Dedicate This Humble Task,

Fruit of My Thoughts and Study

To our

Affectionate “Parents”

Who Always Wished and helped

Us for our Studies

 PROJECT OF CORPORATE FINANCE

SUBMITTED TO:

SIR FAISAL RIZWAN

SUBMITTED BY: Sania Ambreen

SUBMITTED ON:

MONDAY, May , 2011

 ACKNOWLEDGEMENT

A
ll praise to ALLAH Almighty, the most merciful, and the most
gracious, without His help and blessing we would have been unable
to complete this project.

We would like to acknowledge the support of our parents and family

members for their love, good wishes and acknowledgement without
which we would have been unable to accomplish anything
worthwhile.

We would like to express sincere and heartiest thanks to our

respected teacher of Corporate Finance MR. FAISAL who guided us
for the accomplishment of this project and gave us the valuable
information in the understanding of this course.
 DECLARATION OF FAIRNESS

We hereby declare that the project undertaken by us have not copied

else where. We have respectfully quoted where we took any
reference from personal interview and else where.

Regarding,

All group members.

ENGRO CHEMICAL PAKISTAN LIMITED

A national company with an international reach, Engro is one of the largest and fastest growing
companies in Pakistan today.
Engro Chemical Pakistan Limited (ENGRO) came into existence in 1991 as a urea
manufacturing concern. The company has since diversified and expanded into several
businesses ranging from dairy to bulk handling. ENGRO today consists of the core
fertilizer business with a capacity of 975K tpa for urea and several subsidiaries namely
Engro Foods Limited (EFL), Engro Vopak Terminal Limited (EVTL), Engro Eximp
Limited (EXIMP), Engro PowerGen Limited (EPGL), Engro Energy Limited (EEL), Engro
Polymer & Chemicals Limited (EPCL) and Avanceon Limited (EIAL).

ENGRO FOODS:
EFL has become a significant market player in a short span of three years. EFL is the 100%
owned subsidiary of ENGRO.
Currently, it manufactures and markets various dairy products ranging from milk to
Ice-cream. Olpers (all purpose milk) in this short span has grasped approximately
34% market share in UHT market. In a population of 170mn, UHT milk comprises
Of only 3% of the total production of 33bn liters per annum - indicating vast room
for growth.

Culture

Our employee’s performance can only flourish in a sound work environment. That is why
ENGRO is committed to supporting its leadership culture through systems and policies
that foster open communication, maintain employee and partner privacy, and assure
employee health and safety.

Core Values

3 SAFETY, HEALTH & ENVIRONMENT

4 ETHICS AND INTEGRITY

5 LEADERSHIP

6 QUALITY &CONTINUOUS IMPROVEMENT

7 ENTHUSIASTIC PURSUIT OF PROFIT

8 EXTERNAL & COMMUNITY INVOLVEMENT

9 CANDID & OPEN COMMUNICATIONS

10 ENJOYMENT & FUN

11 INNOVATION
 12 INDIVIDUAL GROWTH & DEVELOPMENT

13 TEAMWORK & PARTNERSHIP

*NEW PRODUCT*

TARANG CHEESE
There is an opportunity for a processor to add value to the dairy industry by processing
milk into cheese. Cheese is the product which is widely used in hotels, restaurants, fast
food corners and airlines, shipping lines and households. The food processing industry
of Pakistan is growing roughly 10% to 15% annually. Growing popularity of Western-
style cuisine, increasing urbanization, growing per capita income, and increasing two-
income families are fueling this demand. Local pizza restaurants are opening almost in
every corner of the road, which increases the demand for mozzarella and cheddar
cheese, interestingly local pizza industry uses locally made mozzarella and cheddar
cheese (Ratio: 50:50); hence one can easily find growth potential in the market. The
estimated total capital cost of the project is RS. 127,000,000. The growth rate for cheese
consumption in Pakistan can be conservatively estimated at about 10% a year across all
types of consumers.

