03 January, 2014

Dr. Mahmood Osman Imam

Professor
Department of Finance
Faculty of Business Studies
University of Dhaka
Subject: Submission of report on Corporate Finance.

Dear Sir,
It is my recognition to inform you that I took a great pleasure in
preparing the report on Corporate Finance. I have collected the
annual reports of Confidence Cement Limited for preparing the
report. During preparing the report, I have gained lots of
experience contrary to the limited theoretical knowledge on
various aspects.

Your crafted guidance made it possible for me to prepare this

report successfully.

Yours truly,
Raisul Hoque
ID# 23003

Page | 1

Acknowledgement

It is my great privilege to express gratitude to our creator Allah

for such great opportunity to prepare the report. I also have to put
our heartened feelings and gratitude for the kindness and
assistance that was provided to me to complete my assigned
report as on the topic.
I am deeply indebted to Prof. Dr. Mahmood Osman Imam for his
inspiring and invaluable guidance throughout the work. I would
like to thank him for all the advice, encouragement, help and
everything that we learnt from him. Without him this report would
not have been possible.

Raisul Hoque
ID# 23003

Page | 2

Page | 3

Table of Contents
Contents
Executive Summary.................................................................................................... 1
Corporate Goal........................................................................................................... 2
Valuation.................................................................................................................... 4
Financial Statements, And Analysis............................................................................7
Cost of Capital and Capital Structure.......................................................................16
Dividend Policy......................................................................................................... 18
CREDIT RISK GRADING SCORE SHEET......................................................................25
Appendix.................................................................................................................. 31

Page | 4

Executive Summary

Confidence Cement Limited (CCL) is the first private sector cement

manufacturing company in Bangladesh established in early 90's with having
4,80,000 M/T annual production capacity at Chittagong. It manufactures
Portland Composite Cement. CCL is the first ISO-9002 certified cement
manufacturing company in Bangladesh
In this report we tried to evaluate the financial performance of the company
for the last five years based on the Annual Report of the company (2007 to
2011). Based on these published reports we tried to find out various financial
parameters to find out the financial status of the company.

Page | 1

Corporate Goal

Q-1: What is the corporate goal of your firm? Do you think 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 think the goal of
this firm should be? Analyze the provision of information in the
Annual Report in relation to the strategic thinking of a company in
terms of corporate objectives.

Vision and Mission or goal reflects an organizations dedication, hard work,

planning and commitment for future planning and prospect. The whole
company works as one and expresses their ultimate goal. Top level
management to the basic level management is involved with the vision. The
vision and mission may not be stated in the annual report but it is activities
and future plan that reflects the vision and mission of a company. The vision
and mission of Confidence cement is to Build corporate image through
standard product quality, employee policy and commitment to
innovation.

It is well defined that the company is trying its best to complete its mission
and we can find it through a close look in the recent financial reports and
statement. The dedication and continuous efforts of management have
made the performance of the company gradually improved. During the year
2010-2011, Confidence cement has earned operating profit before other
income of Tk. 22.02 crore while Tk. 3636 crore in 2009-2010. The Company
has set up Confidence Electric Limited jointly with Confidence Steel Limited
symbolizing its prospective growths. Jamuna Bridge, Shah Amanat (R.)
Page | 2

international Airport, Redisson Hotel, Rupayan City Centre etc. structures are
carrying the symbol of Confidence Cements recent excellence which
suggests their efforts of obtaining corporate goal.

Q - 2: What is your comment regarding the Corporate Social

Responsibility (CSR) of the firm? Is anything stated about the CSR in
the annual report?

Confidence cement is well aware of Corporate Social Responsibility which

implies that the contribution of the company in the social and environmental
factors. It is the commitment of developing policies to integrate responsible
practices into daily business operations.

Environmental Contribution:

The company is trying to set a plant to produce electricity to mitigate its own
production and contribute in the huge demand of electricity in the country.
Its research team is working to find out a process through which the
environment will be saved from air and water pollution. To reduce the
pollution and to maintain the healthy environment for the worker the
company implemented modern environmental friendly machineries.

Social Responsibilities:

Besides, economic contribution to the country the management of the

company is always committed for the welfare of the society. Confidence
Page | 3

cement family always tries to contribute in the socio-economic projects in

the country. Such project includes-

Natural Calamity is prominent in our country each and every year.

Confidence cement always tries to be beside affected people during
different natural disasters.

Always donates to the primary schools, high schools, colleges,

madrashas, orphanage, mosques and in the sports.

Provide monetary help to the poor and to the freedom fighters.

In the month of Ramadan sponsor Iftar in the mosque and provide

clothing to the poor.

Every year the company arranges eye-camp and provides free eye
surgery.

Although the company has not directly mentioned the Corporate Social
responsibilities in its Annual Report of 2011, but in its profile of
Confidence Cement we find the implication.

Valuation
Q-3: What is the book value of the firm?

Page | 4

Book value is the accounting value of a firm. It is the total value of the
company's assets that shareholders would theoretically receive if a
company were liquidated. Traditionally, a company's book value is its total
assets minus intangible assets and liabilities. Very often this value refers
to the equity of the shareholders. Book value of Confidence Cement Ltd.
over the years is as follows-

Book Value

2007

2008

2009

2010

2011

688309440

857929637

948108472

1097942380

1146848380

169620197

90178835

149833908

48906000

Changes(B
V)

Q-4: What is the market value of the firm?

Market value of a firm is the market capitalization plus the market value
of debt. Sometimes it referred to as "Total market value. In the context of
securities, market value is often different from book value because the
market takes into account future growth potential. Based on the stock
price in the market total market value of Confidence Cement Ltd. over
the years are as follows-

2007
Market
Value
Changes(M
V)

281,133,3
33

2008
171,359,3
75
109773958.

