UNIVERSITY OF WALES

MANAGEMENT DEVELOPMENT INSTITUTE OF SINGAPORE

SUBJECT FINANCIAL MANAGEMENT

LECTURER Manek

COURSE MASTER OF BUSINESS ADMINISTRATION

Name of Group Member (Please PRINT) (S NO) Signature

1 Shah Harshil Bharatbhai (G0876962T)

2 Thakkar Nirav Miteshkumar (G0876565R)

3 Shah Rahul Bharat (G0873881k)

4 Bajaj Chirag(G0871272M)

5 Sharma Siddarth(G0876603M)

Submitted on Due Date? YES / NO (Date submitted: 23 /04 /2010

Submitted soft copy? YES / NO (Date submitted: 23/04 /2010

Word limit observed? YES / NO (No of words 2829 including appendix, charts, tables, ratio
formulas, diagrams, referencing etc.)

TABLE OF CONTENTS:

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(A)DIVIDEND POLICY.......................................................................................... 3

(B)GEARING RATIOS AND LEVERAGE.............................................................. 5

(C)PRICE EARNING RATIO.................................................................................. 8

• FACTORS AFFECTING P/E RATIOS......................................................... 9

(D)WORKING CAPITAL MANAGEMENT........................................................... 10

(E)BUSINESS IDEA – DAZZLE – Pamper the Woman In You!” BEAUTY

SALOON.............................................................................................................. 13

• PAYBACK PERIOD.................................................................................. 14

• NPV CALCULATION................................................................................ 14, 15

• PROFITABILITY INDEX.......................................................................... 15

• DISCOUNTED PAYBACK......................................................................... 15, 16

• INTERNAL RATE OF RETURN................................................................ 16

NON-FINANCIAL FACTORS............................................................................... 16, 17

REFERENCES........................................................................................................ 18, 19

(A)

DIVIDEND POLICY:

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Dividend Policy refers to the policy that a company follows in order to pay dividends. There are
many ways in which a company may pay its shareholder including cash and stock options. There
are cases where the company does not pay dividends but all the same shareholders prefer those
shares because of the high value of the company’s stock. There are 5 basic dividend policies and
we are here considering 2 companies in the telecommunication industry and compare their
dividend policy.

BHARTI AIRTEL LTD:

The company was incorporated in the year 2004 and the company has the following dividend:
(from the annual report). The company paid the first dividend of 20% in the year 2009.

From the above table and the below graph it is clear that the company follows the policy of ALL
WE CAN AFFORD POLICY. The company pays dividend as and when it can afford to, based on
the profits earned.

IMPLICATION: The company needs are met first and only if there enough profits to share do the
company pay any dividends. Even though the company made reasonable profits they did not pay
any dividends for the first 4 years.

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RELIANCE COMMUNICATION LTD:

The dividends paid by the company as seen from its annual reports are:

The policy followed at Reliance clearly reflects that the company the policy of CONSTANT
GROWTH IN DPS.

IMPLICATION:

The effect of this dividend policy is on the share price. The dividend per share increases constantly
to cover against the inflation, as the share needs to be protected.

(B)

LEVERAGE:

Leverage or gearing refers to the ability of the company to borrow so as to improve its financial
performance. Leverage is of two kinds. Operating leverage and financial leverage. Gearing also
improves the Earning per Share (EPS) during good times. Gearing can be understood from three
ratios namely, Debt Ration, Equity Ratio and Debt-Equity Ratio.

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RATIO FORMULA INFOSYS COGNIZANT

DEBT RATIO [760000/5578000]*100 [685063/3338240]*100

(Total
Liability / Total = 13.64% = 20.52%
Assets) * 100

(Capital &
EQUITY RATIO [4818000/5578000]*100 [2653177/3338240]*100
Reserves/Total
Assets) * 100 = 86.37% = 79.47%

(Total
DEBT-EQUITY [760000/4818000]*100 [685063/2653177]*100
Liability/Capital &
RATIO
Reserves) * 100 = 15.77% = 25.82%

Debt Ratio:

The debt ratio gives a quick measure of the amount of debt that the company has on its
balance sheets compared to its assets. The more debt compared to assets a company has, which is
signalled by a high debt ratio, the more leveraged it is and the riskier it is considered to be. This
ratio indicates the leverage of both companies with risk involvement in debt load. In both these
companies they have more assets than liabilities, which is a sign of good leverage or gearing.

