Course Code: F-406

Course Name: Corporate Finance

modeling

An Assignment on financial

Submitted to-

Ms. Nusrat Khan

Assistant Professor,
Department of finance,
University of Dhaka

Submitted by-

Md. Jahed Hossain

ID- 18-138, Sec- B
B.B.A. 18th Batch
Department of finance,
University of Dhaka

Submission Date: October 04, 2015

Purabi General Insurance Company Limited

Purabi General Insurance Company Limited was incorporated on 29 th June, 1988 with the object
of carrying in and outside Bangladesh all kind of insurance business other than life insurance and
obtained the certificate of commencement of Business from the Register of Joint Stock
Companies, Bangladesh with the effect from the same date. In 1995 the company issued public
portion of shares and listed with the Dhaka Stock Exchange from 4th August, 1995.

Historical Common-Size Analysis:

Common-Size Balance Sheet
To make judgment about the firms performance we need benchmark. Here we use common size
of reformulated balance sheet and income statement as the benchmark. Common size analysis is
simply the standardization of line items to eliminate the effect of size. The line items are
expressed as percentage of total value which reflects the scale of operation.
On the equity side issued, subscribed and paid up capital holds the biggest part and it shrinks for
last three years. Then reserve for exceptional losses takes the second position. But it increases in
2012. Investment fluctuation fund shows a small percentage in 2014 which have no amount
before.
On the liability side, sundry creditors holds the large part but it shows a large variability in 2011,
then it shows a little bit fluctuation for the next four year. Outstanding claim and provision for
income tax holds respective portion.
On the asset side, cash and bank balance holds large portion and it increases over the last five
years. Amount due from other insurance companies and sundry debtors shows an increasing
trend. Shares and debentures of other companies are declining at an increasing rate.
Common-Size Income statement
On the income statement profit and loss form the fire, marine and miscellaneous revenue account
is growing over the last five year. Profit on sale proceed of shares shows a great fluctuation and
become negative in 2014. Interest received and accrued shows a decreasing trend.
The cost items decreases the total earnings. Here advertisement expense, wages & bonus,
depreciation holds the major portion of the cost.

Ratio Analysis:
Short term solvency ratio: Here current ratio Purobi Insurance has a enough current assets to
satisfy its current obligations.

Long Term Solvency Ratio: Purabi General Insurance Limited Insurance Company has equity
greater than debt in the following years. So the debt-equity ratio is less than 1. It has a very high
equity multiplier which is a bad sign in terms of long term solvency. It has a very small interest
obligation in comparison with EBIT.
Asset Management Ratio: It takes a long time for Purabi General Insurance Limited Company
to collects its claimants from the debtors. So receivable turnover is very low. It generates current
assets over current liabilities in comparison to gross premium. Therefore fixed asset turnover
shows small ratio.
Profitability Ratio: Purabi General Insurance Limited has a fluctuating profit margin ratio over
the last five years; it is largest in 2008 and the lowest in 2012. Its ROA ratio is quite good though
it declines in 2012. Major portion in the ROE come from operating profit margin which proves
the sustainability of the ROE. But financial leverage holds the second portion of the ROE which
the credibility.
Market Value Ratio: Purabi General Insurance Limited has a continuously decreasing Price
earnings ratio which means investors give less value for one dollar earnings of KIC. Its market to
book value ratio also proves that fact. Tobins Q ratio shows that the replacement cost of asset is
less than 1 that means company needs less amount to replace its assets.
In 2010 and 2011 it has a good amount of earning per share but it declines letter on. It pays
maximum part of the EPS as dividend to the shareholders. Its internal growth rate and
sustainable growth rate both are declining.

Financial modeling and planning

Assumptions for pro-forma income statement

Historical sales growth based on the past five year periods is 13.75%. So the sales are
expected to grow by 13.75% for the following years.

The company is operating at full capacity.

The variable cost ratio remains same as of 2014 for the next periods

Last year dividend payout ratio will be maintained for the pro-forma statements

last year tax rate is use for the forecasting

deferred tax as a percentage of EBT for the last year is used for the pro-forma statements

Assumptions for pro-forma balance sheet

the company has operated at full capacity at last year

each type of assets grows proportionally with sales

payables and accruals grow proportionally with sales

Forecasting (Pro-forma Financial Statements):

Forecasting Balance Sheet: Liabilities and Equities are forecasted, maintaining a growth on
previous years amount. Issued, subscribed & paid capital and premium on right share are
supposed to remain the same for the following years as 2013 and 2014. Balance of fund grows
largely about 28% and expected to grow at this percentage. But marine shows a negative average
growth and shrinks this business. Purabi General Insurance Limited holds significant reserve
exceptional losses and depreciation and it is expected to hold significant portion in the balance
sheet of the forecasted years.
In the liability side income tax provision and sundry creditors shows the high percentage. Items
like lease obligation and amount due to other insurance business are expected to decline in the
forecasted years.
Asset items of Purabi General Insurance Limited are forecasted on the basis of percentage of
forecasted gross premium. Here shares and debenture of other companies, amount due from
other insurance business and sundry debtors hold the major part of the KICs asset.
Forecasting Income Statement: Income and expense are forecasted multiplying the average
ratio with gross premium with forecasted years gross premium. Here we see that Purabi General
Insurance Limited will have an increasing net income in the forecasted years.

External Fund Needed (EFN):

In my calculation I have found that Purabi General Insurance Limited needs 75,890,063;
96,707,459; 117,524,855; 138,342,252; 159,159,648 taka as EFN to maintain its
growth.

Break even Analysis:

In the break-even analysis I have found that Purobis break-even is 19 lac to 42 lac taka over the
last five years. Here we see that as the fixed operating cost of Purobi increases, break-even point
also increases. So Purobi needs to collect more premiums to reach the break-even point. It will
make the firm slow. So it becomes risky for the company.

Purobi Insurance Company has 1 times DOL on an average over the last five years. It means if
the gross premium falls by 10%, EBIT will fall 1 time more than fall in gross premium.
Purobi Insurance Company has 1 time DFL on an average over the last five years. It means that
the company is not heavily financially leveraged. It means fall in EBIT exerts a same percentage
of falls in EPS.

Sensitivity Analysis:
I have shown the sensitivity of Purobi Insurance Companys net income based on 10% variation
of the gross premium. Here I assume that best case scenario is 10% increase of the gross
premium and the worst case scenario is the 10% decrease in the gross premium.
In the base case scenario total earnings is 263809255.6 taka, total cost is 36537380.5 taka and
net income is 106736745.3 taka.
In the best case scenario total earnings is 290190181.1 taka, total cost is 40191118.55 taka and
net income is 117410419.8 taka.
In the worst case scenario total earnings is 237428330 taka, total cost is 32883642.45 taka and
net income is 96063070.77 taka.
Here we can see that the company is making far more profit even than its break-even point even
in the worst case scenario. So we can say that the company has the enough ability to protect its
profit if any negative occurrence happens