2009
239,250,0
00
67890625

2010

2011

4,146,677,0
83

4,010,346,4
44

3907427083

136330639.3

Page | 5

Q-5: Using Price-earnings multiples of the industry, find out the

price of the share of your company.

Confidence Cement Ltd. belongs in the category of Cement Industry in

Dhaka Stock Exchange (DSE). According to the latest data of DSE the

Confidence Cement Limited

(DSE:CONFIDCEM)
Current Price ( 02/01/2014 )
Total Number of Share

124.70
44.99 MN

Free Float (%)

76.5%

Forward PE Heidelberg

17.88

Trailing PE Heidelberg

20.20

Forward PE - Cement Sector

21.40

Page | 6

Using these data the price of the share of the firm is calculated as 86.33
BDT. Current market price of the share is 96 BDT, which indicates that
current market price of the share is below the average price of the sector.

Q-6: Compute FCF to the equity-holders over the 5 years forecasted

periods and discount these free cash flows at the cost of equity
(with an average growth rate) to arrive at the price of the stock of
your company.

To calculate the FCF to the equity holders we have to forecast the Income
Statements & Balance Sheets for the years 2012 to 2016 based on the
historical data of the years 2007-2011. In our forecasting we have
considered some assumptions. The summary of the assumptions are
discussed below:

The Sales Revenue is expected to grow at a rate of 26% while The

Cost of Sales & Operating Expenses is expected to be 88% & 3.3%
of Sales respectively.

No other Income is forecasted as this amount was not consistent

and significant in the previous years while WPPF is expected to be .
5% of Sales Revenue based on historical data.

The Income Tax rate is expected to be % (Based on the previous

year)

Average depreciation rate of the Property, Plant & Equipment

(PP&E) is 0.38% of sales revenue. Accumulated Depreciation is
forecasted based on depreciation.

Page | 7

Based on these assumptions we calculated the net cash flow of the firm for
the next five years.

2007

Depreciation

20,959,746
1.901%

2008

34,932,262

2009

48,904,778

2.840%

2010

103,299,99
8

76,215,460

4.027%

2011

4.434%

4.610%

2012

2013

2014

2015

2016

Total Fixed assets

2,833,823,
216

3,081,093,3
65

3,349,939,4
98

3,642,244,2
65

3,960,054,5
91

Forecasted CAPEX

547,574,19
5

558,525,67
9

569,696,19
2

581,090,11
6

592,711,91
9

2012

Forecasted
Depreciation

100,196,16
3
3.563%

2013

125,759,45
8
3.563%

2014

157,844,77
9
3.563%

2015

198,116,10
7
3.563%

2016

248,661,95
9
3.563%

Page | 8

And the Capex is determined by the difference of the two consecutive years.

Valuation: In the next section, after forecasting the Balance Sheet and the
Income Statements, we have performed valuation of the Stock Price of the
company by using the FCFE (Free Cash Flow to Equity) method. The main
purpose of this analysis is to determine the equity value of the company.
Enterprise Value

505,683,409

Plus: Cash balance

23,676,231

Less: Gross Debt

25,894,625

Equity Value

503,465,015

No of shares outstanding

25,000,000.00

Equity value per share

20.14

Financial Statements, And Analysis

Q-7: Analyze your firms behavior with the analysis of structure,

conduct and performance of the industry to which your firm belong?

Company Profile

Page | 9

Confidence Cement Limited (CCL) is the first private sector cement

manufacturing company in Bangladesh established in early 90's with having
4,80,000 M/T annual production capacity at Chittagong. It manufactures
Portland Composite Cement. CCL is the first ISO-9002 certified cement
manufacturing company in Bangladesh. ACI introduced the concept of quality
management system by being the first company in Bangladesh to achieve
ISO 9001 certification in 1995 and follows the policy of continuous
improvement in all its operations.

Key Revenue Drivers & Company Insight

Sale of Portland Composite Cement (PCC) through the brand namely Lion
Brand Cement is the key revenue driver. Confidence Cement Limited has
pursued innovative and aggressive business strategy and seeks to seize
large market by reaching mass people through economies of scale. CCLs
main target sales zone is in Chittagong.

Financial Performance

In 2011, gross margin stayed the same at 14% from 2010, despite increase
in price of raw materials in the international market and devaluation of BDT
against USD. However, as last year cement consumption across the industry
increased by only 4%, scaling up effects didnt materialize as expected.
Consequently,

Operating

Profit

and

NPAT

margin

both

had

suffered

significantly.

Recently, the company has reported net profit after tax of BDT 218.49 million
with EPS of Tk. 4.86 for the period of nine months (Jan'12 to Sep'12) as
against Tk. 158.94 million and Tk. 3.53 (restated) respectively for the same
period of the previous year.
Page | 10

Considering Company is operating within an industry which is influenced by

the following forces:

Rivalry among the Existing Firms:

Threat of New Entrants

Threat of Substitute Products

Bargaining Power of Suppliers

Bargaining Power of Buyers

Cement industry has a very competitive sector in Bangladesh considering

the above facts and the companies have to react very sensitively.
Confidence Cement Ltd. is very aware of this competition and responding
accordingly. The company has spent a lot money in the previous year to
introduce new technologies and replacement of old machineries and the
results of these measures are reflected in the last two years financial
performances of the company.

Q-8: Evaluate the firms financial condition of the recent five years
using the ratios like (a) liquidity (CR, QR), (b) efficiency & activity
(A/R period, Inventory period, TAT, operating and cash cycle, (c)
solvency (debt equity ratio, debt to total asset, debt service
coverage ratio (d) profitability (OPM, NPM, ROA, ROE), and (e)
market (BV/MV, P/E ratio. TOBIN Q).

