Chapter 1: Introduction

Corporate finance is the area of finance dealing with the sources of funding and the capital
structure of corporations and the actions that managers take to increase the value of the firm to
the shareholders, as well as the tools and analysis used to allocate financial resources. The
primary goal of corporate finance is to maximize or increase shareholders’ value. Principles that
govern corporate finance -The investment principle specifies that businesses invest only in
projects that yield a return that exceeds the expected rate. The financing principle suggests that
the right financing mix for a firm is one that maximizes the value of the investments made. The
dividend principle requires that cash generated in excess of good project needs to be returned to
the owners. These principles are the core for corporate finance.

To analyze different aspects of corporate finance of a company industry analysis is done to

compare financial position (debt-asset-equity). I have been assigned two companies from
Engineering Industries named Ifad Autos Limited and Aftab Automobiles Limited. There after
all possible aspects of corporate finance of aforesaid companies are analyzed and evaluated to
employ the bookish knowledge in empirical arena.

1
1.1 Objectives:

The specific objectives are as follows:

 To analyze the capital structure pattern of the aforesaid companies.

 To evaluate the divided policy and dividend pattern of the companies.

 To analyze the financial statements of the selected Companies.

 To analyze the corporate goal/objectives & CSR activities of the selected Companies.

1.2.1 Data Source:

This report is mostly based on secondary data which were available on the web. My main source
of secondary data was the DSE (web) and company’s web, Lankabd.com and
stockbangladesh.com.

1.2.2 Time Frame

This report is based on 5 years data (for Ifad Autos Limited (June 2014 to July 2018) and for
Aftab Automobiles Limited (June 2014 to July 2018).

1.3 Scope of Report

Our main focus of this report is to analyze:

 Cost of Capital and Capital Structure

 Dividend Policy

 Financial and Statement and Performance Analysis

 Corporate Goal

1.4 Limitation

Financial analysis needs lots of time & due procedure. Due to time constraint and knowledge
constraint right procedure may be missing in some cases.

2
Chapter 2: Industry Overview

Bangladesh is a developing country with potential for rapid economic development Like all other
developing nations it has an ample scope for industrial development, which would eventually
bring about positive outcome for the country's economy, Towards ensuring a healthy growth the
country needs development of adequate infrastructure facilities and development of
infrastructural facilities is not possible without development of industries, Analyzing the capital
structure of an engineering company of Bangladesh will give the overall situation of the sector.
A company's proportion of long-term debt and equity is considered when analyzing capital
structure.

When people refer to capital structure they are most likely referring to a firm's debt-to-equity
ratio, which provides insight into how risky a company is, Usually a company is more heavily
financed by debt poses greater risk, as this firm is relatively highly levered, The capital structure
is how a firm finances overall operations and growth by using different sources of funds, Debt
comes in the form of bond issues or long-term notes payable, while equity is classified as
common stock, preferred stock or retained earnings.

Currently, the main trade flows in the engineering sector are mostly one with the majority of
engineering services being imported from abroad. Most inflows are in the form of supplier's
credits debt financing as the international oil companies make capital production, while energy
companies develop electricity generating capacity.

The Engineering industry covers a broad range of sub-sectors, with potential major prospects
coming from backward linkages of the other industry, if these programs are finally realized.
Business prospects for engineering industry have been found in a number of he Balancing,
Modernization, Relocation and Expansion (BMRE) program that have been authorized by the
Bangladesh Government in order to upgrade the manufacturing capacity of the country. Owing
to the problems of pollution associated with leather and metal working industries, a number of
BMRE projects have been found justified, with financial assistance being made available
through national banks and Asian Development Bank under the BMRE scheme of the
government. The Bangladesh Government also hopes to privatize a number of public sector
manufacturing industries, which could attract foreign investment and allow them to be

3
modernized or relocated. However, no European company contacted appeared to be interested in
any public sector manufacturing company in any industry sector, since all of the public sector
firms owe very large sums of money to the public sector banks ,which would have to be repaid.
Other modernization programs were found in the metal working business, where the Pran group
of companies was found to have gone to the Dhaka stock market to raise Taka 20 million to
expand the capacity of the Rangpur Foundry Limited to produce tube wells, rice mill spares,
pumps and agricultural pipe fittings, using imported equipment, mostly from India. The same
company had originally been set up in 1989 to manufacture pumps, tube wells, plastic pipes and
engine spares. Also in the building materials sector, there appeared to be some interest in
attracting European machinery suppliers to relocate equipment to Bangladesh to set up the
manufacturing of hollow concrete blocks, roof tiles and floor tiles.

NAME OF THE ENGINEERING COMPANIES ENLISTED IN DHAKA STOCK

EXCHANGE:

Aftab Automobiles IFAD Autos Limited

Anwar Galvanizing Kay and Que
AppolloIspat Complex Limited KDS Accessories Limited
Atlas Bangladesh Monno Jute Stafflers Ltd.
Aziz Pipes Ltd. NavanaCNG Limited
Bangladesh Building Systems Ltd. National Polymer
BD. Autocars National Tubes Limited
Bangladesh Lamps Olympic Accessories Limited
Bd.ThaiAluminium Quasem Drycells
Bengal Windsor Thermoplastics Ltd. Rangpur Foundry

Bangladesh Steel Re-Rolling Mills Limited Renwick Jajneswar& Co (Bd)

Ratanpur Steel Re-Rolling Mills
BSRM Steels Limited Limited
Deshbandhu Polymer Limited S. Alam Cold Rolled Steels Ltd.
Eastern Cables Shurwid Industries Limited
Golden Son Ltd. Singer Bangladesh
GPHIspat Ltd. Western Marine Shipyard Limited

4
Contribution of engineering sector in Total value of the index

5
Company overview

Ifad Autos Limited

IFAD Autos Limited imports and sells Ashok Leyland’s vehicles in Bangladesh. The company
offers bus, open truck, covered van, light commercial, special application vehicles, and tractor. It
also deals in Farmtrac brand agriculture machinery and related spares; and provides dump trucks,
ready-mix concrete carriers, and prime movers. The company sells its products through a
network of showrooms, dealers, zonal offices, and authorized service stations. Ifad Autos
Limited was founded in 1988 and is based in Dhaka, Bangladesh.

