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( ), (), , , , sohel114@gmail.comPage 2 ............................................................................................................................................................................................ 4 BASIC EQUATION OF ACCOUNTING ................................................................................................................................... 4 Year ............................................................................................................................................................................................. 4 INTEREST .................................................................................................................................................................................. 5 PAID IN CAPITAL ..................................................................................................................................................................... 5 ADDITIONAL PAID IN CAPITAL ............................................................................................................................................ 6 CONTRA EQUITY ACCOUNT ................................................................................................................................................. 6 Diluted EPS: ................................................................................................................................................................................ 7 Financial Performance Analysis ....................................................................................................................................................... 8 Liquidity Ratio ............................................................................................................................................................................. 9 Quick Test or Acid Test Ratio ..................................................................................................................................................... 10 Asset Management Ratio (Activity Ratio) ................................................................................................................................. 10 Total Asset Turnover Ratio ......................................................................................................................................................... 10 Asset Management Ratio ........................................................................................................................................................... 11 Average payment period ........................................................................................................................................................... 11 Debt Management Ratio ............................................................................................................................................................ 12 Times interest Earned = ............................................................................................................................................................. 12 Profitability Ratio....................................................................................................................................................................... 12 Gross profit Margin .................................................................................................................................................................... 12 Operating Profit Margin ............................................................................................................................................................. 13 Net Profit Margin ....................................................................................................................................................................... 13 Return On Asset (ROA) ............................................................................................................................................................... 13 Stock Market Ratio .................................................................................................................................................................... 14 Market to Book value ratio (M/B) .............................................................................................................................................. 14 Price to Earning Ratio (P/E) ........................................................................................................................................................ 14 TIME VALUE OF MONEY .......................................................................................................................................................... 15 Lump sum / Single sum amount (Single deposit with single withdraw) .................................................................................... 15 1.a) Single interest calculation .............................................................................................................................................. 15 1.b) Compound interest calculation ....................................................................................................................................... 15 Annuity ...................................................................................................................................................................................... 17 2.a) Ordinary Annuity:Payments are made at the end of each period. ................................................................................ 17 2.b) Annuity due: Payments are made at the start of each period. ......................................................................................... 17 Perpetuity ................................................................................................................................................................................... 19 Loan Amortization ..................................................................................................................................................................... 20 Sinking fund:.............................................................................................................................................................................. 20 Volume Cost Profit Analysis .................................................................................................................................................... 21 Fixed cost (FC) .......................................................................................................................................................................... 21 Variable cost .............................................................................................................................................................................. 21 sohel114@gmail.comPage 3 Mixed cost ................................................................................................................................................................................. 21 Break-even point (BEP) ............................................................................................................................................................. 21 Risk & Rate of Return .................................................................................................................................................................... 