complete this report properly for your kind consideration.

I have confident that the internship program has increased both of my practical experience and theoretical knowledge to a great extent. I will be obliged to answer any query that may arise during the evaluation of this report. So, I fervent requesting and hope that you would be kind enough to accept my report and oblige thereby.

Please call me if you require further clarification.

Sincerely Yours,

______________________(Md. Ahsanuzzaman) MBA (Major in Finance)21st (A) BatchID:00405311 Stamford University Bangladesh.

ACKNOWLEDGEMENT

In the process of preparing this report I received genuine cooperation from number of individuals whose names are not possible to mention in this report but I would remember them with my heart felt appreciation and gratitude.

First of all, I am very much grateful to God whose gave blessings me to courage and ability to prepare this report. I am very much grateful to Mr. Mostafa Saidur Rahim Khan, Lecturer, Department of Business Administration, Stamford University Bangladesh, for guiding me to complete properly my internship program. I am also highly indebted to him for his scholarly and constructive suggestion which was of much assistance to prepare this report of “”.

____________________(Md. Ahsanuzzaman) MBA (Major in Finance)21st (A) BatchID: 00405311 Stamford University Bangladesh.

PROLOGUE

Thesis and research program is a scope for acquiring knowledge after successful completion of academic curriculum. Theoretical knowledge gets a complete shape only when it is applied in a practical field.

Every Organization is concerned about the competence of its executive to cope with the technological advances in industrial and commercial development in the fast-moving global environment. The capability of the executive must be enhanced so as to make them efficient and effective in the execution of their duties and responsibilities. The principal emphasis on BBA program has been given on the operation of business organization mostly in private sector. The objective of this program is to prepare students in such a manner so as to equip them with Accounting and financial skills, competence in to depth knowledge of business Administration so as to enable them to meet any challenging situation and to work with the competence in the competitive business environment.

I have accomplished my thesis and research program on portfolio management in the stock market.

During my 03 (Three) months research program, I’ve tried my best to get knowledge about the overall operations of stock market.

This program is, in fact, is at endeavor to make the students familiar with the real business situation and to prepare themselves to match their theoretical knowledge with practical field.

EXECUTIVE SUMMARY As an integral part of BBA program I was sent to Dhaka Stock Exchange to have practical exposure on investment activities. There are two stock exchanges in Bangladesh- Dhaka sock exchange and Chittagong stock exchange that are operating under the regulatory authority Security Exchange Commission.

Portfolio management is the management of investment by diversifying the

investment rather than investing in one. It reduces the risk of loss by

diversifying the investment. In this term paper efficient portfolio has been

made from the five companies. For the input of the portfolio 36 months data

has been used. By using single index model portfolio has been formed at the

same time naïve portfolio risk and return has been calculated to judge the

same result of efficient portfolio. As naïve portfolio consists of all the

securities of equal weight so the return under this method is much lower than

what is found in the efficient portfolio. Cut off point has been calculated by

using the formula, which exclude short sales, which means that in our

efficient portfolio we did not allow short sales. Out of the five companies

only one security has been taken to form the portfolio. This is BATC. Thus

in the portfolio full weight has been imposed on the BATC. In our portfolio

we considered twenty companies and most of the companies face negative

return. Only BATC has a better return and as full weight has been imposed

on BATC thus the efficient portfolio has a reasonable return. After forming

the portfolio, performance evaluation has been made. In this section we

found that.

Chapter 1

1.1 Introduction1.2 Background of the study (why you choose it?)1.3 Objective of the study 1.4 Scope of the Study ( things that are included)1.5 Methodology ( model used, data source etc)1.6 Limitation (data collection, sensitive information, time frame, information

disclose etc.)

Chapter 2

2.1 Introduction2.2 Overview of (Industry)2.3 Organizational overview (History, Vision, Mission)2.4 Operating and financial performance

Chapter 3

3.1 Introduction

Chapter 4

4.1 Introduction

Chapter 5

5.1 Introduction

Chapter 6

Findings, Recommendation & Conclusion

BibliographyAppendixReference

TABLE OF CONTENTS

Chapter 1: 1.0. Introduction1.1. Origin of the study1.2. Background of the study1.3. Significance of the study1.4. Objective of the study1.5. Scope of the study1.6. Methodology of the study1.7. Conceptual framework of the report

Chapter 2: 2.0. Organization Overview2.1. Profile of Square Textiles Ltd.2.2. Profile of Atlas Bangladesh Ltd.2.3. Profile of Janata Insurance Ltd.2.4. Profile of PRAN (AMCL)2.5 Profile of Southeast Bank2.6 Profile of ACI Ltd.