Vision

To be the No. 1 company in our industry through our commitments to employees, customer and
stakeholders.
Mission

Exceed Customer's expectations through our passion, continuous innovation and development.

Value

- Customer focus

- Responsibilities

- Aspiration

- Teamwork

6
Aftab Automobiles Limited

Aftab Automobiles Limited (earstwhile East Pakistan Automobiles Limited) was incorporated as
a private Limited Company in the year 1967 with a mission for assembling of Toyota Land
Cruiser (Jeep). The assembling Plant of the Company is presently located at Fouzderhat Heavy
Industrial Estate, Chittagong on a land measuring more or less 12.33acres.

In 1981 the Company was converted into Public Limited Company which is the lone largest
assembler-cum-progressive manufacturer of Toyota & Hino vehicles in the private sector of the
country.

The Company is mainly a vehicle assembler and bus-body fabricator. It has been successfully
assembling TOYOTA & HINO vehicles for Bangladesh market since 1982.

The Company was listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange
Limited in the year 1987 and 1996 respectively.

The principal activities of the Company throughout the period were assembling of Toyota Land
Cruiser soft top/ Pick-up, Land Cruiser Prado, Hino Bus, Hino Mini Bus/ Truck with a yearly
production capacity of 2400 units of vehicles in 3 shifts. The Company have also a subsidiary
companies, e.g. Navana Batteries Limited.

Presently, the Company is mainly engaged in assembling and body fabrication of HINO luxury
bus of model RM2 which is in great market demand now-a-days.

HINO buses are widely operated in all the routes of the country. We have also introduced
environmental friendly (CNG driven) AK1JMKA model HINO Bus for the first time in
Bangladesh.

Vision

Our Motto is "Better Product Better Service" and our goal is "To be the No. 1 in the transport
sector of the Country"

7
CHAPTER-3: CAPITAL STRUCTURE ANALYSIS

3. Capital Structure

Capital structure is a mix of a company's long-term debt, specific short-term debt, common equity
and preferred equity. The capital structure is how a firm finances its overall operations and growth
by using different sources of funds. A company's proportion of short and long-term debt is
considered when analyzing capital structure. A healthy capital structure that reflects a low level of
debt and a corresponding high level of equity is a very positive sign of financial fitness.

In general, analysts use three different ratios to assess the financial strength of a company's
capitalization structure. The first two, the debt and debt/ equity ratios are popular measurements;
however, it's the capitalization ratio that delivers the key insights to evaluating a company's capital
position.

3.1 Stock Concept

3.1.1 Debt Ratio

Debt ratio is the ratio of total financial debt to total asset of the firm calculated as follows:

Short Term Financial Debt + Long Term Financial Debt

Debt ratio =
Total asset

The debt ratio compares total financial liabilities to total assets. More of the former means less
equity and, therefore, indicates a more leveraged position.

8
 Debt Ratio
70.00%
65.41% 64.92%
60.00%
54.00% 54.08%
50.00% 49.20%

40.00%

30.00% 26.51%
23.39% 25.38%
18.74% 23.08%
20.00% 21.96% 19.64% 20.44%
16.58% 15.85%
10.00%

0.00%
2013 2014 2015 2016 2017

Ifad Auto Debt Ratio Aftab Auto Deb Ratio Industry

Interpretation:
Debt ratio of Ifad Auto is continuously fluctuating in last three years that means financial debt
contribution to asset is decreasing. Financial debt has been significantly increased in 2016 but
decreased in 2018. In contrast, it indicates that equity is increasing to asset.
Peer firm Aftab Auto’s debt ratio is also increasing at lower rate. But debt contribution in target
firm is more than 2.35 and 2.16 times respectively of peer firm and also in industry.

3.1.2 Debt to Equity Ratio

The higher the debt-equity ratio, the greater the level of firm financing that is provided by its
creditors and the lower the level of its financing provided by its shareholder. This ratio measures
the financial leverage of a company by indicating what proportion of debt and equity a company
is using to finance its assets.
The ratio is calculated as follows:

Total Debt
Debt equity ratio =
Equity

9
 Debt to Equity Ratio
350.00%

300.00% 297.98%
282.87%
250.00%
228.53%
200.00% 210.57% 210.11%

150.00%
113.22%
100.00% 84.10% 109.62%
55.49% 60.40% 61.61% 82.38%
50.00% 56.15%
53.71%
35.35%
0.00%
2014 2015 2016 2017 2018

Ifad Auto D/E Ratio Aftab Auto D/E ratio Industry

Interpretation:
Debt to Equity ratio of Ifad Auto is continuously increasing in last three years that means
financial debt is also increasing compared to equity.