23 Retrun: ....................................................................................................................................................................................... 23 Risk: ........................................................................................................................................................................................... 25 Diversifiable / Company specific / unsystematic risk ........................................................................................................... 25 Non-diversifiable / Market / Systematic risk ......................................................................................................................... 25 Financial Planning & Forecasting ................................................................................................................................................... 26 Stock & Bond Valuation ................................................................................................................................................................. 29 Coupon rate: .............................................................................................................................................................................. 29 Coupon payment ....................................................................................................................................................................... 29 Terms to maturity: ..................................................................................................................................................................... 29 Types of Bond: ........................................................................................................................................................................... 29 Bonds based on their issue price: .................................................................................................................................................... 29 Stock & their valuation .............................................................................................................................................................. 30 Cost of Capital: ............................................................................................................................................................................... 31 1. Loan: ...................................................................................................................................................................................... 31 2. Equity: .................................................................................................................................................................................... 31 Dividend Policy: ............................................................................................................................................................................. 33 Cash flow: ....................................................................................................................................................................................... 34 Normal Cash flow ................................................................................................................................................................. 34 Payback period: ......................................................................................................................................................................... 35 Discounted Payback period ........................................................................................................................................................ 36 Net Present Value (NPV) ............................................................................................................................................................ 36 Profitability Index (PI) ................................................................................................................................................................. 37 Internal Rate of Return (IRR) ...................................................................................................................................................... 37 Modified IRR .............................................................................................................................................................................. 39 TABLE: FVIF(i,n) ................................................................................................................................................................................ 42 TABLE: PVIF(i,n) ................................................................................................................................................................................ 42 TABLE: FVIFA(i,n) .............................................................................................................................................................................. 43 TABLE: PVIFA(i,n) .............................................................................................................................................................................. 43 sohel114@gmail.comPage 4 Finance is the art & science of managing money. Finance is all about: 1.Financing activity : I. Bank loan II. Bond ( ) III. Preferred stock ( ) IV. Common stock V. Retained earning 2.Investing activity: Capital budgeting:Capital budgeting is the process of evaluating & selecting long term investments that are consistent with the goal of shareholders (owners) wealth maximization. 3.Dividends policy BASIC EQUATION OF ACCOUNTING Total asset (TL) = Liabilities + Shareholders equity .. (1) Total asset (TL) = Current asset (CA) + Fixed asset (FA) Liabilities = Current liabilities (CL) + Long term liabilities (LL) Shareholders equity = Owners equity (OE) So from equation 1 we have: (CA + FA) = (CL + LL) + OE Or,(CA CL) + (FA LL) = OE ( Liability Net asset or OE or Net worth or Net OE) (CA CL) is called WORKINK CAPITAL. Year Calendar year: January ~ December Financial year: July ~ June ( ) Fiscal year: , Sept 01, 2012 Fiscal year Sept 01, 2012 ~ Aug. 30, 2013 sohel114@gmail.comPage 5 INTEREST Interest is called TAX DEDUCTIBLE EXPENSE. X Y.X , Y EBIT (Earnings Before Interest & Tax) X(No Loan) Y(Loan) 20,000 20,000 0 (5,000) Y pays interest for its loan 20,000 15,000 (4,000) (3,000) Y pays 1,000 TK less as TAX than what Xpays 16,000 12,000 Y , Interest is called TAX DEDUCTIBLE EXPENSE. X, Tax 4,000 TK. Y, Interest Tax : 5,000 + 3,000 = 8,000 TK,Y Net expense for loan: INTEREST PAID (I) 1,000;Y pays 1,000 TK less as TAX than what X pays Y Net expense for loan: 5,000 1,000 = 4,000 TK. After Tax income = Before Tax income (1-T) 50,000 TK 15% After Tax income = 50,000 (1-0.15) = 42,500 TK PAID IN CAPITAL XYZ SEC (Securities & Exchange Commission) 1TK 5 million (authorization) 3 Million ( ) Common Stock (5m authorized, 3m issued & outstanding, TK 1 Par) TK 1 Par FACE Value 1TK. Paid in capital , 3m TK. sohel114@gmail.comPage 6 ADDITIONAL PAID IN CAPITAL XYZ 1M Par value Face value Premium Charge 4 TK 4 TK = 1TK (Face value) + 3TK (Premium Charge) Face value Additional Paid In Capital or Paid in Capital in access of Par Share or Share Premium. 3M TK. Common Stock (5m authorized, 4m issued & outstanding, TK 1 Par) Paid in Capital = 3m + 1m = 4m TK Additional Paid in Capital = 3m TK CONTRA EQUITY ACCOUNT authorization , Treasury stock. (buy back) ( Face value TK 1) 2 1m 2m TK. equity , Contra Equity Account. ()

