Professional Documents
Culture Documents
Advance Corporate Finance
Advance Corporate Finance
Term Project
Hamza Malik
Hammad Khan
Shehryar Fazal
Contents
Introduction.................................................................................................................................................. 4
Board of Directors: ................................................................................................................................. 4
Total Liability details: ............................................................................................................................. 4
Nature of business: ................................................................................................................................ 5
Assumptions............................................................................................................................................ 5
Company Registration Process: .............................................................................................................. 6
Company Name...................................................................................................................................... 6
Documents of Incorporation ................................................................................................................. 6
Memorandum of Association ............................................................................................................ 6
Articles of Association ....................................................................................................................... 6
Forms: .................................................................................................................................................. 7
Fees of Filing: ......................................................................................................................................... 7
Certificate Of Incorporation ................................................................................................................... 7
Mission ..................................................................................................................................................... 8
Projected capital requirements: ........................................................................................................... 9
Projected Total Cash flows: ...................................................................................................................... 9
Costing details: ......................................................................................................................................... 10
Panel Costs: .......................................................................................................................................... 10
Expected Revenue ............................................................................................................................... 11
Human Resource: ................................................................................................................................ 12
Vehicles ................................................................................................................................................. 13
Equipment: ............................................................................................................................................ 13
Plant office construction: ..................................................................................................................... 14
Furniture & Fixtures: ............................................................................................................................ 14
Depreciation: ......................................................................................................................................... 15
Amortization: ......................................................................................................................................... 15
Admin expenses: .................................................................................................................................. 17
Office supplies: ..................................................................................................................................... 18
Income Statement .................................................................................................................................... 19
Balance Sheet........................................................................................................................................... 20
Ratio Analysis: .......................................................................................................................................... 21
Liquidity Ratio ....................................................................................................................................... 21
Profitability Ratio................................................................................................................................... 22
Asset Productivity Ratio ...................................................................................................................... 23
Financial Leverage ............................................................................................................................... 24
WACC ........................................................................................................................................................ 26
Capital Budgeting ..................................................................................................................................... 27
Conclusion ................................................................................................................................................. 29
Introduction
Board of Directors:
The following personnel are the initial partners in this new venture with their titles as
well as initial investment are shown below:
Load shedding is one of the serious problems of Pakistan, Government is working hard
to deal with this issue. Consequently, the demand exceeds supply & rapid growth
transmission losses due to out-dated infrastructure, power theft & seasonal reductions
in the availability of hydropower have worsened the situation. Business leaders are
facing challenges on their projects due to expensive energy & the taxes enquire by
government on commercial electricity units. So by looking at the current situation we
came up with an idea to produce cheap electricity which we will contributing in the
national grid. Our company actually producing Energy through Solar, which is one of a
very cheap sources in energy sector. Our main & only source of producing energy is
sunlight for which the geographical location is very important factor, for which we have
selected land in Sindh, outskirts of Larkana where the sunlight is at optimum level &
span of day light is maximum if we compare it with rest of the region. The power which
is produce will be connected with the national grid station.
Assumptions
1. Tax Rate=29%
2. AR=50%
3. No dividends to be paid
8. We are not investing in any marketable securities and are only focusing on our
core business.
9. Current Liabilities=0
Company Registration Process:
Company Name
We used SECP website to check if the company name that we chose was available or
not so that we shall start the process and fill out the details.
We received an email at our registered email address in a weeks time that our name
reservation was successful.
Our company name was then reserved for a period of 90 days. We then picked up the
Company Name Reservation Certificate from the concerned CRO on the next working.
Documents of Incorporation
We then filed the following documents during the process of incorporation. Then we
started drafting our Memorandum and Articles of Association at the same time as we sent
our name availability application.
Memorandum of Association
Memorandum of Association contains the fundamental conditions upon which the
company is allowed to operate. The document governs the relationship between the
company and the shareholders. It is one of the most important documents to consider. If
you do not find the sample for your business then you may need to hire a professional
lawyer to draft those for your particular business. The contact of my recommended lawyer
who has experience with startups is listed at the end.