Whereas Peer firm Aftab Auto and industry’s debt to equity ratio is also increasing over the
years. Debt to equity ratio of target firm is 2.71 and 2.64 times more than respectively of peer
firm and also in industry.

3.1.3 Financial Leverage

Financial Leverage is the ratio of net financial obligation to equity:

NFO
Financial Leverage =
Equity

10
 Financial Leverage Ratio
2
1.84
1.8
1.79
1.5
1.45

0.5 0.350
0.331 0.291 0.359
0.147
0.054 0.103
0
2014 -0.013 2015 -0.004 2016 2017 2018 -0.140

-0.33
-0.5
Ifad Auto Financial Leverage Aftab Auto Financial Leverage Industry

Interpretation:
Financial Obligation of Ifad Auto was positive throughout last four years but negative in 2017. It
means that the company has lower financial obligation than financial asset. They invested more
in financial assets. Peer firm Aftab Auto’s financial leverage is increasing over the years which
means their financial obligation is high compared to financial asset. Financial leverage of target
firm is below the industry.

3.2 Flow Concept

3.2.1 Interest Coverage Ratio
This ratio defines the ability of the firm to pay interest expenses. Higher the ratio, higher the
ability.
EBIT
Interest Coverage Ratio =
Interest

11
 Interest Coverage Ratio
25

20 19.88

15 15.6

10
6.06 8.7
7.2
5.74 6.38
5 4.4 5.4
3.98 3.55
4.60 2.58 2.39 2.68
0
2014 2015 2016 2017 2018

Ifad Auto Interest Coverage Ratio Aftab Auto Interest Coverage Ratio Industry

Interpretation:

Target Firm Ifad Auto can cover their interest 19.88 times by operating profit. The ability of
covering interest rate has been gradually increased over the years.

On the other hand, peer firm’s ability to pay interest is fluctuating over the years. Target firms
interest coverage ratio is 7.42 & 2.76 times more than respectively of peer firm and also in industry.

3.2.2 Debt Service Coverage Ratio

This is also an indicator of firm’s ability to pay; in this case it is the ability to pay both interest and
principal. Higher the ratio indicates higher ability to pay debt.

EBIT
Debt Service Coverage Ratio =
Interest + Principal Repayment

12
 Debt Service Coverage ratio
7.00
6.58
6.00
5.78

5.00
4.85

4.00
3.74
3.53
3.00
2.57 2.54
2.00
1.55
1.38
1.00 0.88
0.90 0.57
0.32 0.35 0.20
0.00
2014 2015 2016 2017 2018

Ifad Auto Debt Service Ratio Aftab Auto Debt Service ratio Industry

Interpretation:

Debt service coverage ratio is also decreasing for the target firm Ifad Auto. New debt has been
added to the long term liabilities that is why debt service coverage has been decreased in 2018
compare to the last year.

Debt service coverage ratio is also decreasing for the peer firm Aftab Auto is decreasing in last 3
years. Industry coverage ratio is 4.25 times & 32.9 times higher than the target & peer firm
respectively.

3.2.3 Cash Flow Coverage Ratio

This ratio indicates whether the cash flow of the firm is enough to pay its interest and principal.

EBIT + Depreciation + Amortization

Cash Flow Coverage Ratio = Principal
Interest + 1−Tc

13
 Cashflow Coverage ratio
12.00
10.75
10.00
9.86
8.00 8
6.87
6.00

4.00 4.14
2.95
2.00 2.16
1.16 0.74 1.24
0.75 0.66 0.40
0.00 0.28
0.26
2014 2015 2016 2017 2018

Ifad Auto Cashflow Coverage ratio Aftab Auto Cashflow Coverage ratio
Industry

Interpretation:
Cash flow coverage ratio of target firm Ifad Auto compared to interest has been fluctuating in
last three years to 1.24 from 0.75. Peer firm Aftab Auto’s cash flow has been increased to .40
from .26 in 2018. Both target & peer firm have lower Cash flow coverage ratio than the industry
could be the indication of growing firm in case of both firms.

CHAPTER 4: CHECKLIST
We are using checklist for looking the factor that are supposed to affect capital structure.

4.1 Tangibility
Tangibility is a characteristic that an asset can be used as collateral secure debt. If there is no
variation in tangibility then there will be no effect on debt ratio of a company. In tangibility
calculation I have used Property plant and equipment and capital work in progress as a proxy of
tangible asset. Tangibility is calculated as follow:

PPE + capital work in progress

Tangibility =
Total asset

14
 Aftab Auto Tangibility against Debt ratio
18.00% 25.00%
23.08%
16.00% 17.08%
20.44%
14.00% 19.64% 13.98% 20.00%
12.62%
12.00% 16.58%
15.85%
15.00%
10.00%
8.00% 8.36%
7.27% 10.00%
6.00%
4.00% 5.00%
2.00%
0.00% 0.00%
2014 2015 2016 2017 2018

Aftab Auto Debt ratio Aftab Auto Tangibility

Ifad Auto Tangibility against Debt ratio

20.00% 70.00%
17.97% 64.92%
65.41%
18.00% 17.73% 60.00%
16.00% 54.00%
14.79% 54.08%
14.00% 50.00%
49.20%
12.96%
12.00%
40.00%
10.77%
10.00%
30.00%
8.00%
6.00% 20.00%
4.00%
10.00%
2.00%
0.00% 0.00%
2014 2015 2016 2017 2018
Ifad Auto Tangibility Ifad Auto Debt ratio

Interpretation:

15
Tangibility of Ifad Auto was consistent for 2 years & then it starts to fluctuate with debt ratio from
2015 to 2018. Tangibility is consistent with the debt ratio which is supporting the tangibility
hypothesis.