(2) EPS Maximize owners (Shareholders) wealth. CEO, CFO, Director share holders AGENT Agent owner (relation) AGENCY RELATIONSHIP. Agent owner conflict of interest AGENCY PROBLEM. Agency problem agent compensation plan agent agency problem AGENCY COST. (profit) (efficient), (stable) economic recession sohel114@gmail.comPage 7

Diluted EPS: stock dividend dividend , EPS , 3m. Dividend 1m 4m. 3m EPS BASIC EPS 4m EPS DILUTED EPS. EPS , BASIC EPS EPS DILUTED EPS sohel114@gmail.comPage 8 Financial Performance Analysis Net profit margin 10% - , 1.Compare with own companys average: Time series analysis 2.Compare with competitors: Cross sectional analysis 3.Compare with Industry average: Cross sectional analysis Time Series AnalysisCross Sectional Analysis for year 2014 0510152009 2010 2011 2012 2013 2014 2015ABC 05101520ABC Square Beximco IndustryAverage sohel114@gmail.comPage 9 Total 10,000 share outstanding. Mkt. price of share = 12 tk. Liquidity Ratio 20052006 Industry Average (IA) Current AssetCA1,2001,200Current LiabilitiesCL200300

Current RatioCA/CL64 5 Times

Interpretation In 2006 the companies CA were 4 times higher than CL. sohel114@gmail.comPage 10 Report Current ratio declined & was below IA. Decision Performance POOR. Reason CL has increased from last year. Quick Test or Acid Test Ratio (ATR) =

; Inv. = Inventory Inv. least liquid asset. CA Inv. Acid Test (Quick) Ratio ATR Interpretation & others: Same as Liquidity Ratio ( Inv. ) Asset Management Ratio (Activity Ratio) I nventory Turnover Ratio (I TR) =

20052006 IA ITR2.182.32 2.2 Interpretation In 2006, the company had sold out & restored its inventory 2.32 times. Report It is satisfactory, improved from last year & above IA Decision Performance GOOD. Reason Relative change in sales was more than the relative change in Inv. Total Asset Turnover Ratio =

20052006 IA TAT0.50.56 0.75 20052006 IA 3.251.92 3 Times Times Times sohel114@gmail.comPage 11 Interpretation In 2006, every $1 worth of total asset generated $0.56 sales Report Slightly improved but below IA. Decision Performance POOR. Reason Relative change in sales increased than relative TA efficiency still low. Asset Management Ratio Fixed Asset Turnover Ratio =

Do it yourself, I am tired. Days sales outstanding (DSO) or Average collection period =

(

) 20052006 IA DSO137108 90 DaysDays Days Interpretation On an average, it takes 108 days to collect receivables from customers. Report, Decision, Reason Do it yourself Average payment period = () 20052006 IA APR10465 Not DaysDays Available 65 supplier Interpretation, Report, Decision, Reason Do it yourself Average payment period liability account. asset performance management decision sohel114@gmail.comPage 12 Days sales outstanding 108 65 supplier liquidity Liquidity ratio Debt Management Ratio Debt to Asset Ratio = 20052006 TL200+600300+600 TA2,4002,600 DAR33.33%34.62% Interpretation In 2006, 34.62% of the total Asset were financed by Debt. Times interest Earned =

20052006 TIE55.625 TimesTimes Interpretation In 2006, the company has covered their interest expense 5.625 times with their operating income. Profitability Ratio Gross profit Margin =

x 100 20052006 GPM41.66%41.38% sohel114@gmail.comPage 13 Interpretation Every $ 100 sales generated $ 41.38 Gross Profit (GP) GP = Sales COGS $ 58.62 COGS. Operating Profit Margin =

x 100 20052006 OPM20.83%24.83% Net Profit Margin = ( )

x 100 20052006 NPM10.00%12.27% Return On Asset (ROA) = x 100 20052006 ROA5.00%6.85% Interpretation Every $100 Asset generates $6.85 Net Income. Return on Equity (ROE) or Return on I nvested capital or Return on Investment (ROI ) = ( )

x 100 (Note: Total Equity = Common Share holders Equity + Preferred Share holders Equity Total Common Equity= Common Share holders Equity In our country Preferred Share is not available.) sohel114@gmail.comPage 14 20052006 ROI7.50%10.47% Interpretation The common share holders have earned $ 10.47 out of every $100 investment in the company. Stock Market Ratio EPS (for common share holders) =