Page | 11

The firms financial condition on the basis of analysis of recent five year
annual report and the different ratios of the firm are

A) Liquidity ratio

Internal Liquidity
Ratios

2007

2008

2009

2010

2011

Current Ratio

1.29

1.0
7

1.42

1.59

1.23

Quick Ratio

0.88

0.7
7

1.04

0.98

0.78

Cash Ratio

0.71

0.6
0

0.83

0.77

0.64

Current Ratio

The higher the current ratio, the more liquid or solvent firm, and it has
enough current assets to cover its short term obligation. So, we can conclude
that the liquidity position of Confidence is average.

Quick Ratio or Acid-Test Ratio

The higher the quick ratio, the more liquid or solvent firm, and it has enough
current assets to cover its short term obligation. From the quick ratio of the
company it can be said that the company is not in a good position.

Page | 12

B) Efficiency and activity

Internal Liquidity
Ratios

2008

2007

Accounts Receivable
Turnover

2009 2010

2011

16.2
8

13.9
2

12.51

15.12

17.45

Average Collection Period

22.1
2

25.8
5

28.78

23.82

20.63

Operating cycle

85.6
7

73.4
3

91.75

102.70

98.09

Accounts Payable
Turnover

81.0
6

562.
61

131.49

169.26

36.81

Average Paying Period

4.44

0.64

2.74

2.13

9.78

Cash Cycle

81.2
3

72.7
9

89.01

100.58

88.31

Operating Efficiency
Ratios

Fixed Asset Turnover

Current Asset Turnover

2007

2008

0.6
4
2.0
6

2009

2010

2011

0.70

0.67

0.73

2.18

1.88

2.03

0.86

1
0.98

Page | 13

Total Asset Turnover

0.4
9

0.53

0.49

0.54

0
0.60

Average Collection Period

The collection period indicates the inefficiency of the firms collection policy
by showing how long it takes for accounts receivable to be cleared. The
actual value of these ratios reflects the firms credit policy. The lower the
number, the quicker the collection of money. The A/R turnover or avg.
collection of A/R of Confidence Cement Mills Ltd. is steady over the last 5-7
years.

Inventory Turnover Ratio

The inventory ratios measure how quickly inventory is produced and sold.
Inventory turnover commonly measure the activity or liquidity of a firm. The
ratios are affected by the perish ability of the finished goods. The inventory
turnover of the firm is not very good-looking for the last few years, which is
not a good sign for the company.

Total Assets Turnover

Page | 14

This ratio is intended to indicate how effectively a firm is using all of its
assets. Higher the ratio indicates the firms efficiency in using fixed asset.
The TAT of Confidence Cement Ltd is in average of 68%. It is good for the
firm and firm is in right truck to use its asset.

Operating cycle

Operating cycle is the time interval between the arrival of inventory stock
and the date when the cash is collected from receivables. The length of the
operating cycle is equal to the sum of the lengths of the inventory and
accounts receivable periods. Lower operating cycle is better for the company.
But the firms operating cycle is high and it increasing in the last few years
because of increase of inventory period.

Cash cycle

In general, cash cycle is the time between cash disbursement and cash
collection. The cash cycle begins when cash is paid for materials and ends
when cash is collected from receivables. The cash flow time line consists of
an operating cycle and a cash cycle. Though the operating cycle of the
company is high, the cash cycle of the company is also high. It is not good
for the firm.

C) Solvency ratio

Financial Risk/Leverage
Ratios

2008

2009

2010

2011

2012

Page | 15

Debt to Total Asset Ratio

0.18

0.23

0.19

0.16

0.14

Debt-Equity Ratio

0.60

0.61

0.48

0.46

0.46

End-of-Year Stock Price

0.30

0.37

0.39

0.34

0.31

Earnings Per Share (EPS)

2.77

-1.50

6.86

7.39

5.29

Price/Earnings Ratio

0.11

-0.25

0.06

0.05

0.06

Other Performance Ratios

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. Confidence Cement Ltd. has debt-equity ratio less than 1.
It indicate firm has lower portion of debt than equity.

Debt to Total Asset Ratio

The debt to total asset ratio is the ratio of the total debt in the firm, both
long-term and short-term to total asset, where asset is the sum of debt and
stockholders equity. Confidence Cement Ltd. has debt-total asset ratio
very low. It indicate firm has lower portion of debt than total asset.

Page | 16

Debt Service Coverage ratio

Interest payments plus repayments of principal to creditors, that is,

retirement of debt. Debt service is interest payments plus repayments of
principal (that is, retirement of debt). The debt service coverage ratio
measures the risk. The lower the ratio, the greater the risk to both lenders
and owners, the grater the ratio and lower the risk. Confidence Cement
Ltd. has a lower trend in this ratio but the scenario is changing for the last
two years.

D) Profitability

Operating
Profitablity Ratios

2007

2008

2009

2010

2011

Gross Profit
Margin

11.76%

1.93%

18.83%

13.77%

14.03%

Operating Profit
Margin

9.83%

-1.10%

18.72%

11.80%

12.69%

Net Profit Margin

19.41%

111.65%

14.14%

16.86%

14.36%

Return on Total
Assets (ROA)

2.33%

-1.23%

5.84%

7.54%

5.30%

Return on Equity
(ROE)

30.50%

37.08%

38.58%

34.36%

30.68%

Page | 17

Operating Profit Margin

The operating profit margin measures the percentage of each sales

remaining after all costs and expenses other than interest, tax, and preferred
stock dividends are deducted. The high operating profit margin is preferred.
But in this margin is not very lucrative for the last few years though the
margin increased in the last year.

Net Profit Margin

The net profit margin measures the percentage of each sales remaining after
all costs and expenses including interest, tax, and preferred stock dividends
are deducted. The high operating profit margin is preferred. The net profit
margin for Confidence Cement Ltd. has increased significantly comparing
to the low margin of the last few years.

Return on Asset (ROA)

Return on assets relates net income to total assets; it measures how

profitably and efficiently the firm has used its assets. The higher ROA is
desired for any firm. The ROA was very poor for our firm in the previous
years but the scenario improved on the last year.