The tangibility of Aftab Auto has been fluctuated over the years with debt ratio. Peer firm
tangibility is increasing consistently with the debt ratio.

Tangibility of Ifad Auto was lower than Aftab Auto which indicates target firm is using less assets
as a collateral than peer firm to secure their debt.

4.2.1 Profitability on Total Asset (ROA)

It indicates the profitability over uses of total asset. So actually it shows how profitable the asset
is.
EBIT (1 − Tc)
Operating Return on Asset =
Total asset

Ifad Auto Profitability On ROA

6.00% 70.00%
65.41% 64.92%
5.00% 60.00%
4.85%
54.00%
49.20% 54.08% 50.00%
4.00%

3.36% 3.36% 40.00%

3.48%
3.00%
2.50% 30.00%
2.00%
20.00%

1.00% 10.00%

0.00% 0.00%
2014 2015 2016 2017 2018

Ifad Auto Profitability On Total asset Ifad Auto Debt ratio

16
 Aftab Auto Profitability On ROA
6.00% 25.00%
5.49% 23.08%
5.00% 20.44%
19.64% 20.00%
4.14% 4.23%
4.00% 16.58%
3.67% 15.00%
15.85%
3.00%
3.00%
10.00%
2.00%

5.00%
1.00%

0.00% 0.00%
2014 2015 2016 2017 2018
Aftab auto Profitability ROA Aftab auto debt ratio

Interpretation:

Profitability of both Ifad & Aftab Auto is fluctuating over 3 years but increased in last 2 years.
Last year the return on asset has been increased 4.85% to 3.36% in 2018. On the other hand,
Aftab return has been increased to 3.67% from 3%. Profitability percentage of target firm was
higher than peer firm indicates target firm is more capable of taking debt compare to the peer
firm.

4.2.2 Profitability on Net Operating Asset (NOA)

It indicates the profitability on net operating asset rather total asset as operating asset only generate
operating return. So it actually shows the efficiency of operating asset.

OR (1 − Tc)
Return on NOA =
NOA

17
 Profitability on NOA against Financial leverage
10.00% 0.160
9.00% 0.147
0.140
8.64%
8.00% 0.120
0.103
7.00% 6.35% 0.100
7.10%
6.00% 5.77% 0.080
5.00% 4.85% 0.060
0.054
4.00% 0.040
3.00% 0.020
2.00% -0.004 0.000
1.00% -0.013 -0.020
0.00% -0.040
2014 2015 2016 2017 2018
Aftab Auto Profitability NOA Aftab Auto financial Leverage

Profitability on NOA against Financial leverage

7.00% 2
1.79 1.8 1.84
6.00% 6.18%
1.45 1.5
5.00%

1
4.00%
3.87% 3.72% 3.63%
3.00%
2.73% 0.5

2.00%
0
1.00%
-0.33
0.00% -0.5
2014 2015 2016 2017 2018

Ifad Auto Profitablity on Net Operating Asset Ifad Auto financial leverage

18
 Interpretation:

Profitability on NOA is increasing for target firm Ifad Auto and for peer firm Aftab Auto; it has
been fluctuating over the years. In 2018, Profitability on NOA of peer firm is higher than the
target firm. Target firm is more profitable compare to the peer firm so the tendency of investing
in financial asset has been increased in 2018 that is why their financial exceeds the financial
obligation compare to the net financial obligation of the target firm.

4.3 Uncertainty of Operating Income (CVEBIT)

I have measured the uncertainty of income for the firms by calculating Co-efficient of Variation
of EBIT of these firms. Coefficient of variation allows determining how much risk is assuming in
comparison to the amount of return which can expect from investment. Higher coefficient of
variation represents higher the risk for the company. CV is calculated on 3 years’ moving average
EBIT.

Ifad Autos Limited

Particulars 2012 2013 2014 2015 2016 2017 2018

Operating Profit/ 652,229,507 381,486,001 468,697,740 495,670,722 539,743,504 839,295,073 1,574,378,523
(loss)
Moving Average 500,804,416 448,618,154 501,370,655 624,903,100 984,472,367
Std. Deviation 138197831 59681906.37 35864217.2 90479715.14 532376503
CV 0.276 0.133 0.072 0.145 0.541

Aftab Automobiles Limited

Particulars 2012 2013 2014 2015 2016 2017 2018

Operating 296841869 318740179 353,953,227 552,348,468 445,880,025 381,040,724 566,315,300
Profit/ (loss)
Moving 323178425 408347291.3 450727240 459756405.7 464412016.3
Average(3
months)
Std. 28813197 125945400 99286401.6 86492781.5 94017249.242
Deviation
CV 0.089 0.308 0.220 0.188 0.202

19
 Uncertainty of EBIT against Debt ratio
0.600 70.00%
64.92% 0.541
65.41% 60.00%
0.500 54.00%
54.08% 50.00%
0.400 49.20%
40.00%
0.300
0.276 30.00%
0.200
20.00%
0.133 0.145
0.100 10.00%
0.072
0.000 0.00%
2014 2015 2016 2017 2018
Ifad Unceratainty EBIT Ifad Debt Ratio

Uncertainty of EBIT against Debt ratio

0.350 25.00%
23.08%
0.308
0.300
19.64%
20.44% 20.00%
0.250 15.85%
16.58% 0.220 0.202 15.00%
0.200
0.188
0.150
10.00%

0.100
5.00%
0.089
0.050

0.000 0.00%
2014 2015 2016 2017 2018

Aftab Uncertainty EBIT Aftab Debt ratio

Interpretation:

20
Higher CV represents operating profit of target firm Ifad Auto is more risky than operating profit
of target firm Aftab Auto. Uncertainty in operating profit is increasing with increased debt ratio
for both the firms.