20052006 EPS 0.01200.0178 (For C.S.)per shareper share Market to Book value ratio (M/B) = () BVPS =

20052006 BVPS$0.1600$0.1700 per shareper share 20052006 M/B75.070.5 TimesTimes Price to Earning Ratio (P/E) =

2006 P/E674.15 Interpretation In 2006, the common share holders were willing to pay $674 for every dollar of reported earnings. sohel114@gmail.comPage 15 TIME VALUE OF MONEY Definition:The value of an unit of money is different in different time periods (A dollar today worth more than a dollar tomorrow). , 10% interest rate 100TK , Present Value (PV) = 100 TK Future Value (FV) = 110 TK Interest Rate (i) = 10% n = number of years or number of compounding (n i ) (Financial analysis inflation constant ) Cash flows: Lump sum / Single sum amount (Single deposit with single withdraw) Deposit Withdraw 500,000 FV

012345 Year 1.a) Single interest calculation , % ? Interest = Pin ; (P = 500,000 TK, i = 10%, n = 5) Interest = 500,000 x 0.01 x 5 = 25,000 TK FV = P + I = 500,000 + 25,000 = 525,000 TK 1.b) Compound interest calculation I = Pin , % compounding . . . . . Po ,Io=Po i n = Po i ; (n=1) sohel114@gmail.comPage 16 Po + Io = Po + Poi = Po(1+i) (1+i) 1 Po(1+i) i1 = Po(1+i)i Po(1+i) + Po(1+i)i=Po(1+i) (1+i) = Po(1+i)2(1+i) 2 n Po(1+i)n n FVn FVn = Po(1+i)n Compute the FV of an initial taka 100 compounded annually for 10 years at 10%. FV = 100(1+0.1)10 = 259.37 TK FV = PV(1+i)n FV = PV (FVIFi,n) ; FVIFi,n : Future Value of Interest Factor for interest i & year n (1+i)n (FVIFi,n) (FVIFi,n) (FVIFi,n) table table FV = PV(1+i)n = PV (FVIFi,n) ;(FVIFi,n Table i= 10% n = 10 , (FVIFi,n) = 2.594 ) = 100 x 2.594 =259.4 TK % . FV = PV(1+i)n or,PV = FV / (1+i)n = 259.4 / (1+0.1)10 = 100 TK. Table FV = PV(1+i)n or,PV = FV / (1+i)n or, PV = FV (PVIFi,n) ; PVIFi,n : Present Value of Interest Factor for interest i & year n (PVIFi,n Table i= 10% n = 10 , (PVIFi,n) = 0.386 ) PV = 259.4 x 0.386 = 100 TK , i n Table sohel114@gmail.comPage 17 Annuity , , , a. Fixed Payments ( ) b. Time gap same ( ) c. Maturity Deadline ( ) Deposits5,0005,0005,0005,0005,000Withdraw the Matured amount

012345 Year 2.a) Ordinary Annuity:Payments are made at the end of each period. 2.b) Annuity due: Payments are made at the start of each period. , % , ? ordinary annuity

Deposits5,0005,0005,0005,0005,000Withdraw the Matured amount

012345 Year , FV = PV(1+i)n , 5,000(1+0.13)4 = 8,152 taka. , 5,000(1+0.13)3 = 7,214 taka. , 5,000(1+0.13)2 = 6,384 taka. , 5,000(1+0.13)1 = 5,650 taka. , 5 5,000(1+0.13)0 = 5,000 taka. sohel114@gmail.comPage 18 8,152 + 7,214 + 6,384 + 5,650 + 5,000 = 32,400 taka. Annuity table FVA = PMT (FVIFAi,n) Future Value of Annuity = Payment (Future Value Interest Factor for Annuity for Interest i & year n Payment ( , ) FVA = 5,000 x 6.480 = 32,400 taka. FVIFA table i = 13% , n = 5 PVA = PMT (PVIFA i,n) ( ) i n FVA = PMT{ (1+i)n -1}/i PVA = PMT[1 {1/(1+i)n}]/i i n % + x . = semiannual compounding + x . = i . + x . = . FV = PV (1+i)n = 100 x (1+0.05)2 = 100 x 1.1025 = 110.25 taka n compounding semiannual compounding n = 2 i % % % % quarterly compounding n = 4 i = (10/4)% = 2.5% % monthly compounding , n = 12 i = (10/12)% = 0.8333% FV = 100(1+0.008333)12 = 100 x 1.1047 = 110.47 taka sohel114@gmail.comPage 19 n n compounding i compounding , % quarterly compounding ? compounding x = n = 20 compounding i = (10/4)% = 2.5% FV = PV(1+0.025)20 = 100 x 1.63862 =163.862 taka Annual Percentage Rate (APR) or Effective Annual Rate (EAR) APR or EAR = {1 +( iNOM/m)m} 1 NOM: Nominal ( contract ) m = number of times compounded per year % semiannual interest yearly interest rate ? EAR = ( 1 + (0.1/2)2) 1 = 10.25% Perpetuity Def. : A series of equal payments continue forever. , , , Perpetuity. Perpetuity PV ? PV =