Chapter 3:3.0. Linkage between information disclosure and cost of capital3.1. Correlation between information disclosure and cost of capital

Chapter 4: 4.0.Findings and Conclusion

Chapter 5:5.0.Bibliography5.1.References

1.0 Introduction

1.1. Origin of the study

This report is originated as the course requirement of the BBA program

under the coordinator of BBA program, Stamford University-Bangladesh.

Under this program students of every department of this faculty must go

through an internship or thesis program of 3 months duration. As practical

orientation is an integral part of the BBA degree requirement, I was sent to

take real life exposure of the activities.

1.2. Background of the study

This paper has been prepared based on five randomly selected listed

companies in the Dhaka Stock Exchange. This paper has been prepared

based on the price and dividend information of these companies and the

market index of the Dhaka Stock Exchange. All information is secondary

and collected from different books published by the Dhaka Stock Exchange.

Based on this information basic input to the portfolio meaning return, risk

for security and market, alpha, beta & standard error have been calculated.

For the calculation of return of the securities, security index has been

calculated to measure the proportion of investment in the security. For

efficient portfolio formation single index model has been used and for the

purpose of ranking the securities cut off rate without short sales has been

used. Then based on this information, weight has been determined to find

out the efficient portfolio. In the second part of the report performance

evaluation of the securities has been performed. For this purpose average

price and standard deviation have been used to compare with past return and

risk. At the same time differential return has been used to compare with the

market performance.

1.3 Significance of the study:

The study carries much importance in view of the fact that the economic

development of Bangladesh is closely linked with the strong and healthy

financial organizations, which facilitate mobilization of domestic and

foreign funds on a large scale. Investment organizations are doing their jobs

more competitively now a day. Attracting the people to save their money by

developing various products and schemes, investing the fund in different

profitable shares, etc. is the main focus of this study. This research gap

induced me to undertake the study. It is hoped that the findings of the study

will be useful for the readers and young learners to get knowledge about the

topic. It will also add to existing stock of reports in the library section.

1.4 Objective of the study The main objective of practical orientation on stock market is to get a clear

idea about investment environment, how it runs and what function it does.

Again, the information of various companies totally enhance the trainee gets

a chance to familiarize himself with a new knowledge. Furthermore, the

orientations is very useful to detect whether the theoretical knowledge match

with real life scenario or not.

1 Broad Issue: Analysing the variable, like different shares, dividends

and share price, and their impact on the profitability on the investment

is one of the objectives of the study.

2 Specific Issue: In addition to the principal objective, the following are

some of the common but significant objectives of the study:

1. To know about the nature of the stock market.

2. To know about the scope of investment in the stock market.

3. To know about the company details.

4. To know about the procedure of securities exchange commission.

1.5. Scope of the study

The study covers all the best possible ways of fuming an efficient portfolio.

In my report I have tried at my level best to describe each and every function

elaborately.

1.6. Methodology of the study

1 Data collection: For conducting the study I used the following

Method-

Collection of primary data: Some study-related data are collected

from designing questionnaires, personal interview, and from related

instruments.

Collection of secondary data: to prepare the report, I used many

data and literary information for which I had depended on secondary

sources. Secondary Sources include -

1 Annual reports of the selected five companies

2 Different journals and magazines and

3 Other related books.

Along with these, Observation is another method that was given emphasis in

the study.

1.7 Conceptual Framework of the Report

To get ready my report, in the very beginning will discuss about the

company profiles, activities and operation. Then in next chapter I will

discuss all the necessary calculations to form an efficient portfolio. Then I

will show what I find from my analysis and my discussion. And then I will

give my recommendation for the research on which I think the share is

strong enough to build an efficient portfolio. And at the end appendices and

bibliography will be given as require.

2.0. Organization’s Overview

2.1.PROFILE OF SQUARE TEXTILES LTD.

