Welcome to Fundamental of Business Economics The goals and decisions of organisations 8/22/2019Psarchiee were CASA scan © Cee eee eects Maximizing shareholders’ wealth Primary objective ¢ Higher share prices ¢ Higher dividend payments Cash is preferable to profit Exceeding cost of capital Managing both short and long term 8/22/2019"ao a eo —Fifiancial Statement Income Statement Balance Sheet 2 ma cE oe fevenve 130. Curent aes on contot aes $30 Long torm assets 1.950 | Geos Pratt 82 Faedaeats 1.60 | oxtritoncont top Total assets 3580 Admisvaton expenses {20 Cmentaites 330 eee soo We er bin 4.00 Spent 9° | share ceptl 10 Reserves 200 Proftetor tx 429 Total capital and uate 3590, Texonprott 1 cotatemponed 3.00 Sovmcaptt eo hres O10) 2.00 |_-Sthort-term measures of financia performance Rate of return on capital employed * Ability of the organisation to generate income, profit before interest and tax Net value of capital employed averaged out between beginning and end of the year © ROCE is expressed as a percentage Return on net assets as a percentage Earning per share in absolute amount 8/22/2019| short-term meauresotiane performance © ROCE is expressed as a percentage measured rock = — Pofitbefore interest and tax employed X 100% OR Profit before interest and tax Return on. Netassets ‘Total assets minus current liabilities X 100% © Earning per share (EPS): Share holders are more interested in profit after interest and tax Profit aft erest, preference shares ny shares issued ee ee eR Test your understanding 1 Income Statement Balance Sheet ost of aos Long tecnassets 2,030 | Soebee Fixed assets. 1,600, sai soy alate sso] ee reer i aaa eRIE! 420 Curent labities 0 | ene 7 ae eta isn oi sper 60 ane 6 Protit before tax 20. Total Capital and abilities 3,350 er fat eee seo Seeamavoxneei) tee Calculate ROCE, RONA and EPS 8/22/2019=—— Se lee Test your understanding 1 43 ROCE ah 3000 RONAG See ay 3550 - 550 Eps eee re 100 | —tong-term menue Fa performance * ROCE >= cost of capital Issues «+ Establishing cost of capital to finance investment projects + Estimating flow of income for whole life of investment * Valuing flow of income © Calculate present value of cash flow by discounting process * Decisions should be based on cash flow rather than profit. Profit can be distorted by accounting policies * Money has a time value due to inflation, risk and interest 8/22/2019Mlustration XYZ Ld has 1 Million shares with a current market price of Tk 20 each flow Ingisiovermat 460.00) ar (oe) (25000) (15,0) Netewhfow (16902) 66000 sm000 4900, Required: Net present value of projected cash flow Advise whether the project should be accepted ‘The company is considering a 3 years project wth the following post tax cash ~— % Illustration Solution Net present value Nasri) =4/(140.4)?= 9/4. Not Present Value ay HES] Net eash flow (100,000) €0,000 30,000 40,000 Discount factor © 10% 1.000 0.803 0.826 0.751 Present Value (100,000) $4,340 41,300 30,040 Net Present Value 25,880 8/22/2019Share values Factors impacting share value Internal External + New product line + Political situation + Business expansion + Economic situation + Cost reduction + Competition + Impairment of assets «+ Regulations + Change in management + Consumer behaviour + Technological development —Récap ‘+ Maximizing shareholders’ wealth + Share price 1 Dividend payments + Cashis prefered + Return to exceed cost of capital + Managing both short and long term Short term + Return of capital employed 2 Return on netassete + Earning pershare Long term + ROCE » Cost ofeapital + Net present value by discounting factor * Share value + Internal factors + External factors 8/22/2019Stay well and safe till we meet next time THANK YOU 8/22/2019