Course Title: Corporate Finance

Answer to the 14 Questions have been collected from the Annual Reports of
Power Grid Company Bangladesh Ltd

1. What is the corporate goal of your firm? Do you think the goal of the
firm is well defined? If the goal of the firm is not stated anywhere in the
annual report then what do you think the goal of this firm should be? Analyze
the provision of information in the Annual Report in relation to the strategic
thinking of a company in terms of corporate objectives.

Answer:
The corporate goal of the PGCB is efficient and effective management of national
power grid for reliable and quality transmission of electricity as well as economic
dispatch throughout the country. The goal is moderately defined in the annual
report

2. What is your comment regarding the corporate social responsibility

(CSR) of the firm? Is anything stated about the CSR in the annual report?

Answer:
Law of the land and directives of the department (DOE) are being strictly followed
during implementation of transmission line project to ensure that project activities
do not affect environment adversely. Care is also taken to ensure that damage
caused to existing environment through homestead, trees and plants, cultivation
etc are minimum by carefully selecting during selection of line routes. Provisions
for providing adequate compensation to project affected persons are made under
resettlement plan.

II. Valuation
3. What is the book value of the firm?

Answer:
The firm total assets minus the total liabilities
Year Total Assets Total liabilities Book value
(Tk Million) (Tk Million) (Tk Million)
2009 58,716 44,505 14,210
2008 54,650 41,759 12,891
2007 43,863 37,657 6,206
2006 37,805 32,341 5,464
2005 33,279 29,179 4,100

4. What is the market value of the firm?

Answer:
Market value = Market price per share x Total outstanding share
Market value in 2009 = 782 x 36,435,810 = Tk. 28492,803,420

5. Using Price-earning multiples of the industry, find out the price of the
share of your company.

Answer:
Price of share = Price -earning multiple of the industry x EPS
Price of share in 2009 = 18.45 x 42.39 = Tk. 782

6. Compute FCF to the equity-holders over the 5 years forecasted periods

and discount these free cash flows at the cost of equity (with an average
growth rate) to arrive at the price of the stock of your company.
(Figure Tk 000)
Name of particulars 2005 2006 2007 2008 2009
Sales/Revenue 4,840,27 5,276,84 5,612,62 5,401,6 5,713,8
8 9 8 43 28
 Less: Cost of goods sold 4,291,45 4,051,44 3,646,95 2,605,8 3,191,9
1 3 1 33 75
Gross Profit 548,827 1,225,40 1,965,67 2,795,8 2,521,8
6 7 10 53
105,774 140,514 110,558 107,549 130,51
Less: Admin & Selling Exp 5
EBITDA 443,053 1,084,89 1,855,11 2,721,3 2,443,6
2 9 79 16
Less: Depreciation 0 0 0 0 0
Operating Income 443,053 1,084,89 1,855,11 2,721,3 2,443,6
2 9 79 16
Add.: Other income 0 0 0 33,118 52,278
EBIT 443,053 1,084,89 1,855,11 2,754,497 2,495,894
2 9
Less: Interest expense 179330 344123 431136 915985 765632
Less: Taxes 0 120,830 170,285 145,846 185,591

(Current& Deferred)
Net Income 263,723 619,939 1,253,698 1,692,666 1,544,671
Less: Change in NWC 1,207,288 1,977,721 2,592,591 1,878,456 2,272,211
OCF 1,471,011 2,597,660 3,846,289 3,571,122 3,816,882
Less: Capital Expenditure 4,738,123 7,341,304 14,146,142 20,871,081 12,474,463

FCF -3,267,112 -4,743,644 -10299853 -17299959 -8657581

Add.: Net borrowing 3530901 5363403 11553581 18992729 10202061
FCFE 263,789 619,759 1,253,728 1,692,770 1,544,480
No of shares outstanding 36,435 36,435 36,435 36,435 36,435
EPS 7.24 17.01 34.41 46.46 42.39
OCF/Share 40.37 71.30 105.57 98.01 104.76
FCF/Share -89.67 -130.19 -282.69 -474.82 -237.62

III. Financial Statements and Analysis

7. Analyze your firm’s behavior with the analysis of structure, conduct

and performance of the industry to which your firm belong?

Answer:
PGCB is a public limited company formed under company act 1994 in 1996. Total
turnover, gross profit, and net profit increase gradually from its commencement to
2009. Total assets and shareholder equity also increase gradually year to year. The
total asset in 2005 was 33,280 millions and 2009 was 58,710 millions. The
company is rated as ‘A’ category by the stock exchange as company distributed
more than 10% cash dividend over the year.

8. Evaluate the firm’s financial condition of the recent five years using the
ratios like (a) liquidity (CR, QR), (b) efficiency & activity (A/R period,
Inventory period, TAT, operating and cash cycle, (c) solvency (debt equity
ratio, debt to total asset, debt service coverage ratio (d) profitability (OPM,
NPM, ROA, ROE).