If i = 12.5% PV = 10,000/0.125 = 80,000 Tk. sohel114@gmail.comPage 20 Loan Amortization , % ? Annuity PV PVA = PMT (PVIFA i,n) , PMT. i = 10% n = 3 PVA = 1,000 Loan 1,000 = PMT(PVIFA10,3) = PMT x 2.487 So, PMT = 1,000/2.487 = 402.09087 Taka (Principal) + Interest. Loan Amortization Schedule Table Loan Amortization Schedule YearBeginningPaymentInterestPrincipalEnding Balance Balance abcd = 0.1 x be = c - df 11,000402.09087100.00302.09698 2698402.0908769.79332.30366 3366402.0908736.56365.530 Sinking fund: It is a fund in which periodic payments are made in order to accumulate a specific amount at some point in future. ? i = % FV = PMT (FVIFi,n) Or, 100 = PMT(6.105) PMT =100/6.105 = 16.375 TK. sohel114@gmail.comPage 21 Volume Cost Profit Analysis Cost behavior with change in volume: How a cost reacts with the change in the level of business activity. Three types of cost behavior can be visualized with change in volume/level of activity: Fixed cost (FC) Fixed costs do not change with the activity level change. ( , building Fixed cost Activity level FC.

Variable cost ( ) ( ) Variable cost Mixed cost Mixed cost (FC) (VC) Break-even point (BEP) BEP , Profit = 0 ( ) , VC FC ? :

Sales VC Contribution Margin (CR) VC , FC , (/) = , BEPQ (Break Even Point, Quantity) =