Corporate history:1 Establishment: 19942 Year of operation: 19973 Stock exchange listings: 20024 Business line: Manufacturing and marketing of yarn5 Authorized capital: Tk. 1000 million6 Paid up capital: Tk. 304.79 million7 No. Of employees: 1454 persons

Vision: Our conception of business germinates from our vision, which sees it as a means to the well being of the investors, stakeholders, employees and members of the society at large by creating new wealth in the form of goods and services that go to satisfy the wants of all of them without disturbing or damaging the socio- ecological economic balance of the mother earth and the process of human civilization leading to peaceful existence of all the living beings.

Mission: Our mission is realization of vision through maximum production of goods and services strictly on ethical and moral standards at minimum costs to the society ensuring optimum benefits to the shareholders and other stakeholders.

Objective: 1 To strive hard to optimize profit through conduction of transparent

business operations.

2 To create more jobs with minimum investments.3 To be competitive in the internal as well as external markets.4 To maximize export earning with minimum imported inputs.5 To reduce the income gap between top and bottom categories of

employees.

Last five years operational results:

2005(Thousands)

2004 (Thousands)

2003 (Thousands)

2002 (Thousands)

2001(Thousands)

Turnover 2390979 2459201 2102670 1789018 2076925Gross profit 543160 375498 365615 288737 400234Net profit before tax

397812 229759 181253 87204 174723

Net profit after tax

255494 198690 167894 81453 174723

Shareholders equity

1513511 1349457 1233894 1146608 1140724

Total assets 2585177 2537295 2501397 2382055 2613633Total current assets

1391410 1357092 1284065 1055413 1182235

Total current liabilities

989212 1187839 1267503 1214172 1418293

Current ratio 1.41 1.14 1.01 0.87 0.83No of shares outstanding

30479900 27709000 25190000 25190000 25190000

Earning per share

8.38 7.17 6.06 2.94 6.31

Price earnings ratio

9.75 19.29 6.46 8.33 _ _ _

Dividend (cash)

3 3 3 3.20 3

Dividend (stock)

8:1 10:1 10:1 _ _ _ _ _ _

WACC of Square Textiles Ltd.Square textile:Total loan: 197314717Total equity: 1513511233Tax rate: 15.05%Total interest: 67966406Interest rate: 34.44%Dividend: 30, 1B: 10 (2004), 30, 50% (2005), 55% (2006)

G (growth rate) = Div (2006) – Div (2005)Div (2005)

=55-50 50

= .10

Ke (cost of equity) = Do (1 + g) Po

=55(1+.10)74.9

= .8077

WACC (weighted average cost of capital) = Kd ( 1 – Tc ) * Total Debt +Ke * Total equity

D + E D +E

=. 3444(1-.1505) * 197314717 + .8077 * 1513511233 1513511233+197314717 1513511233+197314717

=.7482

2.2.

Profile of Atlas Bangladesh Ltd.

Background:

The Company was established in 1966 under the private management by the then West Pakistani entrepreneur established The Company in 1966 under private management. It was nationalized and placed under the management of Bangladesh Steel & Engineering Corporation (BSEC) in 1972 and converted into a Public Limited Company in 1987 when 49% of its share was sold to general public and 51% is retained with BSEC. Amount of authorized capital of the company is TK.10.00 Crore and Paid-up Capital is TK.6.00 Crore. Mission of the company is to develop communication system by producing Motorcycle and Mishuk (Tri-wheeler) and widen its activities aiming at creating job opportunities, adapt latest technology, provide fast and accurate customer service to ensure steady return on stockholder equity. At present it is meeting about forty percent of domestic demand.

Strategies:

The Company is looking forward to replace the existing assembly lines with most modern and automatic ones. It has planned to manufacture motorcycle components progressively through development of linkage between Atlas Bangladesh Ltd. and other engineering industries in the country.

Name of the Members of the Board of Directors of the enterprise:

Sl. Name Designation1 Mr. Mohammad Abu Jafar

Chairman, BSEC. Telephone: 88-02-8114616, 8112808.