Return on Equity (ROE)

ROE measures the return earned on the common shareholders investment in

a firm. The higher ROE is desired. The ROE is in increasing trend for
Confidence Cement Ltd..
Page | 18

E) Market Ratio

Book
Value/Market
Value

2007

2008

2009

2010

2011

BV

688,309,440

857,929,63
7

948,108,47
2

1,097,942,
380

1,146,848,
380

MV

281133333.3

171359375

239,250,00
0

4,146,677,
083

4,010,346,
444

BV/MV

244.83%

500.66%

396.28%

26.48%

28.60%

MV/BV

0.41

0.20

0.25

3.78

3.50

TOBIN Q

0.12

0.07

0.10

1.30

1.07

BV/MV & MV/BV

The book/market or market/book value ratio provides an assessment of how

investors view the firms performance. It relates the market value of the
firms shares to their book value. Higher MV/BV ratio is the batter for the
investors. It indicates how much high the market price of the share than the
book value. For the last few years (except previous) MV of the Confidence
Cement Ltd. was lower than the BV which means the lack of confidence of
the investors on the performance of the company which is a very poor sign
but the MV increased in the last two years specially in the last year due to

Page | 19

the better financial performance of the company and the recent hike in the
share market of the country.

P/E ratio

The price/earnings ratio is commonly used to assess the owners appraisal of

the share value. The level of this ratio indicates the degree of confidence
that have in the firms future performance. The higher the P/E ratio, the
greater the investor confidence. The P/E ratio of the company is in increasing
trend, so the shareholder should have confidence on the company.

Q Ratio (Tobin's Q Ratio)

A low Q (between 0 and 1) means that the cost to replace a firm's assets is
greater than the value of its stock. This implies that the stock is
undervalued. Conversely, a high Q (greater than 1) implies that a firm's stock
is more expensive than the replacement cost of its assets, which implies that
the stock is overvalued. This measure of stock valuation is the driving factor
behind investment decisions. Initially the Q ratio was much lower for our
company. But now it was just above two years earlier which indicates the
share value of the firm was properly valued in the market. But in the last
financial year it increased to a very higher level.

Q-9: Prepare five-factor Du Pont Analysis for the firm. If you want to
increase the ROE what may be your course of actions? Suggest
specific actions.

Page | 20

We have conducted the 5-factor DuPont analysis. The DuPont Analysis

provides us the following results-

DuPont Analysis
Net Income/Sales
Sales/Total Assts
Total
Asset/Common Equity
ROE

2007

2008

2009

2010

2011

4.78%

-2.31%

11.81%

14.01%

8.85%

48.84%

53.16%

49.42%

53.80%

59.95%
325.92
%
17.28%

327.92%

269.67%

259.17%

291.01
%

7.65%

-3.32%

15.12%

21.93%

The Operating Profit Margin has got a quite stable value around 13%-15%.
But in the last year it increased to 21.01%

The Total Asset Turnover has an overall increase in the last seven years
from 56.35% to the peak value of 89.42 % in the year 2011.

The product of the above two ratios is the EBIT/Total Asset which
experienced quite a stable range from year 2006 to 2010. But this value
increased significantly in 2011.

The Interest Expense Rate has a mixed condition over the last seven years
within the range of 3.19%-6.68%.

Page | 21

 By subtracting the later one from the former one we find NBT/Total Asset
which was very high in last year. But it was within the range of 2%-4.5% in
the previous years.

The Financial Leverage multiplier has an overall stable for the last seven
years from 160% to 203.3%. The reason is that most of the interesting
bearing loan is of short term. The long term loan is basically the lease
obligation.

The product of these two ratios is NBT/Common Equity which was stable
for the years but increased significantly in the last year.

The Tax Retention Rate has a quite stable range from the lowest value of
around 85%.

Finally, as a result of the increased value of NBT/Common Equity in the last

two years and the stable range of Tax Retention Rate the ROE increased
significantly in last two years.

Now, from our analysis we can draw a conclusion that ROE is highly
depending on the operating Profit Margin (OPM) and the Total Asset Turnover
(TAT) ratio. To increase the ROE we have to increase the OPM & TAT and
decrease financial leverage multiplier.

Page | 22

Cost of Capital and Capital Structure

Q-10: What is the companys cost of equity? What is its cost of

debt? What is this company's current cost of capital (hurdle rate)?

The cost of equity can be calculated by following some steps. All the
calculations are shown in detail in the Appendix. The summarized process is
as follows:

Step-1: Calculating the Market Return: at first we have calculated the

percentage change of the General Index for 84 months. The starting month
is July,2007. For 2006-2007 we have found 11 changes or returns. Then we
have calculated the average value of these 11 returns. The process is
continued for rest of the years (up to June, 2011). Then we have calculated
the Annualized average of the yearly returns which is the Market Return. The
market yields a return of 26.58%.

Step-2: Calculating the Stock Return Series: In the next step we have
calculated the return series for Confidence Cement Ltd. by using the
Monthly Closing Prices for the same period.