=

= 50 sohel114@gmail.comPage 22 = x = , BEPC (Break Even Point, Cash) =

x P ;(P Sales Price) BEPC =

BEPC =

;(CR/P is called CR Ratio) BEPC =

= 250 taka (Equation) BEP , Total Revenue (TR) = Total Fixed Cost (TFC) + Total Variable Cost (TVC) + Net Income (NI) , BEP , NI = 0 , BEP , TR = TFC + TVC, Q P , TR = Q x P TVC = Q x VC ; VC unit variable cost TFC = 100 ; (given) So, Q x P = 100 + Q x VC P = 5 & VC = 2 ; (given) Q x 5 = 100 + Q x 3 So, Q = 50 Unit. FC= VC ? + = , FC + = sohel114@gmail.comPage 23 Risk & Rate of Return , share capital gain (product price appreciation ) Share . dividend invest capital gain . dividend Capital gain yield = (3/12)x100 = 25% Dividend yield = (1.5/12)x100= 12.5% So, total yield or total rate of return = 25% + 12.5% = 37.5% Retrun: 1.Expected Rate of Return 2.Required Rate of Return 3.Realized / Historical Rate of Return return () YearBATASingerNavana 201012.00%5.00%19.00% 201113.00%4.50%11.00% 201214.00%7.00%13.00% Average Rate of return13.00%5.50%14.33% Average Rate of Return( ) Expected Rate of Return ( ) So, B= 13% ;S= 5.5% ;N= 14.33% Risk = Standard deviation () = (Variance) = {(Ki -)/(n-1)} = [{(12-13)2+(13-13) 2+(14-13) 2}/(3-1)] = 1 Co-efficient of Variation (CV) = /So, CVB = 1/13 = 0.07692 sohel114@gmail.comPage 24 For Bata, $100 expected return bears a risk of 7.692% share market return Stand Along Return Stand Along Risk. Investment Bata1,20,000 Singer1,00,000 Navana80,000 Total Investment3,00,000 Portfolio Return & Risk calculation YearBeginningPaymentInterestPrincipalEndingPortfolio Balance BalanceReturn abcd = 0.1 x be = c - df11,000402.09087100.00302.096982698402.0908769.79332.303663366402.0908736.56365.530 Weight of investment for Bata, WB = (1,20,000/3,00,000) x 100 = 40% Weight of investment for Singer, WS = 33.33% Weight of investment for Navana, WN = 26.67% So, in 2010 portfolio return, KP = WiKi Or, K2010 = 0.4 x 0.12 + 0.3333 x 0.05 + 0.26666 x 0.19 = 11.52% in 2011 portfolio return, K2011 = 9.63% in 2012 portfolio return, K2012 = 11.40% Average portfolio return = {(11.52 + 9.63 + 11.40)/3}% = 10.85% Required Rate of Return: Ke = Rf + (Rm Rf) x Rf Risk free Rate (Treasury Bill etc.) RmReturn from Stock Market Market Risk associated with each stock = 1.2 1% 1.2% Private Limited company Market Bond Bond Industry Bond Ke = Bond yield + Risk premium sohel114@gmail.comPage 25 Risk: Diversifiable / Company specific / unsystematic risk industry Not to maximize return but to minimize loss Non-diversifiable / Market / Systematic risk , Diversifiable / Company specific / unsystematic risk ( ) Non-diversifiable / Market / Systematic risk ( ) sohel114@gmail.comPage 26 Financial Planning & Forecasting Method: % sales method. Number of share = 100 Total number of common share outstanding = 100 sohel114@gmail.comPage 27 Geometric average = {(1+0.0833)x(1-0.0417)x(1+0.2083)x(1-0.0833)x(1+0.2083)}1/5 1 ={ 1.0833 x 0.9583 x 1.2083 x 0.9167 x 1.2083}1/5 1 = 1.067986 1 = 0.067986 = 6.7986 % FV = PV(1+g)n FV sales PV sales g growth rate sohel114@gmail.comPage 28 sohel114@gmail.comPage 29 Stock & Bond Valuation face value ( ) secondary market face value (redeem buyback) Coupon rate & coupon payment , terms to maturity, Market interest rate or Yield to maturity (YTM) o Required Rate of Return by the bond holders Coupon rate: Stated interest rate Coupon payment: Coupon rate x Face value Terms to maturity: Terms to maturity Market interest rate or Yield to maturity (YTM) or Required Rate of Return by the bond holders: Types of Bond: 1.Government bond: 2.Corporate bond:Issued by corporates 3.Convertible bond: Conversion ration 4.Callable bond: maturity Face value call premium call price Call price = Face value + call premium 5. Secured bonds: fixed asset registered fixed asset 6.Unsecured bonds / Debentures: fixed asset registered 7.Zero coupon bonds: face value , maturity , 8.Junk bond: offer (Z grade stock ) offer