Chairman

2 Dr. Mohammad Ayub Mia Addl. Secretary, Ministry of Industries. Telephone: 88-02-9563561

Director

3 Mr. Mahfuzur Rahman Director

Director (Planning & Development), BSEC88-02-9116340, 9138336

4 Mr. Md. Fazlul Bari Director (Production & Engineering)88-02-9115148, 9118349

Director

5 Mr. M Akbar Ali Telephone: 88-02-9551917 & 88-02-9336671

Director

6 Mr. Md. Mojibur RahmanTelephone: 88-081-63447

Director

7 Mr. Md. Saiful IslamTelephone: 88-01711533749

Director

8 Mrs. Nasima AkterTelephone: 88-081-63447

Director

9 Mr. Md. Shamsul Haque Farajee Managing Director, Atlas Bangladesh Ltd.Telephone: 88-02-9803172

Director

Manpower:

Officer Staff Worker Total44 52 93 189

Products:

Motorcycle (ranging from 50cc to 125cc) & Three- wheeler (Mishuk).

Performance of last 5(five) years:

(Figure in Nos.) Financial Year2000-01

2001-02

2002-03

2003-04

2004-05

Motorcycle 8, 581 12, 015 13, 244 16, 864 22, 002Mishuk (Tri-wheeler)

159 316 424 114 190

Motorcycle 7, 513 11, 983 13, 359 16, 531 22, 185Mishuk (Tri-wheeler)

497 317 420 121 190

Atlas:Total loan: 7184296Total Interest: 182582Interest Rate: 2.55%Total equity: 394805178Tax rate: 26.99%Dividend: 120%, 1B: 3 (2004), 100,50%B (2005), 85%, 1B:3 (2006)


= 85-50 50

= .70


= 85(1+.70)190

= .7605


D + E D +E

= .0255*(1-.2699)* 718426 +.7605* 394805178 7184296+394805178 394805178+7184296

= .74722.3.Profile of Janata Insurance Co. Ltd.

Janata Insurance Company Limited (JICL) incorporated as a public

limited company under the COMPANIES ACT 1994 on 23 September 1986. It

commenced business on 6 November 1986 with a view to running all types

of general insurance business except life pursuant to the Insurance Act 1938

and other related laws and regulations. Authorized capital of the company is

Tk 100 million that remained unchanged, while the paid up capital increased

from the initial amount of Tk 30 million to Tk 60 million in December 2000.

The capital is divided into ordinary shares Tk 100 each. The company was

enlisted with both Dhaka and Chittagong STOCK EXCHANGE in 1994.

Managed by a 13-member board of directors with the managing director as

the chief executive, the company has its head office at Dhaka and 37

branches all over Bangladesh. It underwrites risks involved in trade and

properties and thus provides their security through insurance and reinsurance

services. Major risk underwriting businesses of the company cover fire

insurance, marine insurance, motor insurance and miscellaneous areas. In

accordance to the Re-Insurance Treaty, the company re-insures the risks

undertaken with the SADHARAN BIMA CORPORATION (SBC). It sponsored a

leasing and financing company jointly with the UNITED COMMERCIAL BANK

and some private individuals.

In 1998, the net premium incomes of the company were Tk 118.34 million

and the net claims paid by it were Tk 12.99 million. It earned underwriting

profits almost each year of its operations except 1996. The company earns

incomes each year also from its investments in National Investment Bond,

shares and debentures and other investments including FDR and short-term

deposit accounts. It maintains two special reserve funds namely, reserves for

exceptional losses and reserves for un-expired losses. The pre-tax profits of

the company were Tk 20.70 million in 1998. In that year, the assets of the

company were valued at Tk 337.40 million.

Board of Directors:

Chairman Vice chairman

Director Managing director

Deputy managing director

Executive vice president

Vice presidents

Assistant vice presidents

M A Hasem

Md. Rashed Ali

Mir Mahmud Ali

Md. Saiful Islam

M A Sabur

Md. Abu Musa Chowdhury

Belal Ahmed

Md. Humayun Kabir

Aziz al Kaiser

Md. Moniruzzaman

Aklima Begum

Tabassum Kaiser

Syeda

Shaireen Aziz

Savera H Mahmood

Zannatul Ferdous Zeena

Sultana Hasem

Fahima Akhter

Aziz Al Masud

2.4.