Articles of Association
Articles of Association along with the Memorandum of Association forms the company
constitution, defines the responsibilities of the managers, the form of business to be
undertaken and the means by which the shareholders exert control over the managers.
Forms:
Form 1: Declaration of compliance with the requirements of the Companies Ordinance,
1984
Form 21: Notice of situation of registered office of the company
Form 29: Particulars of Directors and Officers including the Chief Executive, Secretary
etc.
1. Memorandum of Association
2. Articles of Association
3. Scanned version of CNICs of all four of our Directors
4. Scanned Receipt of Bank Deposit.
Form 1, Form 21 & Form 29 were automatically generated from the details that we entered
in the Form of Incorporation.
Fees of Filing:
We had to upload the deposit receipt before submitting the process. After completing the
previous steps, we submitted the process and then it appeared in the online payment
section from where we made the online payment.
Certificate Of Incorporation
SECP generally takes about seven working days to complete the process if there is no
objection and you receive a confirmation email regarding successful incorporation of your
company including the incorporation number.
We picked up the Incorporation Certificate from the concerned Office by showing a copy
of the payment receipt the following day.
Mission
Our mission is to become a market leader in solar energy and create sustainable
solution to improve quality of life.
Projected capital requirements:
1 MW 1,000KW
10MW 10,000 KW
250W 1 Panel
10KW 40 Panel
10MW 40,000 Panels
50MW 200,000 Panels
Inverter (10KW) 80,000
10KW Panel 500,000
Frame 60,000
Other expenses
(Transport, Setup, cables) 40,000
Total cost for 10 KW 680,000
Total cost for 10,000 KW 680,000,000
Total cost for 10,000 KW 3,400,000,000
Total Life 25 years
Panel 5 Year Cost 680,000,000
Expected Revenue
Month Avg temp in Lahore Avg temp in Larkana Percentage Increase Avg Sunshine Hours LahoreAvg Sunshine Hours Larkana
Lahore expected Watt (Daily) Larkana Expected Watt (Daily)
January 19.8 23 13.91% 7.1 9 32.13 36.60
February 22 26 15.38% 7.7 9 35.69 41.19
March 27.1 32 15.31% 7.9 9 43.97 50.70
April 33.9 38 10.79% 9.2 10 55.00 60.94
May 38.6 43 10.23% 9.9 11 62.63 69.04
June 40.4 44 8.18% 9 11 65.55 70.91
July 36.1 41 11.95% 7.3 9 58.57 65.57
August 35 39 10.26% 7.6 9 56.79 62.61
September 35 39 10.26% 8.9 10 56.79 62.61
October 32.9 36 8.61% 9.4 10 53.38 57.98
November 27.4 31 11.61% 8.7 10 44.46 49.62
December 21.6 24 10.00% 7.2 9 35.05 38.55
369.8 99.9 116 600 666
55.53
4,690,000 56,280,000
Vehicles:
For this project we will require a certain no of vehicles for our management as well as
our office employees use and for certain use at the plant. The details are given below:
Equipment:
Due to the fact that there will be an office with regular use there are certain
requirements for the office that are needed including desktops and laptops, mobile
phones for executives as well as managers and other basic office requirements like
printers, scanners etc.
Plant Office
Plant office construction 15,000,000
Fencing 38,000,000
Total 53,000,000
Depreciation
0 1 2 3 4 5
Solar Panels equipments 680,000,000 544,000,000 408,000,000 272,000,000 136,000,000 -
Vehicle 30,000,000 24,000,000 18,000,000 12,000,000 6,000,000 -
Plant 53,000,000 42,400,000 31,800,000 21,200,000 10,600,000 -
Office equipemtn 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 -
Funiture and Fixtures 7,000,000 5,600,000 4,200,000 2,800,000 1,400,000 -
Amortization:
We used the fixed payment method to calculate the interest as well as the repayment of
loans for each month. The detailed calculation for amortization is shown below.