Equity Ratio:

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 The Equity Ratio is a good indicator of the level of leverage used by a company. The
Equity ratio measures the proportion of the total assets that are financed by stockholders and not
creditors. This acts an indicator of shareholders return back when the company winds up or goes in
for liquidation. It is expressed as percentage with shareholders equity and the assets of the
companies. Infosys has 86.37% while Cognizant has 79.47% where it indicates that this is the
percentage at which the shareholders of both the companies can have a claim on their assets.

Debt-Equity Ratio:
The debt-equity ratio is another leverage ratio that compares a company's total liabilities to
its total shareholders' equity. It is the ability of the company to borrow money and repay it. Infosys
has a debt to equity ratio of 15.77% while Cognizant has 25.82%. This indicates that the
companies are financing their growth with only limited debt.

Operating Leverage:
Infosys: 2334000/1773000 = 1.3 times
Cognizant: 1773000/1837000 = 0.97 times

Financial Leverage:
Infosys: 2299637/516670 = 4.45 times
Cognizant: 516670/515210 = 1.02 times

Combined Leverage:
Infosys: 2334000/1837000 = 1.27 times
Cognizant: 2299634/515210 = 4.46 times

EARNING PER SHARE BASED ON EBIT:

EBIT for Infosys is 34.8% while for Cognizant is 19.4% as found from their respective
annual reports. Earning per share of Infosys is US $2.43 while that of Cognizant is US $ 0.47. This
shows that when earnings before interest and tax is more then the earning per share is also more.
This is true only with these 2 companies as they both have a considerably lesser amount of debt
and more gearing. When companies borrow they do so on the prediction that EBIT will be more;

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this may not be true during all situations, which is why it is said that gearing improves EPS during
good times.

[All the values used in these calculations are taken from the annual reports of both the companies]

(C)

PRICE EARNING RATIO: [P/E Ratio]

Price Earning ratio is a measure of how expensive the company’s stock is. It can be denoted as

P/E ratio = Market Price/ Earning Per Share (EPS)

Here we are to consider 2 companies with respect to their P/E ratios. We consider 2 motor
companies from India, TVS and Hero Honda.

COMPANY MARKET PRICE EPS P/E RATIO

TVS MOTORS 83.50 1.35 61.85

HERO HONDA 1919.50 64.19 29.90

[All figures are in Indian Rupees and the market price of the shares were taken on 16/4/2010]

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FACTORS AFFECTING P/E RATIOS:

Growth of the company has an effect on P/E ratio. While TVS has been a dominant industry player
Hero Honda has shown close and tough competition especially in the last few years. So the earning
per share is a affected as EBIT depends on sales.

Level of risk of the stock is also another factor. TVS stocks are comparatively less risky and stable,
which is evident from their market price.

Fluctuations in the share price is also a factor contributing towards P/E ratio. From the graph it is
very clear that Hero Honda has a highly volatile performance at the market.

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(D)

WORKING CAPITAL MANAGEMENT:

In order to understand the investment in working capital we are considering 2 companies Eicher
motors and Ashok Leyland Ltd.

EICHER MOTORS:

CURRENT ASSETS 530.22

CURRENT LIABILITIES 118.32

WORKING CAPITAL 411.90

TOTAL ASSETS 487.40

ASHOK LEYLAND:

CURRENT ASSETS 3195.70

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CURRENT LIABILITIES 2475.37

WORKING CAPITAL 720.33

TOTAL ASSETS 4071.02

Current Ratio Analysis:

EICHER MOTORS:

Current Ratio = Current Asset/ Current Liability

530.22/118.32 = 4.48

ASHOK LEYLAND:

Current Ratio = Current Asset/ Current Liability

3195.70/2475.37 = 1.29

Eicher’s current ratio is 4.48:1 which means for every 1 liability or debt they owe they have 4.48
assets to cover them up. This is quite above the industry average. Whereas Ashok Leyland’s
current ratio is 1.29:1 that means for every 1 liability or debt they have only 1.29 assets to cover
up. If they go below one, the company might face some liquidity problems.

Working Capital Management:

Working capital often referred to as the operating liquidity, which is available for the company in
order to meet its day-to-day operating expenses. Deducting the current liabilities from the current
assets gives working capital.

Eicher Motors:
Working Capital = Current Assets – Current Liabilities
530.22 - 118.32 = 411.90

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Working Capital to Total Asset Ratio = Working Capital / Total Asset
411.90/487.40 = 0.845 = 84.5%

Ashok Leyland:
Working Capital = Current Assets – Current Liabilities
3195.70 – 2475.37 = 720.33
Working Capital to Total Asset Ratio = Working Capital / Total Asset
720.33/ 4071.02 = 0.176 = 17.6%

The working capital of Eicher Motors is quite high than the working capital of Ashok Leyland ltd.
The working capital to total asset ratio of Eicher motors ltd is 84.50% and for Ashok Leyland its
17.6%.