Bonds based on their issue price: 1.Discount bond: face value maturity face value (CRYTM) 3.Par value bond: face value (CR=YTM) , % face value , , ? ( YTM = %) present value convert , % Annuity , lump sum ,Coupon rate: 12% Coupon payment: 12% x 1,000 = 120 Coupon payment PMT PVA = PMT(PVIFAYTM,n)= 120(PVIFA10,5) = 120 x 3.79 = 454.8 PV = FV/(1+YTM)5 = 1,000/(1+0.1)5 = 620 So, PVB = 454.8 + 620 = 1074.8 Stock & their valuation 1.Preferred stock Preferred stock Hybrid Security fixed preferred dividend common stock maturity deadline Perpetuity PV(Preferred Stock) = () () 2.Common stock Stock market transaction 1.IPO: Initial Public Offering. face value IPO Going public @ Face Value. 2.Primary market transaction: authorized share ( Seasoned New Issues) (pro rata basis) preemptive right. 3.Secondary market: DSE, CSE, NYSE Common Stock Valuation: Po = Stock price today Do = Dividend (the most recent dividend that is paid) sohel114@gmail.comPage 31 g = Growth rate of dividend D1 = The next expected dividend Ke = Rf + (RM Rf) x ; Required rate of return by the C.S. holders Po = D1/(ke g) D1 = Do x (1+g) Cost of Capital: Sources of capital: 1. Loan:i. Bank loan ii. Bond 2. Equity:i.Preferred Share ii. Common Share iii.Retained Earning 1.i. Cost of Bank loan: corporate Personal % corporate tax % Cost of bank loan = 0.12(1-0.25) = 9% 1.ii. Cost of issuing bond: YTM (Yield To Maturity): maturity return YTM. YTM = {coupon payment+ (FV-MV)/n}/{(FV+MV)/2} Stock & Bond valuation Market interest rate or Yield to maturity (YTM) or Required Rate of Return by the bond holders Flotation cost:, P.S. , C.S. (licensing cost, bank charge, layers charge etc.) flotation cost. flotation cost , issuer 2.i. Cost of issuing P.S. Po = Dp / Kp , Po = 45 Tk, Flotation cost = 3 taka then from the issuers point of view, Po = 42 taka 2.ii. Cost of issuing C.S. sohel114@gmail.comPage 32 Po = D1/(Ke g) Ke = (D1/Po) + g cost of issuing C.S. % , C.S. 2.iii.Cost of Retained earnings:Retained earnings opportunity cost flotation cost Ranking of Cost of Capital 1.Bank loan // Easy & cheapest ( .%), Flotation cost , 2.Bond // , Flotation cost bank loan expensive. 3.P.S. 4.Retained earning 5.C.S. // Flotation cost higher than flotation cost of P.S.Overall Cost of Capital , WACC (Weighted Average Cost of Capital) = WBL x KBL(1-T) + WB x KB(1-T) + WP x KP + WR x KR + WC x KC If T = 25% WACC = 0.14 x 0.12(1-0.25) + 0.28 x 0.14(1-0.25) + 0.14 x 0.16 + 0.28 x 0.17 + 0.14 x 0.18 = 0.1372 =13.72% ,, ,, .% sohel114@gmail.comPage 33 Dividend Policy: Dividend payout ratio:Net income % dividend Retaining Ratio or Plowback Ratio: Net income % retain Declaration Date: AGM (Annual General Meeting) AGM dividend dividend , liability Record Date: ( , ) record dividend Payment Date: dividend (disburse) Windfall profit: / profit Cash dividend: Stock dividend: dividend % % % small stock dividend. % large stock dividend. , 5m 1m 1m Par value (face value) , Face value + Premium charge. , (face value) + (Premium charge) Premium charge additional paid in capital retained earning 1m , Right share: ( ) sohel114@gmail.comPage 34 2-for-1 stock split: Stock split , 2-for-1 stock split , FV: MV: Share outstanding: Project Evaluation or Capital Budgeting Project may be: 1.Independent project 2.Mutually exclusive project Cash flow: , Investment5,0005,0005,0005,0005,000 -1,00,000 012345 Year investment project cash flows sign , project cash flows sign Investment5,000-5,0005,0005,0005,000 -1,00,000 012345 Year Normal Cash flow: Only one change in cash flow sign. Non-Normal Cash flow: More than one change in cash flow sign. sohel114@gmail.comPage 35 ( project cash flows sign ? Undesirable cash flow ? ) Tools/Techniques for Capital Budgeting 1.Payback period 2.Discounted payback period 3.Net present value (NPV) 4.Profitability Index (PI) 5.Internal rate of return (IRR) 6.Modified IRR (MIRR) Project S & L , , cash flow Investment250750100105 -1,000 012345 Year Project S Investment25008004005 -1,000 012345 Year Project L Payback period: Project S (+) (, ) Project L { + (/)} . (, ) Project S is more LIQUID than project L. , Payback period method Discounted Payback period sohel114@gmail.comPage 36 Discounted Payback period Payback period Time Value of Money Discounted Payback period cash flow present value WACC = 10% For Project S: For Project L: For Project S: Not possible to recover initial investment. For Project L:Discounted payback period=3 Years + (171.675/273.205) Years = 3.63 Years. , payback period method Project S more LIQUID , Project S initial investment Net Present Value (NPV) NPV = PV of all cash inflows PV of all cash outflows So, NPVS = 932.174 1,000 = (67.826) TK NPVL = 1,104.635 1,000 = 104.635 TK When, NPV > 0 Accept the project NPV < O Reject the project NPV = 0 project ( ) Project evaluation NPV method sohel114@gmail.comPage 37 WACC NPV WACC NPV cash flow PV WACC discount PV FV compounding. FV PV discounting. Profitability Index (PI) PI =