Period Beginning Balance Payment Principal interest Cumulative principal cumulative interest End Balance
1 600,000,000 14,273,958 6,773,958 7,500,000 6,773,958 7,500,000 593,226,042
2 593,226,042 14,273,958 6,858,633 7,415,326 13,632,591 14,915,326 586,367,409
3 586,367,409 14,273,958 6,944,365 7,329,593 20,576,956 22,244,918 579,423,044
4 579,423,044 14,273,958 7,031,170 7,242,788 27,608,126 29,487,706 572,391,874
5 572,391,874 14,273,958 7,119,060 7,154,898 34,727,186 36,642,605 565,272,814
6 565,272,814 14,273,958 7,208,048 7,065,910 41,935,234 43,708,515 558,064,766
7 558,064,766 14,273,958 7,298,148 6,975,810 49,233,382 50,684,324 550,766,618
8 550,766,618 14,273,958 7,389,375 6,884,583 56,622,757 57,568,907 543,377,243
9 543,377,243 14,273,958 7,481,743 6,792,216 64,104,500 64,361,123 535,895,500
10 535,895,500 14,273,958 7,575,264 6,698,694 71,679,764 71,059,816 528,320,236
11 528,320,236 14,273,958 7,669,955 6,604,003 79,349,719 77,663,819 520,650,281
12 520,650,281 14,273,958 7,765,830 6,508,129 87,115,549 84,171,948 512,884,451
13 512,884,451 14,273,958 7,862,902 6,411,056 94,978,451 90,583,003 505,021,549
14 505,021,549 14,273,958 7,961,189 6,312,769 102,939,640 96,895,773 497,060,360
15 497,060,360 14,273,958 8,060,704 6,213,255 111,000,343 103,109,027 488,999,657
16 488,999,657 14,273,958 8,161,462 6,112,496 119,161,806 109,221,523 480,838,194
17 480,838,194 14,273,958 8,263,481 6,010,477 127,425,286 115,232,000 472,574,714
18 472,574,714 14,273,958 8,366,774 5,907,184 135,792,060 121,139,184 464,207,940
19 464,207,940 14,273,958 8,471,359 5,802,599 144,263,419 126,941,784 455,736,581
20 455,736,581 14,273,958 8,577,251 5,696,707 152,840,670 132,638,491 447,159,330
21 447,159,330 14,273,958 8,684,466 5,589,492 161,525,137 138,227,983 438,474,863
22 438,474,863 14,273,958 8,793,022 5,480,936 170,318,159 143,708,918 429,681,841
23 429,681,841 14,273,958 8,902,935 5,371,023 179,221,094 149,079,941 420,778,906
24 420,778,906 14,273,958 9,014,222 5,259,736 188,235,316 154,339,678 411,764,684
25 411,764,684 14,273,958 9,126,899 5,147,059 197,362,215 159,486,736 402,637,785
26 402,637,785 14,273,958 9,240,986 5,032,972 206,603,201 164,519,709 393,396,799
27 393,396,799 14,273,958 9,356,498 4,917,460 215,959,699 169,437,169 384,040,301
28 384,040,301 14,273,958 9,473,454 4,800,504 225,433,153 174,237,672 374,566,847
29 374,566,847 14,273,958 9,591,872 4,682,086 235,025,026 178,919,758 364,974,974
30 364,974,974 14,273,958 9,711,771 4,562,187 244,736,796 183,481,945 355,263,204
31 355,263,204 14,273,958 9,833,168 4,440,790 254,569,964 187,922,735 345,430,036
