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Essntials of Coporate finance

Prepared by Mohamed Abuzeid, Mohamed Elbehery, Mohmoud Ghazy, Gammal Salah, Mohamed Elmoslemany. Thnx Ramy khamis,
by

mohamed EL-behery

on 3 May 2013

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Transcript of Essntials of Coporate finance

Income Statement Financial Statement
Vertical & Horizontal Analysis Horizontal Analysis 2011 Financial Statements Analysis The Egyptian Company For Mobile Service Trend Analysis indicate the direction the business is taking by % change from one year to the next. 2010 is the base year Income Statement
Horizontal Analysis The decline in other income by 44.40% accompanied with increasing capital loss by 110.81% and loss from currency exchange by 144% beside increase in dep. expenses by 20.4% all lead to decline in profit by 118.6% which result in loss in 2011 The decrease in revenue result from economic and political instability (i.e.: business closed from 28/1/11 till 10/2/11, the same for banks & Stock exchange) in addition to losses due to twitter boycott campaign Significant increase in depreciation expense by 18%, it is resonable to assume that the firm bought new fixed assets or expanding while increase in interest expenses by 33% reflect that the firm used debt financing for such expansion & interest expense increased as result. Mobinil Generate revenue 10.18 billion in 2011 which reflect negative growth rate in revenue by 3.7% Comments Balance Sheet
Horizontal Analysis Balance Sheet Comments Mobinil planning for noticeable extension or developments indicated by 50% increase in Asset under construction for example more branches (lands & buildings), new technology. Decline in Net fixed Asset by 5% & intangible asset by 9% affected by increase in depreciation expenses by 18% relative to 2010 Financed net investment through : Rapid growth in Cash at bank by 106% result from increase in short term loan by 112%, bank facilities by 88% with relatively smaller amount decline in inventory by 7% & notes receivable by 88% While teasury stock grow more slowly by 1.5% for maintaining share price level from further decline and they might preceived the Share price as undervalued Decline in Retained Earning by 3.4% as the Co. net loss need to be covered, some share rights shall be settled & other long & short term liabilities obligations The Retained Earning will not increase as result of the significant loss The noticeable increase of long term liabilities -Fixed Asset supplier - by 85% reflect the increase net fixed asset under construction by 50% Factors to be considered in Mobinil Financial Analysis.

2011 results affected by the following :

Twitter related boycott campaign in 2011, following the highly politicized tweet and the subsequent loss of subscribers and brand Damage

The political instability and economic slowdown, following the January 25th Revolution