Step-3: Finding the Beta: Then we have calculated the Covariance

between the Market Return Series and the Return Series for the firm and the
Variance of the Market Return. By dividing the Covariance by Variance we
have found the Beta. This is presented in the following table (Detailed
Calculations are shown in Appendix:
Page | 23

Avg Monthly Return (AMR) =

0.022179

Market Return (Vm) =

26.61%

Risk Free Rate (Vf) =

9.50%

Cov (Market, Renata) =

0.000315

Var (X) =

0.045434

0.006936

Ke =

9.62%

Step-4: Finding the Cost of Equity: in this step we have calculated the
cost of equity by using the following Equation:

Ke = Rf + (Rm - Rf)

DRP =

Kd =

4.00%
13.50%

Page | 24

WACC =

9.88%

Discount Rate, k =

9.88%

Page | 25

Dividend Policy

Q - 11: What is the last five years dividend pattern of the firm?
Dividend policy refers to the policy chalked out by companies regarding the
amount it would pay to their shareholders as dividend. With profit making comes
the question of utilizing the profit gainfully. The companies have two options
with them:

They can retain these profits within the company

They can pay these profits in the form of dividends to their shareholders

The dividend policy to be adopted by the company is based on these two

options. Once this is sorted out, a permanent dividend policy can be put into
place. These policies shape the attitude of the investors and the financial market
in general towards the concerned company. The policies are decided according
to the current and future financial positions of the company. The preference and
orientation of the investors are also taken into account.
The dividend policy acts as a signal for investors for gauging the future earning
possibilities as expected by the management of the company. The dividend
policies are directed towards attracting investors to their company. This is
termed as the clientele effect. The firms that hold back free cash flows are lesser
in value than those firms, which allow free cash flows and pay dividends from
them.
There are quite a few impediments to companies paying dividends to their
shareholders. Some of these constraints are as follows:

Consideration of taxes
Consideration of returns
Contractual constraints
Cash flow constraints
Legal constraints

Once a company makes a profit, they must decide on what to do with those
profits. They could continue to retain the profits within the company, or they
Page | 26

could pay out the profits to the owners of the firm in the form of dividends. Once
the company decides on whether to pay dividends, they may establish a
somewhat permanent dividend policy, which may in turn impact on investors
and perceptions of the company in the financial markets. What they decide
depends on the situation of the company now and in the future. It also depends
on the preferences of investors and potential investors.
Dividend policies are the regulations and guidelines that companies develop and
implement as the means of arranging to make dividend payments to
shareholders. Establishing a specific dividend policy is to the advantage of both
the company and the shareholder. In order to make sure the policy is workable,
a company should develop a viable policy and then run this policy through a
number of test scenarios in order to determine what impact the dividend policy
would have on the operation of the business.

Types of Dividends
Dividend refers to cash distributions of earnings
1. Cash dividends
These are the most common and are usually paid four times a year.
2. Stock dividends
Stock dividends are not true dividends in that a distribution of stock does not
affect the value of the firm or the wealth of the shareholder. These dividends are
paid out of Treasury stock.
3. Stock split
Similar to a stock dividend. The NYSE requires share distributions of less than
25% to be treated as stock dividends.
4. Share repurchases
The company repurchases the stock. Shareholders pay tax only on the capital
gains portion. Same effect as a regular dividend as cash LEAVES the corporation.

Types of Dividend Policy

Sticky Dividends

Page | 27

Sticky dividend policy is a policy wherein firms pay out a relatively consistent
and generally rising amount of dividends in the form of specific amounts. They
are considered "sticky" in the sense that once begun, it is difficult to lower the
dividend without sending a signal of impending doom.
Residual Dividend Policy
Residual dividend policy is a policy wherein the dividend received each period is
exactly as the label implies; it is the residual or left over amount after all
acceptable investments have been funded. The cash flow for the period is
compared first to the list of available positive net present value projects.
Projects are accepted to the point where the next project would either have a
negative NPV or a rate of return below the cost of capital. Any cash flow
remaining after these investments are made is then paid out to the shareholder
as a dividend on the grounds that it is not needed by the firm to purchase assets
and shareholders should receive the funds so they can pursue alternative
investments.
Constant payout policy

Constant payout policy guars against overpayments as well as underpayments

of dividend and management cannot pay dividend if there is no profit and it
cannot withhold them when profits are earned.
From the shareholders viewpoint, this method involves uncertainty and
irregularity in regard to the expected dividend.
Stable Dividend Policy

Payment of a specific tk. Dividend each year, or periodically increasing the

dividend at a constant rate-the annual tk. Dividend is relatively predictable by
investors.
As a rule, stable dividends imply more certainty than variable dividends, thus a
lower required rate of return and a higher firm value. So it is this dividend policy
most firm favor.

Last five year dividend pattern of the firm:

Page | 28

Year

Cash

Stock

2007

15.00

2008

10%B

2009

20%B

10.00

2010

15%B

25.00

2011

20%B

20.00

*Considering Face value of share tk.10

From the above table, we can see that Confidence Cement Ltd. has been
following a steady dividend policy since 2000 which indicated that company
has paid nearly a fixed percentage of net earnings per share as dividend. It is
also

observed

that

EPS

and

percentage

of

Dividend

is

increasing

simultaneously over the year. So it indicates a sign of stable dividend policy.

12: Prepare a Table on the computation of the following parameters over

the five recent years in order to assess the dividend policy of the firm:
DPS (Cash Div. per share and stock div. per share), EPS, DPR, OCF per
share, FCF per share, MP, P/E ratio, P/E multiple of the Industry/sector, BV
per share, Reserve & RE per share, Sustainable Growth rate (G), Inflation
rate & GDP growth rate.

Page | 29

The table is shown in the following page. Now, lets have a look on the brief
review of the items on the table.

Five recent years dividend policy and other parameters

Fiscal Year

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

Cash div./share

15%

10.0%

10.00,
20%B

25.00,
15%B

20.00,
20%B

Stock div./share

100%

EPS

2.77

(1.50)

6.86

7.39

5.29

DPR

89.11%

79.33%

86.77%

533.31%

45.32%

OCF/Share

8.44

(23.75)

78.52

31.62

2.44

FCF/Share

11.22

12.61

11.52

18.75

3.31

(Market Price) MP

57.98

113.88

139.98

342.40

98.78

85.00%

85.00%

90.27%

95.61%

84.99%

36.22

45.15

45.36

33.67

30.58

Reserve/Share

6.22

2.61

1.52

18.75

3.31

RE/Share

0.41

1.20

1.32

8.55

3.63

0.18%

0.54%

0.59%

4.06%

26.44%

P/E ratio of the

Industry
BV/Share

Sustainable growth
rate

Page | 30

From this parameter we can measure the dividend policy of the firm.