FINANCIAL CALCULATIONS FOR NEW PROJECT

14 INITIAL INVESTMENT FOR PROJECT = RS. 127,000,000

(www.etdb.org/strategies and research/countries/Pakistan)

15 GROWTH RATE = ROE (1-DPS / EPS)

=NET INCOME/EQUITY (1-DPS/EPS)

=13.14 (1-6/20.5)
 g = 9.2 %

(values given in the balance sheet )

16 KS OF COMPANY = D1/P1+g

= 6.552/10+0.127

= 15 %

17 BETA OF COMPANY

Risk Free rate, krf= 12.24%

Risk premium= 8.9 %

(Risk premium is calculated on the basis of indices index values of kse 100.)

INTEREST RATE =13.5%

Beta = 0.97%

www.trustbank.com.pk

www.igiinvestmentbank.com.pk

www.js.pk

(http://www.sjsu.edu/faculty/watkins/countryrisk.htm

18 Kd OF COMPANY

= i ( 1- tax )

= 13.5 % ( 1- 35 % )

= 8.7 %

19 WACC OF COMPANY = Kd ( 1 - T )( Wd ) + Ks ( Ws )

= 0.087 ( 1 - 0.35 )( 0.45 ) + 0.15

= 10.7 %

20 UNLIVERED BETA
bu = b / (1+ (1- T ) D/E )

bu = 0.97% / ( 1 + ( 1- 0.35 ) ( 0.45/0.55 )

bu =0.52%

21 BETA OF NEW PROJECT

BETA = I.4 (at 100 equity)

(Our product is new in market and the beta of ENGRO FOODS is diversified beta
which is 0.97.On the capital structure of 55:45 but our product is new and the
market situation is nat such suitable so that the beta of product is 1.4.)

22 NET CASH FLOWS OF NEW PROJECT

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
SALES 88900000 90678000 92491560 94341391 96228219
CGS 53340000 54406800 55494936 56604835 57736932
GP 35560000 36271200 36996624 37736556 38491287
LESS DEP 13001520 13001520 13001520 13001520 13001520
OP INCOME 22558480 23269680 23995104 24735036 25489767
LESS TAX 7895468 8144388 8398286.4 8657262.6 8921418.45
NET INCOME 14663012 15125292 15596817.6 16077773.4 16568348.55
ADD DEP 13001520 13001520 13001520 13001520 13001520
NET OP CASH 27664532 28126812 28598337.6 29079293.4 29569868.55
FLOWS
ADD NOWC 4000000
ADD SALVAGE 38555970
VALUE
NET CASH FLOWS 27664532 28126812 28598337.6 29079293.4 72125838.55

( Sales and cost of goods sold are estimated on the basis of the sales and cost of goods sold of
haleeb cheese in Pakistan .Depreciation on machinery is charged by 12%,assumed on the basis
of previous depreciation rates of ENGRO company )

23 NET PRESENT VALUE OF NEW PROJECT

YEAR 0 -127000000 -127000000 -127000000

YEAR 1 27664532 27664532/(1+13.5)1 24374037
YEAR 2 28126812 28126812/(1+13.5)2 21833773
YEAR 3 28598337.6 28598337.6/1+13.5)3 19559296
YEAR 4 29079293.4 29079293.4/1+13.5)4 17522675
YEAR 5 72125838.55 72125838.55/(1+13.5)5 38292310
128582091
-127000000
NPV =
1582091

24 OPTIMAL CAPITAL STRUCTURE OF NEW PROJECT

DEBT Kd Kd B Ks WACC
(1-T)
0 0% 0.052 1.4 16.29% 16.29%
10 8.5% 0.05525 1.5 16.51% 15.41%
20 9.50% 0.06175 1.6 16.96% 14.80%
30 10.50% 0.06825 1.8 17.41% 14.23%
40 13.50% 0.08775 2 18.01% 14.31%

So WACC is minimized at 30% debt and 7o% equity.