Profile Of Pran

Pran in Bangladesh are blessed with a climate ideally suited to agriculture, especially fruits and vegetables rich in taste and flavor, sweet, mellow and juicy. Our deltaic plan is among the most fertile in the world created and drained by the mighty rivers. Our comparative advantage as an economy lies in agriculture. We believe the way to economic prosperity is through agri and agro-business. Pran is the largest grower and processor of fruits and vegetables in the country.Operations:During the year under review Agricultural Marketing Co Ltd. Made a gross sales of Tk. 94 crores in comparison to Tk. 84 crores during the previous year. The cost of principal raw materials i.e. sugar &packing materials like

resin, tetra pack foils etc increased abnormally. The cost of sugar increased from an average price of Tk. 30 per kg to Tk. 45. On the other hand it is difficult to increase the selling price of finished products correspondingly in order not to lose market share. In spite of this adverse development we earned Tk. 3.29 Crore operating profit & Tk. 2.90 Crore net profit after deducting workers profit participation fund &corporate tax. Corporate directory:

Chairman LT Col Mahtabuddin Ahmed

Managing Director Maj Gen Amjad Khan Chowdhury

Deputy ManagingDirector Mr. Ahsan Khan Chowdhury

Director Mrs. Sabiha Amjad

Director Barrister Akhter Imam

Director Mr. Nathendre Nath Paul

Executive Director Mr. Md. Eleash Mridha

ED & Company secretary Mr. Chowdhury Atiur Rasul

Five-year financial statistics:

Particulars 2001- 02 2002- 03 2003- 04 2004- 05 2005- 06

Authorised capital 5000008 5000008 5000008 500000 500000

Paid up capital 0000 0000 0000 80000 80000

Share premium 40000 40000 40000 40000 40000

Turnover (gross) 7892377 8396397 868255 888312 939529

Turnover (net) 1688318 5271019 775132 797683 867001

Gross margin 264844 604246 200780 204813 199232

Profit before tax 167 150 41653 42535 31228

Tangible fixed assets 2865971 3447551 327236 316813 300381

Cumulative surplus 3025327 5471429 169815 189238 196888

Shareholders Equity 253 3914 309015 330038 337688

Dividend proposed 25% 24% 24% 26% 26%

Return on paid up capital 54.26% 55.48% 50.39% 50.96% 36.18%

Book value per share 337.81 367.39 386.27 412.55 422.11

Earning per share 54.26 55.48 50.39 50.96 36.18

Market value per share 366 412 323.50 519.25 386

Price earning ratio 6.75 7.43 10.39 10.19 10.67

PRAN(AMCL):Total loan: 44209923Total Interest: 4471647Interest Rate: 10.11%Total Equity: 337687792Tax rate: 7.30%Dividend: 22% (2004), 26% (2005), 26% (2006)


= 0


= 26 (1+ 0) 363.25

= .0715


D + E D +E

= .1011 ( 1 - .0730) * 44209923 + .0715 * 337687792 44209923+337687792 44209923+337687792

= .074

2.5.Profile of Southeast Bank:

Southeast Bank has a long and relishing heritage. It is a second-generation bank, which was established in 1995 with the vision to stand out as a pioneer banking institution in Bangladesh and contribute significantly to the national economy. It was incorporated on March 12, 1995 as a public limited company. Certificate of commencement of business of the bank issued by Bangladesh Bank on March 23, 1995. The authorized capital of the bank is Tk. 2500 million. Its paid up capital and reserve reached Tk. 1300.14 million as on 31st December 2003.

The ethos of harmony and co-operation is widely practiced in the bank. Resultantly, the public and private face of the bank is one and identical. Transparency in decision making, monitoring mechanism and full disclosure to shareholders and regulatory authorities are essential aspects of bank’s corporate governance and they create intense pressure to rationalize bank’s service and search for new competitive advantage.

Vision: To stand out as a pioneer banking institution in Bangladesh and contribute significantly to the national economy.

