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1. Objective

The objective of this analysis is to establish a model with the capability to find the dependency of breakup value of ordinary share on current ratio.

2. Introduction

There has been a general perception among investors especially small investors in Pakistan that the firms which have the stronger ability to discharge its current /short term obligations (debts and payables) falling due within in next twelve months is more reliable for investment and financially sound in short-run and therefore the breakup value of ordinary share is somewhat dependent on current ratio maintained by firm. To go further in analysis it is worth mentioning what are our variables for this analysis. 2.1 Current Ratio One of the widely used methods to examine the short term liquidity and financial health of the firm is its current ratio which is given by the following formula

Investopedia explains this ratio as under “The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they become due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.”1 2.2 The Breakup value of ordinary share The breakup value is explained by Professor David L. Scott as “The market value of all the individual parts of a firm if the firm were to be broken up and the individual parts operated independently. If the breakup value of a firm exceeds the market value at which its stock trades, the firm may be managed and operated inefficiently. In such a case, stockholder holdings would increase in value if parts of the firm were divested. Many takeovers originate when raiders spot firms with breakup values that exceed the prices at which those firms' stocks are traded.” (Scott, 2003)

1

http://www.investopedia.com/terms/c/currentratio.asp#ixzz1UaUveU2G

178 which show that independent variable in the model can predict only 17.2%. Adjusted R square 2 Statistical Package for the Social Sciences . The First column of Model tells us that one model has been use for this simple regression.8 % of the values in dependent variable unconditionally. 3. Six different companies from different sectors of industries have been taken and their respective current ratios and breakup value of ordinary share between from 2004 to 2009 has been used to perform the regression.178 a Predictors: (Constant).92731 .3 Methodolgy To achieve the objective simple regression analysis using SPSS2 has been performed on two scale variables.154 Std. The R Square is the coefficient of determination which furnishes the information about how accurate the prediction using this model can be. Model Summary (b) Adjusted R Square . lncr(a) a All requested variables entered.2 2. lncr b Dependent Variable: lnsp Model 1 R R Square This table is the most important table that explains the summary of our regression model. Error of the Estimate .422(a) . The secondary data has been collected from Statistics and DWH Department of State Bank of Pakistan’s report on Balance sheet Analysis Of Joint Stock Listed Companies (2004-2009) listed on Karachi stock exchange. Current Ratio has been assumed as independent variable and Breakup Value of ordinary shares as dependent variable. The output value here is . The second column denoted by R show us the correlation between the observed values and predicted values of dependent variable is 42. b Dependent Variable: lnsp Model 1 Method Enter This table shows that only one variable which is lncr is used for regression which is our independent hence it is a simple regression and the method used is enter.This explains that there is moderate positive correlation between observed values of breakup values of ordinary share and predicted values of breakup value of ordinary share. Analysis The performance of analysis has produced the following results which has been interpreted as follow Variables Entered/Removed (b) Variables Entered Variables Removed .

ANOVA(b) Sum of Squares Regression Residual Total a Predictors: (Constant).010 less than 0.3 tells conditional accuracy about model fitness provided the model is adjusted in this case 15. The standard error shows the allowed amount of error in constant as well as independent variable lncr.368 .0296 and value of coefficient as -.296 -0.237 35. lncr b Dependent Variable: lnsp 6.713 Std.010 The table above provides important information about constructing least square equation. .328 .000 .263 -.713 (ln of current ratio) Since p-value of lncr is 0. .05 therefore given a null hypothesis is rejected we can conclude that regression coefficient is not equal to zero.05 which show that mean of current ratio is not equal to mean of breakup value of share on the basis of rejection of null hypothesis.01 which is less than 0. Std.328 29.296 -. Regression row shows the variability in the model due to known reason whereas residual row give the variability due to unknown reason. This enables us to construct a least square equation as Ln of Breakup value of share=8.063 -2.422 Standardized Coefficients Beta t B 6.359 Sig.860 F 7.713 Sig. We have been given as output the regression constant as 8. Error 1. p-value which is . Coefficients(a) Unstandardized Coefficients Model 1 B (Constant) lncr a Dependent Variable: lnsp 8.4 % of values can be predicted more accurately if more conditions are imposed.565 Model 1 df 1 34 35 Mean Square 6. Error .010(a) The above table shows one-way ANOVA.713 along with their respective significance.

986 N =36 Regression Standardized Residual The histogram is approximately bell-shaped or approximately symmetrical this shows the value of mean and standard deviation of the residual in the model to be about 0 and 1 respectively indicating a good fit model. N show that there were 36 observation in the analysis.04E-16 Std. Charts Histogram Dependent Variable: lnsp 8 6 Frequency 4 2 0 -2 -1 0 1 2 3 Mean =1. . =0.4 4. Dev.

0 0.0 0.2 0.6 0.8 % of predicted values of breakup value of shares are exactly the same as actual.4 0.8 1.6 0. .0 Observed Cum Prob This normal probability plot of standardized residual shows the regression line which touch many points on the fitted regression line which shows an approximately good fit. Conclusion: The fitted model is approximately accurate and we can conclude that the breakup value of share is approximately significantly dependent upon current ratio moreover breakup value of share depend upon the change in current ratio such that 17.4 0.8 0.0 Expected Cum Prob 0.5 Normal P-P Plot of Regression Standardized Residual Dependent Variable: lnsp 1.2 0.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor. L. D.6 References Scott. (2003). . Houghton Mifflin Company.

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