( Interest rates are taken on the basis of information given on the following sites,

http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

www.treasurydirect.gov/news/.../currenteebondratespr.htm

www.investopedia.com

www.nzdmo.govt.nz/publications/mediastatements/2009-11-09 )
 25IRR
11.5% ................. 128732288

IRR …………... 127000000

12 % …………… 126885283

IRR = 0.115 + (0.05) (1732288)

255617571

= 0.115 + 0.00003388

= 0.11503

IRR = 11.503 %

26MIRR
YEAR 1 27664532(1+0.135)4 =45909945
YEAR 2 28126812(1+0.135)3 =41125207
YEAR 3 28598338(1+0.135)2 =36841094
YEAR 4 29079293(1+0.135)1 =33004997
YEAR 5 72125839(1+0.135)0 =72125839
TERMINALVALUE=229007082

COST = TV / ( 1+MIRR )n

127000000= 229007082 / (1+MIRR )5

( 1+MIRR) 5 = 229007082 / 127000000

MIRR = 12.51 %

27 Scenario Analysis:
Sales can be change from given rate due to change in market conditions or any other
circumstances so we will assume the three cases:

28 5 % increase in sales
 29 Sales remains same

30 5% decrease in sales

5 % increase in sales
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
SALES 93345000 98012250 102912863 108058506 113461431
CGS 56007000 58807350 61747718 64835104 10076859
GP 37338000 39204900 41165145 43223402 103384572
LESS DEP 13001520 13001520 13001520 13001520 13001520
OP INCOME 24336480 26203380 28163625 30221882 90383052
LESS TAX 8517768 9171183 9857268.75 10577658.7 31634068.2
NET INCOME 15818712 17032197 18306356.25 19644223.3 58748983.8
ADD DEP 13001520 13001520 13001520 13001520 13001520
NET OP CASH 28820232 30033717 31307876.25 32645743.3 71750503.8
FLOWS
ADD NOWC 4000000
ADD SALVAGE 38555970
VALUE
NET CASH FLOWS 28820232 30033717 31307876.2 32645743.3 114306473.8

NPV = 25392275 + 23314031 + 21412433 + 19671755 + 60686420 -

127000000

= 150476914 - 127000000

NPV = 23476914

5 % decrease in sales

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

SALES 84455000 86144100 87866980 89624321 91416808
CGS 50673000 51686460 52720188 53774593 54850085
GP 33782000 34457640 35146792 35849728 36566723
LESS DEP 13001520 13001520 13001520 13001520 13001520
OP INCOME 20780480 21456120 22145272 22848208 23565203
LESS TAX 7273168 7509642 7750845.2 7996872.8 8247821.05
NET INCOME 13507312 13946478 14394426.8 14851335.2 15317381.95
ADD DEP 13001520 13001520 13001520 13001520 13001520
NET OP CASH 26508832 26947998 27395946.8 27852855.2 28318901.95
FLOWS
ADD NOWC 4000000
ADD SALVAGE 38555970
VALUE
NET CASH FLOWS 26508832 26947998 27395946.8 27852855.2 70874871.95
 NPV = 2342583 + 20918704 + 18736943 + 16783645 + 37628160 -
127000000

NPV = 96410035 - 127000000

NPV = - 30589965

PROBABILITIES NPV P*NPV

WORST CASE 30% -30589965 -9176989.5
BASE CASE 50% -5417909 -2708954.5
BEST CASE 20% 23476914 4695382.8
EXPECTED NPV -7190561
STANDARD DEVIATION 18813016
COEFFICIENT OF 2.616%
VARIATION

31 RECOMMENDATIONS

Through the financial calculation for new product of ENGRO foods it is

found that the NPV of TARANG CHEESE is positive which gives the
signals of accepting this new project. It is positive due to increase in
demand and low cost of goods sold. According to best case scenario if
sales increase in future it will show more positive response in Pakistan.