32 345,430,036 14,273,958 9,956,083 4,317,875 264,526,047 192,240,611 335,473,953
33 335,473,953 14,273,958 10,080,534 4,193,424 274,606,581 196,434,035 325,393,419
34 325,393,419 14,273,958 10,206,540 4,067,418 284,813,121 200,501,453 315,186,879
35 315,186,879 14,273,958 10,334,122 3,939,836 295,147,243 204,441,289 304,852,757
36 304,852,757 14,273,958 10,463,299 3,810,659 305,610,542 208,251,948 294,389,458
37 294,389,458 14,273,958 10,594,090 3,679,868 316,204,631 211,931,816 283,795,369
38 283,795,369 14,273,958 10,726,516 3,547,442 326,931,147 215,479,258 273,068,853
39 273,068,853 14,273,958 10,860,597 3,413,361 337,791,745 218,892,619 262,208,255
40 262,208,255 14,273,958 10,996,355 3,277,603 348,788,100 222,170,222 251,211,900
41 251,211,900 14,273,958 11,133,809 3,140,149 359,921,909 225,310,371 240,078,091
42 240,078,091 14,273,958 11,272,982 3,000,976 371,194,891 228,311,347 228,805,109
43 228,805,109 14,273,958 11,413,894 2,860,064 382,608,785 231,171,411 217,391,215
44 217,391,215 14,273,958 11,556,568 2,717,390 394,165,353 233,888,801 205,834,647
45 205,834,647 14,273,958 11,701,025 2,572,933 405,866,378 236,461,734 194,133,622
46 194,133,622 14,273,958 11,847,288 2,426,670 417,713,666 238,888,405 182,286,334
47 182,286,334 14,273,958 11,995,379 2,278,579 429,709,045 241,166,984 170,290,955
48 170,290,955 14,273,958 12,145,321 2,128,637 441,854,366 243,295,621 158,145,634
49 158,145,634 14,273,958 12,297,138 1,976,820 454,151,503 245,272,441 145,848,497
50 145,848,497 14,273,958 12,450,852 1,823,106 466,602,355 247,095,547 133,397,645
51 133,397,645 14,273,958 12,606,487 1,667,471 479,208,843 248,763,018 120,791,157
52 120,791,157 14,273,958 12,764,069 1,509,889 491,972,911 250,272,907 108,027,089
53 108,027,089 14,273,958 12,923,619 1,350,339 504,896,531 251,623,246 95,103,469
54 95,103,469 14,273,958 13,085,165 1,188,793 517,981,695 252,812,039 82,018,305
55 82,018,305 14,273,958 13,248,729 1,025,229 531,230,425 253,837,268 68,769,575
56 68,769,575 14,273,958 13,414,338 859,620 544,644,763 254,696,888 55,355,237
57 55,355,237 14,273,958 13,582,018 691,940 558,226,780 255,388,828 41,773,220
58 41,773,220 14,273,958 13,751,793 522,165 571,978,573 255,910,994 28,021,427
59 28,021,427 14,273,958 13,923,690 350,268 585,902,263 256,261,261 14,097,737
60 14,097,737 14,273,958 14,097,736 176,222 600,000,000 256,437,483 0
Admin expenses:
The expense details for our admin level staff is shown below and comprises of the
Mobile phone expenses, grocery and travel expenses as well as bills and entertainment
expenses.