Working capital is required to use fixed assets profitably. Adequate working capital
determines the short-term solvency of the firm whereas insufficient working capital means that the
firm will be unable to meet its urgent payment commitments. Increase in activity levels and sales
should be backed up by suitable investment in working capital. The aspects of liquidity and
profitability should be analyzed. Too much emphasis on profitability may affect liquidity and vice-
versa. Here in the above analysis Eicher Motors Ltd works on a considerably high working capital
as compared to its assets whereas Ashok Leyland Ltd., which is in the same automobile industry,
works on a low working capital with respect to its assets, when compared to the earlier.

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(E)
BUSINESS IDEA:

Ms. Cutie has a beauty saloon “DAZZLE – Pamper the Woman In You!” , that has been
successfully operating in CBD area and now she would like to open a branch in the suburban area
to cater to the customers who avail from those areas. She would like to operate as a trial run for a
period of 3 years. She provides both beauty services as well as sale of beauty products, which have
already created a special place in the heart of her customers. Most of her old clientele will also be
able to use this saloon. Depending on the performance she plans to further open a number of
branches. Initial investment includes buying furniture, cosmetics for sale and a license to operate.
She plans to use the inventory she already has at the main saloon for sales at the branch.
Depending on the demand she may further buy inventory/beauty products.

CASHFLOW: [All Figures are in ‘000s)

DESCRIPTION YEAR 0 YEAR 1 YEAR 2 YEAR 3
1.INITIAL INVESTMENT (75)
2.INTERIOR (10)
DECORATION
3.ADVERTISEMENT (3) (5) (2)
4.RENT & UTILITY (24) (24) (24)
5.BUYING COSMETICS (10) (12) (15)
6.MAINTANENCE (6) (8) (10)
7.STAFF SALARY (15) (20) (25)
8.PRODUCTS SALE 35 42 46

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9.BEAUTY SERVICES 50 58 69
10.SPECIAL SERVICES 5 7 12
NET CASHFLOW (85) 32 38 51

Net Cash Flow:

Year 0 1 2 3

Cash (85) 32 38 51

PAYBACK PERIOD (PBP):

Payback period is the time taken to recover the initial investment. Payback method is useful
in calculating the payback period.
For Dazzle, payback is the time taken to recover $85000. First two years provide only $70000,
which means we need $15000 more from the 3rd year.
2 + [15/51]
= 2 + 0.3 = 2.3 years.
Thus it takes Ms. Cutie 2.3 years to recover her initial investment. The limitation of this method is
that it does not consider the time value of money as well as the cash flow after the payback period
is ignored. Also the monthly income is assumed to be uniform throughout the year, which is not
practically possible. For this we shall find out the discounted payback period that will overcome all
these limitations. Shorter the payback better is the business. In this case, Ms. Cutie starts making
good money from the 3rd year, which means she can afford to stay in business longer than the
expected period of 3 years.

NET PRESENT VALUE (NPV):

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 Net present value is the method that is used to find out the present value of the investment.
Money today is not equal to money tomorrow, so comparison should be made between money of
same value. So we consider the time value of money to find out the net present value. Usually any
investment that has a positive NPV is chosen over a business that has negative NPV. A higher and
positive value of NPV is better and preferred. The workings for the calculation of NPV are shown
below. The net present value is found to be $10174. A positive NPV shows that this is a good
business idea.
Formula used is: Cash Inflow – Cash Outflow
95.174 – 85
= 10.174 (positive high value)

NPV CALCULATION:

PROFITABILITY INDEX (PI):

Profitability index is the ratio of the cash inflow to the cash outflow. For any profitable
business, incoming cash flow should be more than the outgoing cash flow. PI should be greater
than 1 for a good business, as above 1 indicates that more cash is coming in than going out. For the

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case of Dazzle, the cash inflow is 95.174 while the cash outflow is 85. Thus the PI for the beauty
saloon will be greater than 1.