Cash outlay Only investment PIs =

= 0.9322 PIL =

= 1.105 If, PI > 1 Accept the project PI < 1 Reject the project PI = 0 project ( ) Internal Rate of Return (IRR) WACC NPV WACC NPV WCC NPV = 0 WCC IRR.

sohel114@gmail.comPage 38 , 1.IRR is the particular WACC for which NPV = 0. 2.IRR is the particular WACC which equates the PV of all cash inflows with the PV of all cash outflows. 3.It is the total Rate of Return you will earn from the entire life of the project. Investment to project L: 1,000 TK. For project L: (WACC = 10%) For project L: (WACC = 6%)

For WACC = 10%, NPV = 104.635 For WACC = 6%, NPV = 228.117 , WACC 4% change NPV change 123.482 IRR = WACC when NPV = 0 - , For WACC = 10%, NPV = 104.635 WACC 104.635 NPV NPV 123.482 change WACC change 4% NPV 104.635change WACC change

= 3.389% So, IRR = 10% + 3.389% = 13.389% For project L: (WACC = 13.389%) For WACC = 13.389%, NPV = 13.879 which is almost zero. IRR IRR = 13.389% project invest . return If, IRR > WACC Invest IRR < WACC Dont invest IRR = WACC project ( ) sohel114@gmail.comPage 39 Non-normal cash flow IRR point WACC Modified IRR (MIRR) method Modified IRR Investment700-300200-300800 -1,000 012345 Year Method 1. Negative cash flow PV investment Investment70002000800 -1,453 012345 Year non-normal cash flow normal cash flow IRR sohel114@gmail.comPage 40 Method 2 i. Find PV of all cash outflows ii. Find FV (at the terminal year of the project) of all cash inflows Investment 2067 -1,453 012345 Year Now use the formula, FV = PV (1+MIRR)n Free Cash Flow (FCF): Project cash flows FCF = EBIT(1-T) + Depreciation Expense Change in working capital Capital spending or Initial investment FCF = EBIT(1-T) + DepEx - working capital Capital spending or Initial investment FCF0 = 0+0-5-212=-217 FCF1 = 170.836-45-0 = 125.836 FCF2 = 174.03 FCF3 = 250.876 FCF4 = 200.836 FCF5 = 107.03 Leverage Leverage is the influence of 1 variable over some other related financial variables. Operational leverage: O/p leverage measures the sensitivity of EBIT to the changes in Q. sohel114@gmail.comPage 41 Degree of O/p leverage (DOL) = () = ()

DOL = () ()

// see derivation: Page 18.5, FinancialManagement, M.Y. Khan & P.K. Jain Degree of Financial leverage: It measures the responsiveness of EPS to the changes of EBIT DFL = EBI T/[EBI T I {DP/(1-t)} ] //see derivation: Page 18.5, Financial Management , M.Y. Khan & P.K. Jain Here, I = interest paid, DP = Dividend paid Combined leverage: Total leverage measures the sensitivity of EPS to the change of Q. XYZ Ltd. has an average selling price of taka 10 per unit. Its variable unit cost are taka 7 & fixed cost amount to taka 1,70,000. It finances all its assets by equity funds. It pays 35% tax on its income. ABC Ltd. is identical to XYZ ltd. except in the pattern of financing it finances it assets 50% by equity & 50% by debt the interest on which amounts to taka 20,000. Determing DOL, DFM & DTL at taka 7,00,000 sales for both the farms & interpret the results.

sohel114@gmail.comPage 42 TABLE: FVIF(i,n) TABLE: PVIF(i,n) sohel114@gmail.comPage 43 TABLE: FVIFA(i,n) TABLE: PVIFA(i,n)