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Corporate Goal

Q.1 What is the corporate goal of your firm? Do you think that 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
the goal of the firm should be?

The goal of the company, as expressed in the speech of the Chairman, is to achieve and consolidate
its market share by establishing an efficient supply chain and catering to the needs of the customers.

The goal is, however, is not well defined. As we know the ultimate goal of a firm should be to
maximize the owners wealth as evidenced by stock price. The goal of the company, as defined in
the Annual report, is only a way to reach its goal i.e. maximization of shareholders wealth. Because
capturing market share is not the determinant of maximization of share price of a company.

Q.2 What is your comment regarding the Corporate Social Responsibility (CRS) of the firm?
Is anything stated about CRS in the annual report?

CRS is the concept that business should be actively concerned with the welfare of the society at
large. With strong commitment to social responsibilities, Lafarge Surma Cement Ltd., as stated in
the Annual Report, continued to engage itself is several community welfare activities. Its long term
progress in health, education and women entrepreneurship development for the project rehabilitated
people near its operation at Chhatak are showing visible marks of social uplift. More children are
getting enrolled into non-formal primary education programme and drop-out rates have been
reduced. Besides the healthcare center, satellite clinics are being held regularly at remote villages
taking Medicare to the doorsteps of the villagers.

Valuation

Q.3 What is the book value of the firm?

Book value of the firm:

Number of shares outstanding: 58068675 as issued up to December 31, 2007


Face Value of share: Tk.100.00

Book Value of the firm: (5, 80,68,675.00 x100) = 5806.87 million

Q.4 What is the market value of the firm?

Market value of the firm


Number of shares outstanding 58068675 as issued up to December 31, 2007

Market price per share: Tk.607.08 (as on 01.09.208)

Market value of the firm: (5, 80, 68,675.00 x 607.08) = Tk. 35252.33 million

Q.5 Using the Price Earning Multiples of the Industry, find out the Price of the share of your
company.

It is known as price/earning ratio, it is a measurement of the relationship between a companys or


the aggregate stock markets stock prices and earnings.

Earnings Multiplier = Price/Earnings Ratio

Since there is no structured industry average in our country, we cannot find out the share price of
the company using Earnings Multiplier.

Financial Statements and Analysis

Q.7. What are the financial statements the firm had included in the annual report?

The company had included the following financial statements in its annual report (as of year 2007):
Consolidated Income Statement
Consolidated Balance Sheet
Consolidated Statement of Cash flow
Consolidated Statement of Changes in Shareholders Equity

Tax

Q.11 Compute the average tax rate of the company for recent two years. In which year the
company paid higher tax amount? Between the two years which year the company paid
Lower amount of tax due to depreciation and interest expense?

The average tax rate on the firms ordinary income can be calculated by dividing its taxes by its
taxable income.

2006

Income Tax Taka 105065000


Net Loss Before Tax Taka 685412000
Average tax Rate = 105065000/685412000 = 15.33%
2007

Income Tax Taka 281229000


Net Loss before Tax Taka 1377760000
Average tax Rate = 281229000/1377760000 = 20.41%

The company paid higher tax amount in the year 2007. Depreciation and financial cost (interest
expense) of the company were also higher in the year 2007 resulting in higher amount of tax shield.

Risk and return Analysis

12. What is the stock return from the company for the most recent year? Do you find the
return attractive?
We know that the rate of return of a stock can be represented using CAPM model:

E(r) = rfr+ beta (rm-rfr)

The risk free return is available (say the return of T-bill). The market return can be calculated using
the DSE General Index. But from any other source we could not find the monthly return of the
company that are required to calculate the beta of the given company. So, we cannot calculate and
make any comment about the attractiveness of the stock.

13. Calculate the beta of the company using five years monthly data series and then adjust
beta.

We know that the rate of return of a stock can be represented using CAPM model:

E(r) = rfr+ beta (rm-rfr)

The risk free return is available ( say the return of T-bill). But from the annual report of the
company as well as from other sources we could not find the monthly return of the company for the
last five years that are required to calculate the beta of the given company.

14. Estimate Cost of Equity/RRR of the company using CAPM.


We know that the rate of return of a stock can be represented using CAPM model:

Ks = krf+ beta (km- krf )

The risk free return is available (say the return of T-bill). But since the data for calculating market
return and stocks beta cannot be collected, we cannot calculate the cost of equity.

Operating and Financial Leverage

Q.15 Using your judgment make a list of variable and fixed cost of the company?
List of Variable costs:

Raw materials
Production and maintenance overhead

List of Fixed Costs:

Property, plant and equipment


Investment in subsidiaries
Loan to subsidiary company
Deferred Income tax

Q.16. Compute the Breakeven Point, in revenue of the company. How is the margin of safety
in the most recent years?

BEP (revenue) = FC/[1-vc/sp] [Based on figure of 2007]


= Taka 15716123/[1-0.98]
=Taka 15901826. [ Figure in000]

Q.17 Compute the Degree of Operating Leverage (DOL) of the company?


Operating Leverage is the potential use of fixed operating cost to magnify the effects of the changes
in sales on firms earning before interest and tax (EBIT).
Figure in 000

2006 2007 % Change


Sales 153190 2399876 1467%

EBIT (850898) (2516065) -196 %

EPS (9.99) (18.88) -88.99 %


The degree of operating leverage (DOL) is the numerical measure of the firms operating leverage
that can be derived by using the following equation.

Percentage change in EBIT -196%


DOL = =
Percentage change in Sales 1467 %

= -0.133 times

18. Compute the Degree of Financial Leverage (DFL) of the company?

Financial Leverage is the potential use of fixed financial cost to magnify the effects of the changes
in sales on firms earning per share
The degree of financial leverage (DFL) is the numerical measure of the firms operating leverage
that can be derived by using the following equation.

Percentage change in EPS -89%


DFL = =
= 0.45 Times
Percentage change in EBIT -196 %

19. Compute the Degree of Financial Leverage (DTL) of the company?

Total leverage is the potential use of fixed cost, both operating & financial magnifies the effects of
the changes in sales on firms earning per share.

Percentage change in EPS -89%


DTL = =
= - 0.06 Times
Percentage change in Sales 1467 %

Cost of Capital and Capital Structure

20. What is the companys cost of equity? What is the cost of debt? What is the companys
current cost of capital?

We know that the cost of equity of a company is:

Ke=D1/(P0-F)+g. There is no information about the companys dividend and growth rate of dividend.
Moreover, no information is given about the retained earning of the company. So, it is not possible
to calculate the cost of equity capital of the company.

The company has raised debt capital from different sources and the average cost of debt is 10.64%
(approximately).

The current cost of capital of the company can be determined using the following formula:

WACC (K0) =WdXKd + WeXKe. As some information is not available, we cannot determine the cost
of capital of the company.

Question on Optimal Capital Structure:


We know that the optimal capital structure is that capital structure where the weighted average cost
of capital is minimum. Ideally 40% debt and 60% equity based capital structure is optimum for
many firms. But in this company the proportion of debt to total capital is approximately 71%. So,
the company is highly leveraged that is likely to face financial distress if management does not
manage its capital structure properly.