Expenses
Misc expenses 7,000,000 1.1% 7,700,000 8,470,000 9,317,000 10,248,700
Wages & Salaries 56,280,000 9.0% 61,908,000 68,098,800 74,908,680 82,399,548
Administrative expenses 9,000,000 1.4% 9,900,000 10,890,000 11,979,000 13,176,900
Office supplies 2,500,000 0.4% 2,750,000 3,025,000 3,327,500 3,660,250
Rent 6,000,000 1.0% 6,600,000 7,260,000 7,986,000 8,784,600
Repair & Maintenance 10,000,000 1.6% 11,000,000 12,100,000 13,310,000 14,641,000
Depreciation expense 140,000,000 22.4% 140,000,000 140,000,000 140,000,000 140,000,000
Total expenses 230,780,000 37.0% 253,858,000 249,843,800 307,168,180 337,884,998
-
Other revenue -
-
EBIT 392,920,000 63.0% 432,212,000 504,833,200 522,976,520 575,274,172
Interest 84,171,948 13.5% 70,167,730 53,912,270 35,043,673 13,141,862
EBT 308,748,052 49.5% 339,622,857 450,920,930 410,943,657 562,132,310
Taxes 89,536,935 14.4% 98,490,629 130,767,070 119,173,661 163,018,370
NI 219,211,117 35.1% 241,132,229 320,153,860 291,769,997 399,113,940
Balance Sheet
Liquidity Ratio
Liquidity
Current Ratio N/A CL = 0 N/A N/A N/A N/A
Quick Ratio N/A CL = 0 N/A N/A N/A N/A
WC & NWC 312,095,568 632,967,233 990,745,867 1,388,835,765 1,830,935,610
NWC to Sales 0.50 0.92 1.31 1.67 2.01
Days Sale in Receivables (365*AR/Sales) 168 168 174 174 174
Days Sale in Inventory (365*Inv/Sales) N/A N/A N/A N/A N/A
Operating Cycle N/A CGS = 0 N/A N/A N/A N/A
Day sales receivable+Day
sales inventory-day sales
Cash Conversion Cycle 168.01 payable 167.62 174.20 174.20 174.20
Turnover of Inventory N/A CGS = 0 N/A N/A N/A N/A
Turnover of Receivable 2.17 2.18 2.10 2.10 2.10
Current ratio
N/A as Current Liability is equal to 0
Quick Ratio
N/A as Current Liability is equal to 0
WC & NWC
WC and NWC is same as CL is equal to 0. WC= 312,095,568 It grows to almost
2 billion due to no Current liabilities.
NWC/Sales
Net working capital to sales is 0.5 which means that for every PKR 1 of sale you
will have PKR 0.5 of net working capital available. This figure grows by almost 4
times to 2.01
Days Sales in Receivable
Days sales in receivable is 168 which means that it takes 168 days for smart
energy solution to complete the receivable cycle. The figure more or less stays
constant.
Days sales in Inventory
Days sales in inventory is 8.78 which means that it takes 8.78 days for smart
energy solution to complete the receivable cycle
Operating Cycle
N/A as CGS is equal to 0
Cash Conversion Cycle
Cash Conversion Cycle ratio explains that it takes 176.79 days for a firm to
receive cash from customers after it has invested into purchasing the inventory
and other resources into cash flows from sales.
Inventory Turnover
N/A as CGS is equal to 0
Receivable Turnover
Accounts receivable turnover is 2.17 which means that the company can turn
2.17 number of times per year that a business collects its average accounts
receivable
Profitability Ratio
Profitability
Gross Profit Margin on Sales 100% 100% 100% 100% 100%
Operating Profit Margin on Sales 63% 65.0% 66.9% 68.6% 70.1%
Before Tax Margin on Sales 49.5% 54.8% 59.8% 64.4% 68.7%
Net profit margin on sales 35.15% 38.92% 42.42% 45.69% 48.76%
EPS 0 Cash Dividend = 0 0 0 0 0
EPS
EPS is equal to 0 as cash dividends is not paid for the next 5 years
Debt to Equity
Debt to equity ratio is 0.83 for the first year as we have repaid some debt and the
equity has increased because of Retained earnings. The figure falls to 0 due to
same reason in the last year.
TL/TA
Total Liability to Total Assets is 0.45 which suggests that the assets are almost
twice the amount of liabilities and this is a good sign. This figure falls significantly
as well due to the fact that we repay a lot of the loan back.
TA/OE
Total Assets to Owner Equity is 1.83 and it falls to 1 over the years. This means
that for every PKR 1 of Owners Equity there is a Total Asset of PKR 1.83.