Missions:

1 High quality financial services with the help of the latest technology2 Fast and accurate customer service.3 Balanced growth strategy4 High standard business ethics5 Steady return on shareholders equity6 Innovative banking at a competitive price7 Attract and retain quality human resource8 Deep commitment to the society and the growth of national economy

Management executives:

President and managing director

Syed Abu Naser Bukhtear Ahmed

Deputy managing director M.A. Muhith

Senior executive vice presidents

Syed imtiaz hasibMd. Mosharraf HossainMahbubur RashidA.K. Qureshi

Executive vice presidents M.M.A MoquitA.H.M Wali KhanEnamul HoqueShabbir Ahmed ImtiazChowdhury Khaled SaifullahMuhammad ShajahaMohammad Gofran

Senior vice presidents Md. Ali AhmedMd. Mubin ul KhaliqueShabuddin Md. JafarA.S.M BulbulAkram H. KhanKhandakar Fajhim Uddin AhmedAhmad Tabsir ChowdhuryMd. Altafur Rahman

Shahid HossainVice presidents Md. Sawkat Hossain

Mustafizur RahmanKazi Mahmood KarimMd. Sams TabrezA.F.M. Sariful IslamMohammad mahmud HasanM. Kamal Hossain

Five years Financial Highlights:

(In million)Particulars 2003 2002 2001 2000 1999Authorized capital

2500 2500 500 500 500

Paid up capital 677.16 399.30 363 330 300Reserve fund 622.99 571.66 394.20 235.28 145.70Equity fund 1300.14 970.96 757.20 565.28 445.70Deposit 20118.82 16598.45 12630.25 10309.70 7512.49Advance 15548.11 13027.13 9178.03 7061.87 5051.88Investment 2581.66 2282.08 1727.44 1369.92 971.81Import business 16270.80 12817.01 12187.37 11239.14 8228.50Export business 3033.79 2263.45 2675.05 1319.51 704.47Gurantee business

3391.19 2502.48 1854.50 1306.24 907.18

Total income 2772.52 1936.54 1748.18 1259.03 862.86Total expenditure

2107.36 1443.98 1256.05 921.70 661.02

Operating profit 665.16 492.56 492.13 337.33 201.84Net profit after tax

256.06 253.56 270.74 172.84 85.48

Fixed aseets 288.02 48.81 36.26 71.13 78.37Total assets 23142.35 18882.48 14468.66 11710.56 8336017Earning per share

45.38 69.85 82.04 57.61 56.99

Dividend(cash) 20% 20% 30% 25% 15%Dividend(stock) 20%(5: 1) 10% (10: 10% 10% _ _ _

1) (10:1) (10:1)ROE 19.69% 26.11% 35.76% 30.58% 19.18%ROA 1.11% 1.34% 1.87% 1.48% 1.03%Non performing loans as % of total loans

2.09% 1.99% 2.78% 2.95% 3.75%

Capital Adequacy ratio

9.20% 8.23% 8.77% 8.40% 9.52%

Southeast Bank:Total loan: 4275371862Total equity: 1257606617Tax rate: 53.89%Total interest: 1729415702Interest rate: 40.45%Dividend: 20%, 20B:100 (2004), 30% (2005), 50% (2006)


= 50-30 30

= .6667


= 50(1+.6667)320.75

= .2598


D + E D +E

= .4045(1-.45)* 4275371862 +.2598* 1257606617 1257606617+425371862 425371862

= 1.332.6.Profile of ACI Ltd.:

Mission: ACI’s mission is to enrich the quality of life of people through responsible application of knowledge, skills and technology. ACI is committed to the pursuit of excellence through world-class product, innovative processes and empowered employees to provide the highest level of satisfaction to its customers.

Values:1 Quality2 Customer focus3 Fairness 4 Transparency5 Continuous improvement

Vision:To realize the mission ACI will:

1 Endeavor to attain a position of leadership in each category of its businesses

2 Attain a high level of productivity in all its operations through effective and efficient use of resources, adoption of appropriate technology and alignment with our core competencies

3 Develop its employees by encouraging employment and rewarding innovation

4 Promote an environment for learning and personal growth of its employees

5 Provide product and services of high and consistent quality, ensuring value for money to its customers

6 Encourage and assist in the qualitative improvement of the services of its suppliers and distributors

7 Establish harmonious relationship with the community and promote greater environmental responsibility within its sphere of influence

Corporate governance:ACI board of directors is committed to meeting the highest standard of corporate governance and disclosure. The directors are conscious of their responsibilities in supervision and direction of the affairs of the company in conformity with the practices of sound corporate governance. In fulfillment of those responsibilities the directors have set for themselves the principles that will be followed in their own involvement in the oversight function and in setting up clear guidelines for the executive management.