Forced shutdown of the mobile network for a full day on 28 January, Disconnection of SMS for 8 days and data services for 5 days, Bank & Stock exchange closed from 28 Jan till 18 Feb 11 Vertical Analysis Income Statement Balance Sheet
Net investments Balance Sheet
LTL & Equity Common Size statement representing
the income statement figures as% of Net Sales
Balance sheet figures as a % of Total Assets 2011: Total Assets = 100% = 16,879,885,056
2010: Total Assets = 100% = 16,652,136,279 2011: Total Assets = 100% = 16,879,885,056
2010: Total Assets = 100% = 16,652,136,279 The Egyptian Company for Mobile Services (ECMS) is a leading wireless telecom service provider in Egypt operates under the brand name Mobinil and has (32.9 million as of December 2012), which translates into a market share of approximately 34% represent second highest market share after vodafone. Its network of 5299 sites at the end of 2012 and 34 switches currently covers most of the urban areas in Egypt, or 99.66% of the population. 2011 2010 Current Liabilities Current Assets = 2,756,007,571 7,122,239,229 = 0.387 times Current Assets Current Liabilities 1,996,476,689 = 5,519,478,750 = 0.362 times Current Ratios Quick Ratio Current Asset - Inventory Current Liability = 2,756,007,751-124,546,813 7,122,239,229 = 0.369 times Current Asset - Inventory Current Liability = 1,996,476,689 - 133,508,484 5,519,478,750 = 0.337 times 2010 2011 Cash Ratio Cash Current Liabilities = 1,255,921,706 7,122,239,229 = 0.176 times 2011 2010 Liquidity Ratios Cash Current Liabilities 610,455,587 5,519,478,750 = = 0.111 times Leverage Ratios Total Debt Ratio Debt/Equity Ratio Equity Multiplier Total Assets - Total Equity
Total Assets = 16,879,885,056 - 2,466,602,132 16,879,885,056 = 0.854 times Total Assets - Total Equity
Total Assets = 16,652,136,279 - 4,132,157,626 16,652,136,279 = 0.752 times 2011 2010 Total Debt
Total Equity = 14,413,282,924 2,466,602,132 = 5.84 times Total Debt
Total Equity = 12,519,978,653 4,132,157,626 = 3.03 times 2011 2010 Total Assets
Total Equity 2,466,602,132 16,879,885,056 = = 6.84 times Total Assets
Total Equity = 16,652,136,279 4,132,157,626 = 4.03 times 2011 2010 Coverage Ratios Time Interest Earned Cash Coverage Interest 2011 2010 = 863,699,259+2,408,323,782 838,816,525 = 3.89 times 2011 2010 EBIT
Interest = 838,816,525 = 1.03 times = 2,386,331,892 634,306,574 = 3.76 times EBIT
Interest 863,699,259 EBIT+Depreciation & Amortization Interest = 2,386,331,892+1,970,923,444 634,306,574 = 6.91 times EBIT+Depreciation & Amortization Interest Long Term
Solvency
Measures 2011 2010 Inventory COGS = 2,542,737,303 124,546,813 = 20.41 times Inventory Turnover Total Asset Turnover Sales Total Assets = 10,181,977,239 16,879,885,056 = 0.60 times 2011 2010 Asset Utilization Ratios Sales Total Assets 10,575,862,452 16,652,136,279 = = 0.63 times Inventory COGS = 2,350,063,447 133,508,484 = 17.98 times Receivable Turnover 365 = 365 16.50 = 22.1 days 2011 Days' Sales in Receivables = Receivable Turnover 365 = 365 22.96 = 15.71 days 2010 Days' Sales in Receivable = 2011 2010 Account Receivable Sales = 10,181,977,239 592,034,108 Receivable Turnover = 10,575,862,452 455,083,253 Sales Account Receivable = = 17.2 times 23.24 times Sales Total Assets = 16,879,885,056 9,767,996,233 = 1.66 times 2011 Capital intensity = Total Assets Sales = 16,652,136,279 10,450,073,347 = 1.59 times = 2010 Capital intensity 365 18.79 17.88 days 2011 Days' Sales in inventory 17.60 = 20.29 days 2010 Days' Sales in inventory = 365 Inventory Turnover = = = 365 Inventory Turnover 365 = 2011 2010 Sales Net Income = -252,777,910 10,181,977,239 = -2.49% Profit Margin Profitability Ratios Sales = 1,359,367,207 10,575,862,452 = 12.85% Net Income 2011 2010 Total Assets Net Income = -252,777,910 16,879,885,056 = -1.5% Return on Assets (ROA) Total Assets = 1,359,367,207 16,625,136,279 = 8.18% Net Income 2011 2010 Total Equity Net Income = -252,777,910 2,466,602,132 = -10.25% Return on Equity (ROE) Total Equity = 1,359,367,207 4,132,157,626 = 32.9% Net Income -10.25 ROA x Equity Multiplier PM x Total Turnover x Equity Multiplier Du Pont Analysis -1.5% x 6.84 -2.49% x 0.6 x 6.84 = indicate net
profit margin level It uses its assets
effectively to generate
more sales high financial
leverage The ability of a business to pay its current
liabilities using its current assets A measure of the long-term financial viability of a business
which means its ability to pay off its long-term obligations The ability of a business to earn profit for its owners. measure the risk inherent in lending
to the business in long-term. Mobinil Ability to pay its current liability increase relative to 2010 The result 0.387 indicates the current Assets not enough to cover the Current Liabilities Shows also a slight increase from 2010 from 0.337 times to .369 times in 2011 and also show a fact that Inventory doesn’t reflect a huge part of current asset since it’s a service company Cash ratio in 2010 it was 0.1106 times in compare to 0.1763 times for the year 2011 reflects 2 important facts:

First the company has huge part of idle cash at the year ended 2011 that should be used more efficiently than this by investing it in Bank Certificates and other ways of investment taking into consideration the recent situation in Egypt from political and economic risks