4.4 Sustainable Growth Rate:

The sustainable growth rate (SGR) is the maximum rate of growth that a firm can sustain without
having to increase financial leverage or look for outside financing. The SGR is a measure of how
large and how quickly a firm can grow without borrowing more money. After a firm has passed
this rate, its growth will decline in the long term, and it must borrow funds to facilitate additional
growth.

Growth Rate = ROE * (1 – Dividend Payout Ratio)

Growth Rate against Financial Leverage

5.00% 0.160
0.147
4.50% 4.38% 0.140
4.00% 4.15% 0.120
0.103
3.50% 0.100
3.00% 2.83% 0.080
0.054
2.50% 0.060
2.00% 0.040
1.50% 1.41% 0.020
1.00% -0.004 0.92% 0.000
0.50% -0.013 -0.020
0.00% -0.040
2014 2015 2016 2017 2018
Aftab auto Growth Rate Aftab Auto Financial Leverage

21
 Growth rate Against financial leverage
0.09 1.8 2
1.79 7.98% 1.84
0.08
0.07 1.5
1.45
0.06
5.66% 1
0.05
0.04
4.01% 0.5
0.03
0.02 0
0.01
-0.33
0 -0.5
2014 2015 2016 2017 2018

Ifad Auto Growth rate Ifad Auto Financial Leverage

Interpretation:

Growth rate of Ifad Auto has been decreased because financial leverage has been decreased in
2017 as the firm has invested more in financial assets. Target firm growth decreased to 4.01% in
2017 compared to 7.98% in 2016. Growth rate is consistent with financial leverage which
indicates positive relationship supports the growth rate hypothesis.

On the other hand, Growth rate of Aftab Auto is also decreasing with decreasing financial
leverage ratio. The firm has liquidated their financial assets to pay the dividend. The graph is
showing negative relationship which is not supporting growth rate hypothesis. In 2017, growth
rate of target firm is higher than peer firm.

4.5 Sponsorship Director:

Compnay 2014 2015 2016 2017 2018

Ifad Autos
Limited 62.77% 62.77% 62.77%
Aftab
Automobiles
Limited 30.50% 30.39% 30.39% 28.42% 28.42%

22
Ifad Automobiles Limited At the end of June 30, 2017

Directors, Chief Executive Officer, Number of Shares Held Percentage

Company Secretary, Chief
Financial Officer,
Head of Internal Audit and their
spouse and minor children:
Mr. Iftekhar Ahmed Tipu- 51,967,500
Chairman 19.46%
Mr. Taskeen Ahmed- 11,407,500
Managing Director 2.08%
Mr. Tanveer Ahmed -Director 11,407,500
2.72%
Mrs. Nilufar Ahmed- Director 12,675,000
2.08%
Mr. Tashfeen Ahmed - Director 10,140,200
2.08%
Mr. M. Obaidur Rahman - nil
Independent Director

Mr. Ekramul Haq- Independent nil

Director

Aftab Automobiles Limited At the end of June 30, 2017

Directors, Chief Executive Officer, Number of Shares Held Percentage

Company Secretary, Chief
Financial Officer,Head of Internal
Audit and their spouse and minor
children:
Mr. Shafiul Islam-Chairman 1,86,26,415 33.42%

Mr. Saiful Islam- Managing 19,88,215 7.34%

Director
Mrs. Khaleda Islam-Director 26,03,467 7.34%

Mr. Sajedul Islam- Director 19,88,078 8.14%

Ms. Farhana Islam- Director 19,88,078 6.52%

Mr. M. Obaidur Rahman - nil

Independent Director
Mr. Ekramul Haq- Independent nil
Director

23
4.6 Size (Market Capitalization)

Compnay 2013 2014 2015 2016 2017

Ifad Autos 7981,000,00 1155,4855,00 31024,350,00
Limited 0 0 0
Aftab
Automobile 761,585,609 6280,046,88 5916,263,68
s Limited 1 3 0 5274,856,452 6193,887,703

Market capitalization of Aftab Auto is almost 2 times higher than Ifad Auto. Despite of having
low growth they are continuously giving dividends over the years. They are giving dividends either
by financing debt or liquidating their financial asset. So, Aftab Auto is over capitalized.

4.7 Age

Company Age
Ifad Autos Limited 30 years
Aftab Automobiles Limited 51 years

4.8 Financial Slack:

Financial Slack is the habit of firm to invest in financial asset.