Financing
The financing of business is done with 60/40 ratio which means that 60% of the
business is financed by debt and 40% of the business is financed by equity
Debt Coverage Ratio
Debt coverage ratio is EBIT over Interest Expense which show that the company
is earning (EBIT) PKR 4.67 over its interest payments PKR 1. This figure grows
to a significantly high figure for the last years as our income is growing
significantly but our interest payments are decreasing.
Cash Flow Coverage Ratio
The cash flow coverage ratio is an indicator of the ability of a company to pay
interest and principal amounts when they become due. This tell that for every
PKR 1 of Interest expense the company has an operating cash flow of 5.27. This
figure grows significantly too due to the same reason as stated above.
Debt Service Coverage Ratio
The Debt service coverage ratio is 2.59 which indicates that a company is
generating sufficient operating income to cover its annual debt and interest
payments. This figure grows a little too
Kd
The kd is 0.164 which means that there is an interest of PKR 0.164 for every
PKR 1 of Long term debt
Return on Capital
Return on Capital
Return on invested capital (EBIT(1-t)/Total Capital
Invested) 27.90% 31.68% 35.84% 40.42% 45.46%
ROA 19.36% 20.57% 21.33% 21.75% 21.92%
ROE 35.40% 30.13% 26.54% 23.92% 21.92%
WACC
We calculated the interest rate for our project by calculating WACC which is the
weighted average for the interest rates of debt and equity. The weights were as chosen
by us previously with Debt weighed at 60% and Equity at 40%. The interest rate for
Debt was as charged by the bank and was 15% while the rate of return on our equity
was 16% which was slightly more than what we were paying for our debt and what we
could have gained had we deposited this amount in a bank.
The first and most important tool was NPV which shows if the discounted returns for the
life of the project are more than the initial investment in todays figures, in other words it
calculates if we are getting more than we are spending or not. In our example the NPV
came out to be 5,955,061.31 which shows that this project should be taken as it is
profitable for the company to start it. The second tool we used was of IRR which is the
rate at which our NPV is equal to zero. In our case the IRR came out to be 13.01%
which was slightly above our WACC figure of 12.79% and again suggests that the
venture is profitable for the company.
The payback period came out to be 3.75 years suggesting that the initial investment will
be repaid to us in 3.75 years which is a good sign but a better way to look at this is
through he discounted payback period as that takes into account the interest rate too.
The discounted payback period came out to be 4.97 years which again suggested that
the venture would pay us back just before its completion in 5 years. The Average
Accounting return and the profitability index had figures of 2.94 and 1.01 and both
suggest that the venture is a good venture in the long run.
It can clearly be seen that this project will be profitable for the company as almost all the
indicators are positive and suggest that the venture should be carried out as soon as
possible given the current situation.
NPV
Year 0 1 2 3 4 5
Cash outflow 1,000,000,000.00
Cash inflow 219,211,117.03 241,132,228.73 320,153,859.96 291,769,996.76 399,113,939.82
NPV 5,955,061.31
IRR 13.01%
Payback period 3.75 years
Discounted payback 4.97
AAR 2.94
Profitability index 1.01
Discounted payback
Year 1 2 3 4 5
Current value 194,353,326.56 189,545,756.91 223,124,341.80 180,284,439.47 218,647,196.58
Discounted payback (805,646,673.44) (616,100,916.53) (392,976,574.73) (212,692,135.26) 5,955,061.31
Payback
Year 1 2 3 4 5
Payback period (780,788,882.97) (539,656,654.24) (219,502,794.28) 72,267,202.48
Conclusion
Our conclusion is that the project is feasible. The solar energy business is a highly
lucrative business but the challenges that the private business faces with the
government institute is the payback period. All the ratio analysis, NPV and Discounted
payback support the project feasibility. Research on Nishat and Engro power business
shows that the profits are high but the trade debts is almost close to 50%. Private and
Government sector needs to work together to come up with a workable solution to
resolve the debt issue that the private power sector is facing in order to boost the
support and economy. The country needs to boost the energy sector to facilitate
business sector to produce goods at market competitive rates which will increase our
exports and will decrease our trade deficit.