Dividend per Share (DPS): This company mainly provides cash

dividend. And the dividend is paid on the face value of the share. By
dividing Dividend Declared by Diluted Share we have found the DPS.

Earnings per Share: it has been calculated by dividing the Earnings

after tax by the Diluted Shares.

Operating Cash Flow and Free Cash Flow per Share are calculated by
dividing each of them by the Diluted Share. The Calculations are shown
in Appendix.

MV & BV are the Year End Market Price & Face Value per share for
Confidence Cement Ltd.

P/E multiples for both the Company and the Industry have been
presented in the table. The Industry P/E multiples have been calculated
by weighting the company-P/E multiples those belong in this particular
Industry. The calculations are shown in the Appendix.

Reserve & Retain Earnings per Share are calculated simply by dividing
the Total Reserve & Retained Earnings by the No. of shares.

Sustainable Growth Rate has been calculated by multiplying the ROE

with One minus DPR. That means: G = ROE* (1-DPR).

The Inflation and GDP Growth Rate have been collected from
www.indexmundi.com
Page | 31

Q - 13: Make judgments for inculcating the stylized facts of the

dividend behavior in your firm.

We have matched the dividend policy of the Confidence Cement Ltd. since
2000. We can observe that the board of Directors have paid the dividend in
both form of Cash and Stock dividend when there have been increased
earnings that are maintainable in the long run. The company has increased
its dividend (both Stock & Cash) when they think that earnings can be
maintained in the long run. It is seen from the figure that they never cut
their dividend which is a good sign of company.

Corporate Dividends are substantial: dividends are tax-disadvantaged

relative to capital gains, because dividends are taxed upon payment
while taxes on capital gains deferred until sale. However, the
companies generally provide a large amount of dividends. Our
considering company also follows this fact. The dividend payment of
this company is related the income. And the amount of cash dividend
goes up to 94.31% which is a substantial amount.

Corporations smooth dividends: corporations generally set their

dividend to income target ratio. Those who have opportunities to invest
in positive NPV projects would like to lower the ratio and vice versa.
But it is also true that the managers know that only the part of the
changes in the earnings is permanent. So, with the change of the
earnings the management doesnt change the dividend payment. That
means mangers are not willing to cut the dividend unless they are
forced to do or they wouldnt, on the other hand, increase the dividend
if it is not sustainable. Our company also follows this principle.
Page | 32

Current Dividend Pattern

The Company has the following dividend pattern in the last 5 years.
Year 2007
Since the company has an increasing trend of earnings in the recent past
and also in the year (the company earned a net profit of BDT 52.68 million
during year 2007, the Board of Directors recommended BDT 15 per share
dividend or a total of BDT 285.32 million for all of its shareholders.
Year 2008
Though during this year the company posted net loss which is BDT 28.45
million, the Board of Directors recommended 10% stock bonus per
share dividend or a total of BDT 190.12 million for all of its shareholders
to attract them.
Year 2009
This year the net profit increase significantly, by increasing trend of sales
and cost reduction. However, the Board of Directors recommended BDT
10 per share and stock dividend of 20% or a total of BDT 627.12 for all
of its shareholders.

Year 2010
Net profit after tax increased radically in this year, posted 90% growth. To
share the booming earnings with the share holders, the Board of Directors
recommended BDT40 per share dividend (25% Cash and 15% Stock) or a
total of BDT 1,340.12 million for all of its shareholders.
Year 2011
The company has been able to hold the positive trend in its income and
earned a net profit of BDT 198.22 million during the year. Considering the
Page | 33

situation the company declared BDT 40 dividends (20% Cash and 20%
Stock) per share or a total of BDT 1,499.60 million for all the
shareholders.

Page | 34

CREDIT RISK GRADING SCORE SHEET

Credit Risk Grading Model
Score Summary
Reference No.:

Name of the Borrower

Date:

Confidence Cement

Key Person
Group Name (if any)

Confidence Group

Branch:
Industry

Cement

Aggregate Score:

70.00

Sector
Date of Financials
Originated by (RO/SRO)

Risk Grading:

Marginal/W
atch List

Completed by (RM/SRM)
Approved by (CO/SCO)

Page | 35

Numeric Grade

Grade

Shor
t

Score

Superior

SUP

Fully cash covered, secured

by Government/International
Bank Guarantee

Good

GD

85+

Acceptable

ACCP
T

75-84

Marginal/Watc
hlist

MG/W
L

65-74

Special
Mention

SM

Substandard

SS

45-54

Doubtful

DF

35-44

Bad/Loss

BL

<35

55-64

Score Calculation Sheet (Considering first year)

Page | 36

Criteria

Weig
ht

A. Financial Risk

50%

A-1 Leverage

10%

A-1.1 Debt-Equity (x) Times

Total
Liabilities
Tangible Net worth

5%

to

A-1.2 Debt-Total Asset

(x)- Times

Total Liability
Assets

to

Total

5%

Scor
e

Actual
Parameter

Score
Obtained

< 0.25 x

5.00

1.53

3.25

0.26 to 0.35
x

4.50

0.36 to 0.50
x

4.25

0.51 to 0.75
x

4.00

0.76 to 1.25
x

3.50

1.26 to 2.00
x

3.25

2.01 to 2.50
x

3.00

2.51 to 2.75
x

2.50

> 2.75

0.00

< 0.25

5.00

0.14

0.26 to 0.35
x

4.50

Parameter

Page | 37

A-2 Liquidity
A-2.1Current Ratio (x)
-Times
Current Assets to Current
Liabilities