Financial Asset
Financial Slack =
Total Asset

24
 Financial Slack Against Financial Leverage
0.2500 0.160
0.147
0.140
0.1989
0.2000 0.120
0.1815
0.103 0.100
0.1755
0.1500 0.080
0.1239
0.1240 0.060
0.054
0.1000 0.040
0.020
0.0500 -0.004 0.000
-0.013 -0.020
0.0000 -0.040
2014 2015 2016 2017 2018

Aftab Auto Financial Slack Aftab Auto Financial leverage

Financial Slack Against Financial Leverage

0.9000 2
1.79 1.8 1.84
0.8000
0.7786
0.7000 1.45 1.5

0.6000
1
0.5000

0.4000
0.5
0.3000

0.2000 0
0.1000
0.0773 0.0645 -0.33
0.0693 0.0503
0.0000 -0.5
2014 2015 2016 2017 2018
Ifad Auto Financial Slack Ifad Auto Financial leverage

Interpretation:

In 2017, Investment in financial asset compared to total asset has been increased for Ifad Auto
which indicates also from decreased financial leverage ratio. It is has been fluctuated by slightly

25
in 2014-2015 for peer firm Aftab Auto and then again increased in 2016-2017. In 2017,
Investment in financial asset of target firm has been increased significantly higher than the peer
firm.

4.9 Free Cash Flow:

Free Cash Flow is the cash flow of firm after investing.

Free Cash Flow = Operating Cash Flow –Investment to Operation

FCF per Share Against Debt ratio

90.00 70.00%
80.00 60.00%
70.00
50.00%
60.00
50.00 40.00%
40.00 30.00%
30.00
20.00%
20.00
10.00 10.00%
0.00 0.00%
2014 2015 2016 2017 2018

Ifad auto FCF per Share Debt ratio

FCF per share against Debt ratio

20.00 25.00%

15.00
20.00%
10.00

5.00 15.00%

0.00 10.00%
2014 2015 2016 2017 2018
-5.00
5.00%
-10.00

-15.00 0.00%
Aftab Auto FCF per share Debt ratio

26
Interpretation:

Free Cash Flow per share of Ifad Auto is decreasing over the years with the decreasing debt ratio
whereas FCF of Aftab Auto is increasing over the years with the increasing debt ratio. The
hypothesis proves to be true for the both target & peer firm as they are showing positive
relationship between their free cash flow per share with debt ratio.

Chapter 5: Pecking Order Theory

Ifad Autos Limited

Particulars 2014 2015 2016 2017 2018

capital
expenditure 78,476,804 161,417,528 91,590,386 90,947,470 152,116,629
Retained
earnings 1,261,893,318 1,457,014,775 1,970,941,688 2,133,252,673 3,043,137,321
New Stock 50,000,000 12,500,000 - - -
issued
New debt - - 1,585,997,680 3,612,926,099 2,977,244,598
added
Pecking Order Followed Followed Not Followed Not Followed Not Followed
Theory

Aftab Automobiles Limited

Particulars 2014 2015 2016 2017 2018

capital
expenditure 43,758,848 179,133,778 182,910,971 134,706,454 750,482,919
Retained
earnings 2,016,363,062 2,088,568,769 2,247,588,021 2,417,697,503 2,722,945,676.00
New Stock
issued - - - - -
New debt 992,417,973 1,246,027,046 885,552,377 1,385,165,621 1,810,578,998
added
Pecking Not Followed Not Followed Not Followed Not Followed Not Followed
Order Theory

CHAPTER 6: DIVIDEND POLICY:

27
There are different dividends Policies Company can follow. From historical dividend behavior we
can comment on firm’s dividend policy.

Dividend Policy of IFAD Autos Limited

Particulars 2014 2015 2016 2017 2018

CDPS .7 1.3 2.1
SDPS 3 .4 .5
TDPS 3.7 1.7 2.6
DPR 21.94% 32.66% 31.16%
EPS 5.57 4.47 3.19 3.98 6.74
Scaling factor 1.3 1.04 1.05
Scaled EPS 4.15 4.14 7.78
OCFPS 85.96 20.73 11.28 5.62 9.87
FCFPS 84.39 18.15 10.48 5.01 9.25
Market Price 69.4 77.29 126
P/E 21.76 19.42 18.69
Industry P/E -3.57 33.18 40.15 44.55 61.65
Book Value 66.79 58.56 44.01 33.58 38.61
per share
Reserve & 25.24 23.31 30.63 14.27 12.36
Retained
Earnings Per
share
MP/BV 1.58 2.30 3.26
G 5.66% 7.98% 4.01%
Industry
G 4.48% 3.75% 3.59% 2.50% 2.23%
Dividend Policy of Aftab Automobiles Limited:

Particulars 2014 2015 2016 2017 2018

CDPS .80 1.7 1.6 1.5 1.6
SDPS 1.2
TDPS 2 1.7 1.6 1.5 1.6
DPR 25.32% 42.39% 76.19% 53.57% 38.83%
EPS 3.16 2.1 2.8 3.98 4.12
Scaling factor 1.2 1.2 1.2 1.2 1.2
Scaled EPS 3.79 2.52 3.36 4.78 4.94
OCFPS 0.65 1.80 -8.89 18.13 24.46
FCFPS 0.14 -0.07 -10.80 16.72 16.80

28
 Market Price 89.1 65.6 61.8 55.1 64.7
P/E 28.19 16.36 29.43 19.68 15.7
Industry P/E -3.57 33.18 40.15 44.55 61.65
Book Value 56.91 52.64 54.3 56.08 59.27
per share
Reserve & 24.38 22.52 24.18 25.96 29.15
Retained
Earnings Per
share
MP/BV 1.57 1.25 1.14 .98 1.09
G
4.15% 4.38% 0.92% 1.41% 2.83%
Industry
G
4.48% 3.75% 3.59% 2.50% 2.23%

FCF against Cash Dividend

4,500,000,000.00 0.25
4219570741
4,000,000,000.00
21%
0.2
3,500,000,000.00

3,000,000,000.00
0.15
2,500,000,000.00 2278159267
13%
2,000,000,000.00
1205706824 0.1
1,500,000,000.00
1134080306 7%
1,000,000,000.00 749102317.2 0.05

500,000,000.00

0.00 0
2014 2015 2016 2017 2018
Ifad Auto Free Cashflow Cash Dividend Ifad

Interpretation:
29
So far Ifad Auto followed FCF hypothesis. Target firm have distributed dividends because of
having positive free cash flow for five consecutive years. Ifad Auto distributed 21% cash
dividend from their earnings. They can afforded to so because their growth rate is above the
industry growth. Ifad has a promising growth opportunity & their pattern of giving dividend
shows that, they are following “Stable dividend policy”.