Answer:
(a) Liquidity:
Current Ratio
Year Current assets Current liabilities Current Ratio
(Tk Million) (Tk Million)
2009 13,106 3,383 3.87
2008 12,178 2,807 4.34
2007 9,948 3,638 2.73
2006 7,869 2,664 2.95
2005 6,618 2,664 2.48

Quick Ratio
Year Quick assets Current liabilities Quick Ratio
(Tk Million) (Tk Million)
2009 12,538 3,383 3.71
2008 11,609 2,807 4.14
2007 9,376 3,638 2.58
2006 7,286 2,664 2.73
2005 6,053 2,664 2.27

(b) Efficiency and activity:

Total Asset Turnover
 Year Total Sales Total Assets TAT
(Tk Million) (Tk Million)
2009 5,713 58,716 0.097
2008 5,401 54,650 0.099
2007 5,029 43,863 0.115
2006 5,021 37,805 0.133
2005 4,683 33,279 0.141

(c) Solvency:
Debt to Equity ratio
Year Total debt Total equity D/E ratio
(Tk Million) (Tk Million)
2009 38,367 14,210 2.70
2008 36,506 12,809 2.85
2007 32,981 9,845 3.35
2006 28,917 8,632 3.35
2005 16,563 6,765 2.45
Debt to Total Assets
Year Total debt Total assets D/E ratio
(Tk Million) (Tk Million)
2009 38,367 58,716 0.65
2008 36,506 54,650 0.67
2007 32,981 43,863 0.76
2006 28,917 37,805 0.76
2005 16,563 33,279 0.50

Time interest earned ratio

Year EBIT Fixed interest TIE ratio
(Tk 000) (Tk 000)
2009 2,443,616 1,277,750 1.91
2008 2,721,379 1,040,135 2.62
2007 1,855,119 1,179,709 1.57
2006 1,084,892 1,755,293 0.62
2005 443,053 2,024,191 0.22

(d) Profitability:
OPM
Year EBIT Sales OPM
(Tk 000) (Tk 000)
2009 2,443,616 5,713,000 0.43
2008 2,721,379 5,401,000 0.50
2007 1,855,119 5,029,000 0.37
2006 1,084,892 5,021,000 0.22
2005 443,053 4,683,000 0.09

NPM
Year Net income Sales OPM
(Tk 000) (Tk 000)
2009 1,555,000 5,713,000 0.27
2008 1,693,000 5,401,000 0.31
2007 1,254,000 5,029,000 0.25
2006 620,000 5,021,000 0.12
2005 264,000 4,683,000 0.06

ROA
Year Net income Total assets ROA
(Tk 000) (Tk 000) (%)
2009 1,555,000 58,716,000 2.60
2008 1,693,000 54,650,000 3.10
2007 1,254,000 43,863,000 2.90
2006 620,000 37,805,000 1.60
2005 264,000 33,279,000 0.80

ROE
Year Net income Total equity ROE
(Tk 000) (Tk 000) (%)
2009 1,555,000 14,210,000 10.94
2008 1,693,000 12,809,000 13.22
2007 1,254,000 9,845,000 12.74
2006 620,000 8,632,000 7.18
2005 264,000 6,765,000 3.90
9. Prepare five factors Du Pont Analysis for the firm. If you want to
increase the ROE what may be your course of actions? Suggest specific
actions.

Year EBIT/Sales Sales/T.Asset EBT/EBIT EAT/EBT TA/EQUITY ROE

200
9 0.43 0.10 0.48 1.52 4.13 10.94%
200
8 0.50 0.10 0.62 1.17 4.27 13.22%
200
7 0.37 0.11 0.36 1.99 4.46 12.74%
200
6 0.22 0.13 -0.62 -1.17 4.38 7.18%
200
5 0.09 0.14 -3.57 -0.20 4.92 3.90%

IV. Cost of Capital and Capital Structure

10. What is the company’s cost of equity? What is its cost of debt? What is
this company's current cost of capital (hurdle rate)?

Answer:
From the firm perspective, the expected return is the cost of capital. The expected
return on common stock
R= RF + β x (Rm- RF)
Where, RF = risk free return
Rm- RF = The market risk premium
Β = The company beta
Another Way return can be calculated
 rs = D1/P +g
Where, rs = Expected return/ Cost of equity capital
D1 =Dividend
P = Price
g = Growth
In year 2009, Rs = 27/782+ (58716,000,000-54650,000,000)/ 54650,000,000
= 0.1089
= 10.89%
The cost of debt, written in the annual report, is 4.5 %

► Total cost of capital of leavered firm, rwacc = S/(S+B) x rs + B/(S +B) x rb (1-T)
= 14210m/(52577m) x .1089 + 38367m/(52577m) x .045(1-.2750)
= 0.0294+0.0238
= 5.32%

V. Dividend Policy

12. What is the last five years’ dividend pattern of the firm?

Answer:
Cash dividend paid to the shareholders over the years are given below

Particulars 2009 2008 2007 2006 2005

Cash dividend per share 27 27 25 10 5

13. Prepare a Table on the computation of the following parameters over

the five recent years in order to assess the dividend policy of the firm.
DPS (Cash Div. per share and stock div. per share), EPS, DPR, OCF per
share, FCF per share, MP, P/E ratio, P/E multiple of the Industry/sector, BV
per share, Reserve & RE per share, Sustainable Growth rate (G), Inflation
rate,

Answer:
Particulars 2009 2008 2007 2006 2005
Cash dividend per share 27 27 25 10 5
EPS 42.39 46.46 34.41 17.01 7.24
DPR 63.69 58.11 72.65 58.79 69.06
OCF per share 104.76 98.01 105.57 71.30 40.37
FCF per share -237.62 -474.82 -282.69 -130.19 -89.67
MP 782 544 380 290 -
P/E multiple of the 18.45 11.71 11.04 17.05 -

Industry/sector
BV per share 394.72 358.08 172.39 151.78 113.89
Reserve & Surplus 7119m 6361m 5090m 3716m 2624m
RE per share 94.62 79.22 30.50 21.09 13.64

14. Make judgments for inculcating the stylized facts of the dividend
behavior in your firm.

Answer:
As reviewed the last five years dividend, it is found that the company paid regular
basis dividend. That means the company paid cash Dividend. The board of
Director has recommended Cash Dividend of Tk.27.00 per share of Tk 100.00
each for the year 2008-2009. Upon its approval in the General meeting, the
dividend will be paid to the shareholders whose names appear in the register of
members to the company as on the record day.