0.36 to 0.50
x

4.25

0.51 to 0.75
x

4.00

0.76 to 1.25
x

3.50

1.26 to 2.00
x

3.25

2.01 to 2.50
x

3.00

2.51 to 2.75
x

2.50

> 2.75

0.00

> 2.74

5.00

2.50 to 2.74
x

4.50

2.00 to 2.49
x

4.25

1.50 to 1.99
x

4.00

1.10 to 1.49
x

3.50

0.90 to 1.09

3.25

10%
1.23

3.5

5%

Page | 38

A-2.2 Quick Ratio (x)

-Times

0.80 to 0.89
x

3.00

0.70 to 0.79
x

2.50

< 0.70

0.00

> 2.00

5.00

1.75 to 2.00
x

4.50

1.50 to 1.74
x

4.25

1.25 to 1.49
x

4.00

1.00 to 1.24
x

3.50

0.75 to 0.99
x

3.25

0.50 to 0.74
x

3.00

0.25 to 0.49
x

2.00

Less than
0.25

0.00

0.10

5%

Quick Assets to Current

Liabilities

A-3 Profitability

20%

Page | 39

A-3.1 Operating Profit

Margin (%)

5%

(Operating Profit/Sales) X
100

Criteria

A-3.2 Net Profit Margin

(%)

(Net Profit/Sales) X 100

Weig
ht

5%

> 25%

5.00

10.91%

2.5

23% to 25%

4.50

20% to 22%

4.00

17% to 19%

3.50

14% to 16%

3.25

11% to 13%

3.00

8% to 10%

2.50

< 8%

0.00

Scor
e

Actual
Parameter

Score
Obtained

> 15.00%

5.00

8.85%

3.25

13% to 15%

4.50

11% to 12%

4.00

9% to 10%

3.50

7% to 8%

3.25

5% to 6%

3.00

3% to 4%

2.50

Parameter

Page | 40

A-3.3 Retrun on Asset

5%

(Net Profit/Total Asset) X

100

A-3.4 Return on Equity

(Net Profit/Total Equity) X

100

5%

< 3%

0.00

> 30%

5.00

26% to 30%

4.50

22% to 25%

4.00

18% to 21%

3.50

14% to 17%

3.25

8% to 13%

3.00

5% to 7%

2.50

< 5%

0.00

> 15.00%

5.00

13% to 15%

4.50

11% to 12%

4.00

9% to 10%

3.50

7% to 8%

3.25

5% to 6%

3.00

2% to 4%

2.00

< 2%

0.00

5.30%

2.5

57.69%

Page | 41

A-4 Coverage

A-4.1 Interest Coverage

() - Times

10%

> 2.00

5.00

1.51 to
2.00

4.00

Earning before interest &

tax (EBIT)

1.25 to
1.50

3.00

Interest on debt

1.00 to
1.24

2.00

< 1.00

0.00

> 2.00

5.00

1.51 to
2.00

4.00

1.25 to
1.50

3.00

1.00 to
1.24

2.00

< 1.00

0.00

A-4.2 Debt Service

Coverage

5%

5%

EBITDA/(Total
Interest+CMLTD)

Total Score- Financial

Risk

B. Business/ Industry
Risk

50.0
0

11.47

13.91

35.00

18%

Page | 42

B-1 Size of Business (in

BDT crore)

4%

Size of the borrower's

business measured by
the most recent year's
total sales. Preferably
audited numbers.

B-2 Age of Business

3%

Number of years the

borrower is engaged in
the
primary
line
of
business

B-3 Business Outlook

2%

Critical
assesment
of
medium term prospects
of industry, market share
and economic factors.

Weig
ht

Criteria

B-4
Raw
Availability

Material

2%

> 60.00

4.00

30.00 59.99

3.50

10.00 29.99

3.00

5.00 - 9.99

2.00

2.50 - 4.99

1.00

< 2.50

0.00

> 10 Years

3.00

6 - 10 Years

2.00

2 - 5 Years

1.00

< 2 Years

0.00

Favorable

2.00

Stable

1.50

Slightly
Uncertain

1.00

Cause for
Concern

0.00

Parameter

Locally
available

22407914.56

Favorable

Scor
e

Actual
Parameter

Score
Obtained

2.00

Locally
available

Page | 43

B-5 Industry Growth

B-6 Market
Competition

3%

2%

Consider market share,

demand supply gap etc.

B-7 Entry/Exit Barrier

(Technology, capital,
regulation etc)

Total Score- Business

Risk

2%

Partially import
dependent

1.00

Fully import
dependent

0.50

Scarce

0.00

Strong (10%+)

3.00

Good (>5% 10%)

2.00

Moderate (1%5%)

1.00

No Growth
(<1%)

0.00

Dominant
Player

2.00

Moderately
Competitive

1.00

Highly
Competitive

0.00

Difficult

2.00

Average

1.00

Easy

0.00

18.0
0

Strong (10%+)

Highly
Competitive

Easy

13.00

Page | 44

C. Management Risk
C-1 Experience

12%
5

Total length of experience

of
the
senior
management
in
the
related line of business.

C-2 Trackrecord

Reputation, commitment,
trackrecrod of onwers in
business.

C-3 Second
Line/Succession

C-4 Team Work

More than 10
years

5.00

610 years

3.00

15 years

2.00

No experience

0.00

Very Good

2.00

Moderate

1.00

Poor

0.50

Marginal

0.00

Ready
Succession

3.00

Succession
within 1-2
years

2.00

Succession
within 2-3
years

1.00

Succession in
question

0.00

Very Good

2.00

610 years

Moderate

Succession in
question

Moderate

Page | 45

Moderate

1.00

Poor

0.50

Regular
Conflict

0.00

Total ScoreManagement Risk

12.0
0

Criteria

Weig
ht

D. Security Risk

10%

D-1 Security Coverage

(Primary)

4%

5.00

Scor
e

Actual
Parameter

Score
Obtained

Fully covered
by underlying
assets/substan
tially
cash
covered

Fully covered
by underlying
assets/substan
tially cash
covered

Registered
Hypothecation
(1st
Charge/Pari
passu Charge)