Executive management:Mr. M Mohibuz ZamanChief operating officer

Dr. F H AnsaryExecutive Director

Mr. Azmal HossainExecutive Director

Company Secretary:Ms. Sheema Abed Rahman

Auditors:Rahman Rahman Huq

Financial consultant:Mr. M Sekander Ali

Principal Bankers:

Standard Chartered BankThe Hongkong Shanghai Banking corporation Ltd.Commercial Bank of Ceylon Ltd.Citibank NAArab Bangladesh Bank Ltd.Mutual Trust Bank Ltd.Mercantile Bank Ltd.

Five years comparative statistics:Particulars 2001 2002 2003 2004 2005Taka in ThousandsAuthorised capital

500000 500000 500000 500000 500000

Issued and paid up capital

161700 161700 161700 161700 161700

Turnover 1637408 2052914 2239565 2557772 3088715Gross profit 453334 630666 639354 740378 957176Profit before tax 136715 163603 92968 141390 169075

Profit after tax 91715 109181 84941 89516 112271

Current assets 816321 1099460 1396400 1342336 1537156

Net current assets

206401 192222 216094 181380 12952

Shareowners equity

547186 590384 667512 861487 905935

Dividend 60638 60638 64680 68723 72765Current ratio 1.3 1.2 1.2 1.2 1Quick ratio .6 .5 .5 .5 .6Return on equity

16.8% 18.5% 12.7% 10.4% 12.4%

Inventory turnover

2.5 2.7 2.3 2.4 3

Debtors turnover

24 23 16 12 11

Working capital turnover

7.9 10.7 10.4 14.1 238.5

Fixed assets turnover

7.7 8.8 7.3 3.8 4.2

Net asset per share

33.8 36.5 41.3 53.3 56

Market price 55.3 54.2 66.7 94.4 69.6

per shareEarnings per share

5.67 6.75 5.25 5.54 6.94

Dividend per share

3.75 3.75 4 4.25 4.50

Dividend payout ratio

88.2% 66.1% 55.6% 75.8% 76.7%

Effective dividend rate

6.8% 6.9% 6% 4.5% 6.5%

ACI:Total Loan: 846979658Total Interest: 83396936Interest Rate: 9.84%Total Equity: 905935269Tax Rate:33.59%Dividend: 40% (2004), 42.50% (2005), 45% (2006)


= 45 – 42.5042.50

= .0588


= 45(1+ .0588)70.20

= .6787


D + E D +E

= .0984 (1 - .3359) * 846979658 + .6787 * 905935269 905935269+846979658 846979658+905935269

= .3823

Company Cost of Capital Average Return

Average Risk

Disclosure Index

Janata Insurance .1723 .0087 .1646 5.71Atlas .0255 .0014 .1229 5.43Pran .1011 .00028 .0616 5.43Square Textile .3444 .0223 .0790 6.0Southeast Bank .4045 .0189 .1218 4.57

ACI .0984 .0331 .0533 6.57

Summary of the calculation:

3.0.Linkage between information disclosure and cost of capital

We have developed an asset pricing model in which both public and private information affect asset returns. Because the return investors demand determines a firm's cost of equity capital, our analysis provides the linkage between a firm's information structure and its cost of capital. We have demonstrated that investors demand a higher return to hold stocks with greater private information. This higher return reflects the fact that private information increases the risk to uninformed investors of holding the stock because informed investors are better able to shift their portfolio weights to incorporate new information. Private information thus induces a form of systematic risk, and in equilibrium investors require compensation for bearing this risk. An important implication of our research is that firms can influence their cost of capital by affecting the precision and quantity of information available to investors. This can be accomplished by a firm's selection of its accounting standards, as well as through its corporate disclosure policies. Attracting an active analyst following for a company can also reduce a Company’s cost of capital, at least to the extent that analysts provide credible information about the company. Yet another way to influence its information structure is through the firm's choice of where to list their securities for trading. Because investors learn from prices, the microstructure of where a firm's securities trade can influence how well and how quickly new information is impounded in the stock price. These factors suggest that a firm's cost of capital is determined, at least partially, by corporate decisions unrelated to its product market decisions. These findings suggest an important role for the accuracy of accounting information in asset pricing. Here greater precision will directly lower a company's cost of capital because it will reduce the riskiness of the asset to the uninformed. This finding is consistent with the extensive accounting literature documenting the effects of accounting treatments on stock prices. .