FCF against Cash Dividend

2,000,000,000 18%
17%
1,600,815,743 1,591,549,044
16% 16%
1,500,000,000
16% 15%
14%
1,000,000,000
12%

500,000,000 10%
11,952,906
0 8% 8%
2014 2015 2016 2017 2018
6%
-6,638,283
-500,000,000
4%
-1,000,000,000
2%
-1,033,913,034
-1,500,000,000 0%
Free Cash Flow (Aftab) Cash Dividend Aftab

Interpretation:
On the other hand, Aftab Auto is not following free cash flow hypothesis. They are distributing
dividends despite of having negative Cash flow for two consecutive years. They were
distributing dividends from their past earnings. As a result, growth has been decreased over the
years. Growth rate of peer firm is mostly lower than the industry but growth rate was better than
industry in 2017. The pattern of giving dividends shows that, Peer firm is following “Sticky
Dividend Policy” over the years.

30
 Stock Dividend against Growth rate
0.35 9.00%
8.33% 30.00% 7.98% 8.00%
0.3 7.64%
7.00%
0.25
6.00%
5.66%
0.2 5.00%
4.48% 4.38%
0.15 4.01% 4.00%
12.00% 4.15% 3.75% 3.18%
2.83% 3.00%
0.1
1.41% 1.64% 2.00%
0.05 4.00%
1.41% 1.00%
0.92% 5.00%
0 0.00%
2014 2015 2016 2017 2018
Aftab Auto Stock Dividend Ifad Auto Stock Dividend
Aftab Growth rate Ifad Growth rate
Industry growth rate

Interpretation:
Company shouldn’t give stock dividend if it is not growing. To check this hypothesis I observed
stock dividend against growth rate. From above chart it is clearly seen that Ifad auto has given
stock dividend in last two years even though their growth rate is increasing at a decreasing rate.
Target firm is afforded to do so because their growth rate is above the industry. On the other
hand, Aftab auto issued stock dividend in 2013. After that it didn’t issue any stock dividend as
growth rate is decreasing. Growth rate of peer firm is mostly lower than the industry but growth
rate was better than industry in 2017.

31
 P/E Ratio
70

60 61.65

50
44.55
40
40.15
33.18
30 28.19 29.43
21.76 19.68 18.69
20
16.36 19.42 15.7
10

0 -3.57
2014 2015 2016 2017 2018
-10
Ifad Auto P/E ratio Aftab Auto P/E ratio Industry

Interpretation:
The stock price of Ifad Auto seems to be underpriced compared to other firms of same industry
though P/E is reducing in last two years because of high earning. P/E ratio is representing a
potential buying opportunity for the investors.

CHAPTER 7: SIGNALING OF DIVIDEND

In this section I tried to find the market price behavior just after dividend declaration of Target
Firm & peer firm.

32
Ifad Autos Limited price movement during declaration date to record date 2017

Aftab Autos Limited price movement during declaration date to record date 2017

33
It is clearly seen that, there is a positive impact of dividend decisions in market price in case of
target firm. The market price of stock has been significantly increased during the period from
declaration date to record date in 2017. On the other hand, the situation is exactly the opposite
for the peer firm. The market price of stock has been decreased during the period from
declaration date to record date in 2017.

CHAPTER 8: EPS and Scaled EPS (SEPS)

To find the trend of Earning we have to rescale the EPS to balance the stock dividend. We found
REPS by following Calculation –

Ifad Autos Limited 2014 2015 2016 2017 2018

Cash Dividend % 7% 13% 21%
Cash Dividend/ .7 1.3 2.1
Share
21.94% 32.66% 31.16%
DPR
Stock Dividend 30% 4% 5%
No of Share 500,000,000 625,000,000 1,150,000,000 1,495,000,000 2,254,460,000
EPS 5.57 4.47 3.19 3.98 6.74
1.3 1.04 1.05
Factor
4.15 4.14 7.78
SEPS
Closing Market Price 69.4 77.29 126.00
Scaled P/E Ratio 16.72 18.67 16.20

Aftab Automobiles
Limited 2014 2015 2016 2017 2018
Cash Dividend % 8% 17% 16% 15% 16%
Cash Dividend/ .80 1.7 1.6 1.5 1.6
Share
DPR 25.32% 42.39% 76.19% 53.57% 38.83%

Stock Dividend 12%

No. of Share 85475377 95732422 95732422 95732422 95732422
EPS 3.16 2.1 2.8 3.98 4.12
1.2 1.2 1.2 1.2 1.2
Factor
3.79 2.52 3.36 4.78 4.94
SEPS
Closing Market Price 89.1 65.6 61.8 55.1 64.70

34
 Scaled P/E Ratio 23.51 26.03 18.39 11.52 13.10

EPS & SEPS trend of Ifad Auto

9
7.78
8
7 6.74
6
5 4.15 4.14
4 3.98
3 3.19
2
1
0
2016 2017 2018

EPS Scaled EPS

EPS & SEPS trend of Aftab Auto

6

5 4.78 4.94

4 3.79 4.12
3.36 3.98
3 3.16 2.52
2.8
2 2.1
1

0
2014 2015 2016 2017 2018

EPS Sclaed EPS

Interpretation:

Although, Both earning per share & scaled earning per share is increasing for three years &
significantly increased in 2017 compare to 2016 for Ifad Auto Auto. On the other hand, both EPS
& SEPS are constantly fluctuating for three years & slightly increased in 2017 compare to 2016
for Aftab Auto.

