Projected Cash Flows
Transcript of 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.
Supporting Calculation:
Calculation of % change in EPS:
2008 EPS -2009 EPS
0.77-1.36=-0.59
-0.59/0.77=-0.7662 or -76.62 %
Degree of total leverage= % change in EPS/ % change in SALES
-76.62 %/-49.87 %= 1.5363 %
The relationship of OPERATING, FINANCIAL,& TOTAL LEVERAGE:
Degree of total leverage= DOL * DFL
3.482 * 0.4411=1.5359 %
2009-2010
Degree of operating leverage=% change in EBIT/% change in SALE
77.76 % /28.33 %=2.7447 %
Decision Criteria:
If DOL is > 1 the operating leverage exist.
2.7447 > 1 the operating leverage exist.
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Supporting Calculation:
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 %
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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%
WACC-2009 Cost Weight WACC
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%
WACC-2010 Cost Weight WACC
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%