Second the company has enough cash to face its short term obligations by this huge increase in cash from 2010 to 2011 by 105% and this might be because of the political situation in Egypt after revolution many companies decided to keep more than enough cash to face any unexpected events after revolution 2011 2010 Shares outstanding Net Income = (252,777,910) 99,375,857 = -2.53/Share Earning Per Share Market Value Measures = 1,359,367,207 1.181.939.345 = 1.15/Share Net Income 2011 2010 Earning per share = 78.9 2.53 = 31.18 Price Earning Ratio = 151.15 1.15 = 131.43 2011 2010 Price-Sales Ratio The ability of a business to earn profit for its owners. Ratio
Analysis Shares outstanding Earning per share Price Per Share Price Per Share Sales per share = 78.9 102.46 = 0.77 Price Per Share Sales per share = 151.15 8.95 = 16.89 Price Per Share Total debt ratio in 2010 was 0.7518 times in compare to 0.8535 times in 2011 which reflects the fact of increase in the use of debt as financial source by taking more loans specially short term loans and bank facilities to finance its capital expenditure, 3G license fees and general purposes although it is cheapest source for finance comparing to Equity finance but it drives the risk higher as shown in this ratio and the later ratios Debt/equity ratio in 2010 was 3.03 times while in 2011 was 5.84 times which assure the fact as was said above the company using debt as its main financial source and made less usage of the expensive source of finance which is Equity and as we can see from balance sheet Equity decreased from 2010 to 2011 by 40.3% and increase in liabilities in current portion by 38% and long term portion by 4.2% equity multiplier in 2010 was 4.03 times but in 2011 was 6.84 times which goes in same direction as we said equity decreased as source of finance and the majority of finance comes from debt We conclude that the company is facing higher risk by depending on debt rather than equity and this should be good covered and this is one of the reasons for having high cash on hand in 2011 the company should put into consideration the political risk and also the expenditure for the new technology of 3G Time interest earned in 2010 was 3.81 times while in 2011 was 1.12 times this ration indicate two things one of them was clear as debt increases also interest paid increases and risk increases the other thing is if we looked at the EBIT before looking to profitability and efficiency ratios it dropped by large questionable amount from 2010 to 2011 by almost 61% this indicate both great risk and indication of increase in operating expenses and drop in sales cash coverage ratio in 2010 was 6.93 times while in 2011 was 3.89 times it indicates in addition to previous comments which is the increase in depreciation and amortization from 2010 to 2011 by 18% due to accelerated depreciation resulting from the emerge of the new technology of 3G and 3G license amortization (which was added by the end of 2010) The conclusion of coverage ratio reflect the fact of growing risk for the company resulting from the usage of debt and also due to sustainability of revenues, growth of business the company has to take caution against the increase in risk and decrease in earnings inventory turnover and days’ sales in inventory 2011 showed recovery in these ratios from 2010 by slight difference Receivables turnover and days’ sales in receivables showed bad results for 2011 in 2010 receivables turnover was 22.96 times but 2011 was 16.5 times as for day’s sales in receivables 2010 showed 15.90 days while 2011 showed 22.12 days this means the collecting policy in the company is not efficient enough in 2011 this is clear due to the increase in accounts receivables by 30% in 2011 but didn’t help the company in improving its sales and as we saw sales dropped by 6.5% this indicate both less efficiency in managing sales and account receivables and also the drop in market and economic conditions for the country and this require some improvement in collection policy indicates less efficient use of the company asset’s to generate revenue As conclusion for turnover and efficiency measures we can say there is inefficient use of the assets and inefficient collection policy and both need care to get benefit of every possible thing the company has to generate sales in these tough country conditions and Fierce competition in this tough fast growing market Profit margin ratio, ROA and ROE in 2010 showed 13.19%, 8.27% and 33.35% in order while in 2011 showed negative results as the company showed net loss in 2011 for 170,955,760 L.E which made all results dropped to negative this indicates increased in all operating expenses and interest expenses and also capital losses from the Obsolete assets, technologies and network upgrade exercise that was introduced to provide customers with high quality services.