EPS of Ifad Auto is around 1.57 times of Aftab Auto.

35
CHAPTER 9: Cost of Equity and WACC:

I have calculated Cost of Equity following CAPM method as below:

E(R) = Rf + beta * (Rm – Rf)

Where, Rf = Risk Free Rate (Calculated from T-bill (364 days) return)

Rm= Market Return (Calculated from DSEX index and then annualized)

Ifad Autos Limited

Covariance 0.000964578
Variance of market return 0.023572825
Beta 0.040919074
Blumes adjustment 0.357415779
Market return 1.9%
Market return -yearly 22.38%
Risk-free rate 0.045
Market return 0.22
Cost of equity, Ke 10.89%

Particulars Year 2014 Year 2015 Year 2016 Year 2017 Year 2018
Total loan 2165956799 2039128769 1846130297 4115624853 4106321805
Average loan 2102542784 1942629533 2980877575 4110973329
Interest 81793849 62039483 53800966 79174324
expense
Interest rate 3.89% 3.19% 1.80% 1.93%
Cost of Debt 2.70%
(Average), Kd
Cost of Debt 12%
(based on
Industry)

36
 Market price 126.00
Number of shares 246225000
Market value of equity 31,024,350,000.00
Book/market value of debt 4110973329
Weight – equity, We 0.882996001
Weight –debt, Wd 0.117003999
Tax rate, Tc 0.23
We*Ke+Wd*Kd*(1-Tc)
WACC 10.70%

Aftab Automobiles Limited

Covariance 0.005145271
Variance of market return 0.01555328
Beta 0.330815807
Blumes adjustment 0.55164659
Market return 1.4%
Market return -yearly 17.20%
Risk-free rate 0.045

Cost of equity, Ke 11.51%

Particulars Year 2014 Year 2015 Year 2016 Year 2017 Year 2018
Loan 1,017,728,413 1,424,381,848 1,217,293,752 1,892,533,104 2,623,223,868
Average loan 1221055131 1320837800 1554913428 2257878486
Interest 155472315 172596114 159752681 211703217
expense
Interest rate 12.73% 13.07% 10.27% 9.38%
Cost of Debt 11.36%
(Average), Kd

Market price 64.70

Number of shares 95732422
Market value of equity 6,193,887,703.40
Book/market value of debt 2,257,878,486
Weight – equity, We 0.732851284
Weight –debt, Wd 0.267148716
Tax rate, Tc 0.23
We*Ke+Wd*Kd*(1-Tc)
WACC 10.77%

37
Beta has been calculated by using Capital Asset Pricing Model based on five years month end
closing price, Index return, stock return & market return.. I have calculated beta to find the cost
of equity of the respective firms. Risk free rate has been taken from Bangladesh Bank website
based on T-bill (365 days) rate.

Weighted Average Cost of Capital

10.80%
10.77%

10.75%

10.70%
10.70%

Ifad auto
10.65% Aftab Auto
Industry

10.60% 10.59%

10.55%

10.50%

Interpretation:
On the basis of five years equity & debt structure, I have found that WACC of target firm Ifad
Auto is almost same compare to the Peer firm Aftab Auto & above than industry average. Target
firms debt is comparatively lower than the peer firm.

38
Chapter 10: Conclusion
At first, I have analyzed the debt and debt to equity ratio of both companies. Secondly, financial
leverage, operating liability leverage of the companies that took place in over the five years.
Thirdly, firms’ performances are analyzed by using different ratios. Fourthly, checklist of the
capital structures is analyzed and finally, dividend policies & CRG are analyzed.

By analyzing all these I have found that Ifad Autos Limited and Aftab Automobiles Limited both
are levered firms but Aftab Autos Limited is less levered. Ifad Autos Limited has more risk
comparing to Aftab Automobiles Limited which we can see from the analysis because of their
too much dependency on debt. Ifad Autos Limited is operating with higher Debt to equity ratio
against industry average and Aftab Automobiles Limited is operating at lower debt equity ratio.
Ifad Autos Limited is mostly high growth company. So it has opportunity to increase Debt to
equity ratio and retain current smoothen dividend policy in order to secure a prosperous position
in the industry.

CHAPTER-11: REFERENCE:

1. Ross S. A., Westerfield R. W., and Jaffe J., Corporate Finance (Ninth Edition), McGraw-
Hill/ Irwin, Singapore, 2005.

2. Annual Reports of Ifad Autos Limited from 2014 to 2018.

3. Annual Reports of Aftab Automobiles Limited from 2014 to 2018.

4. Official Website of Dhaka Stock Exchange Ltd. (www.dsebd.org)

5. Company Website of Ifad Autos Limited (www.ifadautos.com)

6. Company Website of Aftab Automobiles Limited (www. aftabautomobiles.com

7. www.stockbangladesh.com

8. www.lankabd.com

39