2nd
charge/Inferior
charge

Simple
hypothecation
/ Negative lien
on assets

No security

Parameter

Page | 46

D-2 Collateral
Coverage (Property
Location)

4%

R/M
on
Municipal
corporation/Pri
me
Area
property

R/M on
Municipal
corporation/Pri
me Area
property

Appendix

Page | 47

Page | 48

Balance Sheet
Description

2007

2008

2009

2010

2011

1
71,733,16
9

1
59,397,19
1

1
72,414,91
2

324,812,4
37

67,723,21
8

88,323,36
7

97,066,24
8

113,713,9
74

1
17,827,68
7

1
45,387,90
7

1
75,057,47
0

129,857,8
42

1
33,963,33
1

1
31,882,92
2

1
58,703,97
2

237,502,9
09

Other receivables

13,282,96
9

16,163,12
9

18,401,86
6

25,121,60
1

Cash and cash equivalents

30,777,48
7

22,919,78
1

24,863,77
8

40,555,83
1

Current Assets

Inventories

Stores and spares

Book debts

Advance, deposits and pre

payments

Total Current Assets

535,307,
861

564,074,
297

646,508,
246

847,532,
766

414,4
94,683

128,3
85,489

231,6
15,420

481,8
19,699

33,5
99,795

59,5
12,296

1,131,35
9,647

Fixed Asset/Non Current

Assets

Property, Plant and

equipment

8
45,234,93
9

8
54,102,98
8

8
56,252,46
4

1,
559,553,3
22

1,878,1
67,572

Page | 49

Capital work in Progress

2
98,273,43
4

3
32,006,03
1

3
65,281,62
5

Intangible Assets

5
46,961,50
5

5
22,096,95
7

4
90,970,83
9

Investment- at cost

141,961

664,019,1
01

83,445

3,
233,864

31,325,00
0

41,325,00
0

98,208,97
0

123,836,9
60

724,912,6
12

Total Non Current Assets

1,721,79
4,878

1,749,53
0,976

1,810,71
3,898

2,347,55
1,344

2,606,39
7,493

Total Assets

2,257,10
2,739

2,313,60
5,273

2,457,22
2,144

3,195,08
4,110

3,737,75
7,140

Current Liabilities

Creditors and accurals

Short term loan

Current portion of Long term

loans

Provision for taxation

97,073,19
8

58,606,75
3

58,084,68
2

32,266,36
2

2
58,329,46
9

4
18,590,83
9

2
96,281,55
5

262,352,7
07

12,000,00
0

46,500,00
0

2,143,904

46,500,00
0

7,495,999

1
01,000,00
0

8,757,173

19,166,66
7

12,7
72,104

381,3
28,750

52,3
25,792

264,1
56,667

Page | 50

Liabilities for other Finance

Provision for taxation

Total Current Liabilities

4
00,905,78
0

6
17,135,77
0

5
67,030,85
7

24,482,54
6

46,500,00
0

46,500,00
0

1
01,000,00
0

185,000,0
00

97,5
45,085

108,2
89,885

413,902,
667

525,841,
496

455,366,
237

532,025,
454

916,418,
282

Long Term Loan-Secured

602,584,6
15

449,757,6
08

1,032,633,
110

655,645,7
34

508,778,0
60

Deffered Tax Liabilities

182,656,9
97

211,219,0
60

225,742,9
42

302,865,5
04

425,187,6
02

Total Long Term Liabilities

785,241,6
12

660,976,6
68

1,258,376,
052

958,511,2
38

933,965,6
62

Total Liabilities

413,902,
667

525,841,
496

455,366,
237

506,500,
370

527,232,
155

179,322,0
00

228,228,0
00

277,134,0
00

326,040,0
00

374,946,0
00

Non-current liabilities

Shareholder's Equity &

Liabilities

Share capital

Share Premium

Page | 51

323,586,9
72

546,588,6
90

546,588,6
90

658,089,5
49

658,089,5
49

General Reserve

105,878,2
00

105,878,2
00

105,878,2
00

105,878,2
00

105,878,2
00

Retained earnings

79,522,26
8

(22,765,2
53)

18,507,58
2

7,934,631

7,934,631

688,309,
440

857,929,
637

948,108,
472

1,097,94
2,380

1,146,84
8,380

1,102,21
2,107

1,383,77
1,133

1,403,47
4,709

1,604,44
2,750

1,674,08
0,535

19,000,00
0

19,000,00
0

20,900,00
0

32,604,00
0

37,494,60
0

33.07

36.09

89.56

79.32

67.07

Total equity attributable to

equity holders of the
company

Total Liabilities &

Shareholders' Equity

Number of Common Shares

NAV/Share

Page | 52

Page | 53

Market (rm)

0.02473

Annual mkt. (rm)

29.68%

Variance

0.88%

Covariance

0.92%

Beta for Confidence Cement

RF

7.00%

Default Risk Premium

5.00%

CAPM(Ke)

30.56%

Cost of Debt (Kd)

12.00%

WACC

29.05%

2007

Depreciation

103.91%

20,959,746
1.901%

2008

34,932,262
2.840%

2009

48,904,778
4.027%

2010

76,215,460
4.434%

2011

103,299,998
4.610%

Page | 54

Total current
assets

535,307,861

564,074,297

646,508,246

847,532,766

1,131,359,6
47

Total Current
Liabilities

413,902,667

525,841,496

455,366,237

532,025,454

916,418,282

1.29

1.07

1.42

1.59

1.23

191,142,009

315,507,312

214,941,365

CR
NWC

Total Fixed assets

CAPEX

121,405,194

38,232,801

2007

2,008

2009

2010

2011

1,721,794,8
78

1,749,530,97
6

1,810,713,8
98

2,347,551,3
44

2,606,397,4
93

27,736,098

61,182,922

536,837,446

258,846,149

1.59%

3.38%

22.87%

9.93%

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