life cycle of a firm may also influence its cost of capital. In particular, it seems reasonable that investors will better know a firm with a long operating history. Attracting an active analyst following for a company can also reduce a company's cost of capital, at least to the extent that analysts provide credible information about the company. Yet another way to influence its information structure is through the firm's choice of where to list their securities for trading. Because investors learn from prices, the microstructure of where a firm's securities trades can influence how well and how quickly new information is impounded in the stock price. These factors suggest that a firm's cost of capital is determined, at least partially, by corporate decisions unrelated to its product market decisions.

Our findings here raise a number of issues for further study. If, as our analysis suggests, the quality of information affects asset pricing, then how information is provided to the markets is clearly important. Recently, the SEC has considered allowing individual investors access to IPO electronic road shows, has proposed tighter restrictions on what companies can disclose privately to analysts, and has pondered whether internet investment chat rooms are positive or negative influences for stock prices. While addressing each of these topics is beyond our focus here, the framework we develop does provide a way to consider how particular market practices affect equilibrium asset pricing. Our results also raise interesting questions about security market design and the cost of capital. In particular, how transparency of trades and orders influence the informative ness of stock prices, or even how the speed of the trading system affects information flows to investors, seem important directions for future research.

3.1.Correlation between information disclosure and cost of capital

Disclosure Index Cost of capital5.71 0.1723

5.43 0.0255

5.43 0.1011

6 0.3444

4.57 0.4045

6.57 0.1011

Correlation -0.40726

Greater information will directly lower a company's cost of capital because it will reduce the riskiness of the asset to the uninformed and vice versa. That’s why; we can see that there is a negative correlation between disclosure index and cost of capital.

The effect of disclosure level on the cost of equity capital is a matter of considerable interest and importance to the financial reporting community.

However, the association between disclosure level and cost of equity capital is not well established and has been difficult to quantify. In this paper examine the association between disclosure level and the cost of equity capital by regressing firm-specific estimates of cost of equity capital on market beta, firm size and a self-constructed measure of disclosure level. My measure of disclosure level is based on the amount of voluntary disclosure provided in the last five years annual reports of a sample of 7 firms. For firms that attract a low analyst following, the results indicate that greater disclosure is associated with a lower cost of equity capital. The magnitude of the effect is such that a one-unit difference in the disclosure measure is associated with a difference of fewer units in the cost of equity capital, after controlling for market beta and firm size. For firms with a high analyst following, however, I find no evidence of an association between my measure of disclosure level and cost of equity capital perhaps because the disclosure measure is limited to the annual report and accordingly may not provide a powerful proxy for overall disclosure level when analysts play a significant role in the communication process.

5 ConclusionThe primary focus of this paper has been to demonstrate possible linkages between intangible assets and a firm's cost of capital. We highlight the accounting bias towards recognized intangible assets, which present only a fraction of a firm's overall intangible assets that also include internally generated intangible assets. By addressing the efficient market hypothesis, this paper has attempted to draw managerial and academic attention to possible implications of intangible assets on a firm's cost of capital. Accounting-driven information distorts the market perception of the true impact of intangible assets. Market values of equity may not fully incorporate intangible assets. As the cost of capital is a weighted average, the market-driven weight of equity may be incorrect due to inadequate assessment of a firm's intangible assets. An inaccurate cost of capital wills not only results in flawed corporate financial decisions; it will also result in incorrect estimations of a firm or project's value. Information asymmetry has been linked to increased cost of capitals and intangible asset-

Intensive companies. In this context, we refer to research that demonstrates a negative correlation between disclosure of information and the cost of capital. Based on our findings, we have put forward suggestions for possible managerial actions. We assume that a firm may be able to manage its cost of capital by means of intangible assets. Optimizing and leveraging the potential of intangible assets may result in higher and less volatile cash flows and reduced business risk. As part of managing the cost of capital, we also see managerial implications by means of enhanced disclosure and transparency that could result in lower information asymmetry and perceived risk.

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