Profitability Index = Inflow

Outflow
= 95.174 =>
85

DISCOUNTED PAYBACK PERIOD (DCP):

As mentioned before, discounted payback period considers the time value of money
therefore the limitations of the payback method are overcome. Discounted payback is calculated
using the net present value of the cash flow. Otherwise the method is similar to the payback
method. Now the first two years provide only $59162. To recover $85000, we need $25838 more.
The third year has the present value of $36312. We follow the same procedure as above for
payback period.
Using this, the discounted payback period is calculated as: = 2+[25.838/36.312]
= 2 + 0.71 =>

INTERNAL RATE OF RETURN (IRR):

IRR or the internal rate of return is ideally the rate at which the business yields returns or to
be precise it is also known as the actual earning rate of the business, where IRR is calculated by
equating NPV to be 0. For calculation of IRR we require NPV at two percentages, as we already
have calculated it according to 12%, let us now assume a cost of capital of 20% to calculate
another NPV. NPV calculation for 12% is taken from the above NPV calculation. NPV calculation
for discount rate of 20% is as follows.

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After this, IRR can be calculated using the formula,

On solving the above equation, we get [let IRR = x]

12 - x = 4.165x – 83.3
5.165x = 95.3 =>

NON-FINANCIAL FACTORS
In any business, non-financial factors play an important role, almost as much as the financial
factors. Some of the major non-financial factors in a business include the macro environmental
factors such as Political, Legal, Social, and Technological etc. Other factors include customer
loyalty, satisfaction, location etc.

NON-FINANCIAL FACTORS IN STARTING A BEAUTY SALOON INCLUDES:

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  POLITICAL FACTORS
The government in Singapore is politically very stable and there is no restriction to starting a
small business. In fact the government is very encouraging towards such ventures.
 SOCIAL FACTORS
As Ms.Cutie already has a flourishing business going on, she does not need to worry about
experience and moreover Singapore is a place where beauty saloons are very common. The social
lifestyle here complements the business.
 LOCATION
The location of the saloon is in the suburbs. This encourages those who travel from afar to the
main saloon to make use of the branch. Also the strategic location near HDB dwellings will help
attract more customers.
 ECONOMIC FACTORS
The consideration of economic factors is equally important for this situation as it directly
affects the purchasing power or acceptability of price fixed for the saloon. The economic
environment in Singapore right now is improving but then along with recession playing high in the
back drop hence it may affects the pricing policy for the saloon and this probably will be the most
important consideration before taking into consideration a change in the pricing policy or even
future capital expenditures such as ‘further expansion’.
 CUSTOMER SATISFACTION
The present customers are quite happy with the service and cosmetics available in the saloon,
which is why Ms.Cutie is confident she can provide the same level of service in the new branch
too.

REFERENCES

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BOOK REFERENCES

1. Lawrence J. Gitman, (2009), Principles of Managerial Finance, 12th edition, Pearson.

WEBSITE REFERENCES

2. Rediff Money (2010), Bharti Airtel Limited, accessed on 15th April 2010
http://money.rediff.com/companies/bharti-airtel-ltd/15200022/dividend

3. Rediff Money (2010), Reliance Communications Ltd, accessed on 15th April 2010
http://money.rediff.com/companies/reliance-communications-ltd/15200050/dividend

4. Forbes Financial Applications (2010), Infosys, accessed on 16th April 2010

http://finapps.forbes.com/finapps/jsp/finance/compinfo/FinancialIndustrial.jsp?
tkr=infy&period=qtr

5. Forbes Financial Applications (2010), Cognizant Tech Solutions, accessed on 16th April 2010
http://finapps.forbes.com/finapps/jsp/finance/compinfo/FinancialIndustrial.jsp?
tkr=ctsh&period=qtr

6. Rediff Money (2010), Hero Honda Motors Ltd, accessed on 18th April 2010
http://money.rediff.com/companies/hero-honda-motors-ltd/10540005/ratio

7. Rediff Money (2010), TVS Motor Company Ltd, accessed on 18th April 2010
http://money.rediff.com/companies/tvs-motor-company-ltd/10540010

8. Rediff Money (2010), Eicher Motors Ltd, accessed on 19th April 2010
http://money.rediff.com/companies/eicher-motors-ltd/10510004/balance-sheet

9. Rediff Money (2010), Ashok Leyland Ltd, accessed on 20th April 2010

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http://money.rediff.com/companies/ashok-leyland-ltd/10510001/balance-sheet

10. Cognizant Tech Solutions; Annual Report 2009

11. Infosys; Annual Report 2009
12.Ashok Leyland Ltd; Annual Report 2009
13. Hero Honda Motors Ltd; Annual Report 2009
14. Eicher Motors Ltd; Annual Report 2009
15. TVS Motor Company Ltd; Annual Report 2009

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