Great part was from the loss in net foreign currencies exchange due to the drop of the value of Egyptian pound against USD dollar and Euro due to the bad condition of Egypt of revolution which also affect sales revenue and the transition from the 2G technology to 3G the application of different accounting treatment to employees’ bonus and the new tax regime. Comments Comments Comments Comments Comments Comments Operating Cash Flow EGP 2,996,731,304 Earning before Income and taxes EGP 863,699,259 Accumlated Depreciation EGP 2,408,323,782 Taxes paid EGP 275,291,737 Net Capital spending EGP 2,996,731,304 Ending Net Fixed Assets EGP 14,123,877,485 -Begining Net Fixed Assets EGP 14,655,659,590 -Accumilated Depreciation EGP 2,408,323,782 Net Working Capital -EGP 4,366,231,658 Ending Curent Assets EGP 2,756,007,571
- Ending current liabilities EGP 7,122,239,229
= -EGP 4,366,231,658 Begining Curent Assets EGP 1,996,476,689
-Beginning current liabilities EGP 5,519,478,750
= -EGP 3,523,002,061 Cash flow From Assets EGP 1,963,419,224 - - Interst Expense EGP 841,185,432 Ending long term liabilities EGP 7,291,043,695
Beginning long term liabilities EGP 7,000,499,903 -Net new Borrowing EGP 290,543,792 Cash Flow to creditors EGP 550,641,640 Dividences declared EGP 1,413,092,280 Ending equity EGP 1,307,774,574
Beginning Equity EGP 1,307,459,878 Net new Equity EGP 314,696 Cash flow to Stockholders EGP 1,412,777,584 + Cash flow From Assets EGP 1,963,419,224 In the beginning of 2008 , Mobinil Company was studying an opportunity to start new project regarding starting 4G networks in Egypt , the structure of the project requires an immediate investment of 355 million US dollars .
The construction of the 4G network infrastructure will take almost a year, the project will be starting yielding profits from the first year of operation ( 2009 ) .the initial investment will be made at the 1st of the contraction year , here is a projection with the future cash flows in the 1st nine years of operation :- ( all the figures are in 000 USD )
YearOperating cash flowNet capital spendingChange in working capital
Cash flow from assets

1 59,034 0 12,951 46,083
2 90,547 0 9,114- 99,661
3 110,589 0 9,099- 119,688
4 142,339 0 32,151 110,188
5 118,001 0 74,764 43,237
6 110,093 0 65,702 44,391
7 110,527 0 67,015 43,512
8 109,936 0 103,874 6,062
9 108,104 0 103,549 4,556

The interest rate is 10% , the company decided to use both Net Present value and payback period methods to evaluate whether to accept or to reject the project . Using NBV method :-
Using the formula PV = FCF / ( 1+IR) , the Present value for each cash flow will be as follows :-
Year123456789
Cash flow460839966111968811018843237443914351260624556
Present Value4189382364899237526026847250582232928281932

•The total BV of the all cash flows will be 368,434,000 $
•The Net present value of the projected cash flows is :
368,436,000 $ - 355,000,000 $ = 13,434,000 $
Its +ve, so MOBINIL will accept and proceed in the project. Using payback period method :-

Year 1 : 355,000,000 - 46,083,000 = 308,917,000 $ still to recover

Year 2 : 308,917,000 – 99,661,000 = 209,256,000 $ still to recover

Year 3: 209,256,000 – 119,688,000 = 89,568,000 $ still to recover

Year 4: 89,568,000 – 110,188,000 = - 20,620,000 $

so the project pays back in year 4
Payback period is 3 years + ( 20620 / 110188) year which equal 3.187 year , so MOBINIL will accept and proceed in the project. 2011 Financial Statements Analysis Prepared by Factors to be considered in Mobinil Financial Analysis.

2011 results affected by the following :

Twitter related boycott campaign in 2011, following the highly politicized tweet and the subsequent loss of subscribers and brand Damage

The political instability and economic slowdown, following the January 25th Revolution

Forced shutdown of the mobile network for a full day on 28 January, Disconnection of SMS for 8 days and data services for 5 days, Bank & Stock exchange closed from 28 Jan till 18 Feb 11 The Egyptian Company for Mobile Services (ECMS) is a leading wireless telecom service provider in Egypt operates under the brand name Mobinil and has (32.9 million as of December 2012), which translates into a market share of approximately 34% represent second highest market share after vodafone. Its network of 5299 sites at the end of 2012 and 34 switches currently covers most of the urban areas in Egypt, or 99.66% of the population. Mohamed Abuzeid Mahmoud Ghazy Mohamed Elbehery Gammal Salah Mohamed Elmoslemany High dividend distribution to meet shareholders’ return expectations, which has adversely impacted the free cash flow position of the company for years, management’s supposed to have a more conservative dividend distribution policy. Comments Final Conclusion Comments Comments Final Conclusion Final Conclusion WACC Weighted Average Cost of Capital WACC is important to Decsion maker:

"Whether the decision is to launch a new product, enter a strategic partnership, invest in R&D, or build a new facility, how a company estimates value is a critical determinant of how it allocates resources."- Harvard Business Review

Lower WACC allows our firm to take on more projects
Use WACC to discount cash flows from projects to get NPV as it considers risk
Larger the WACC, the lower the the NPV Notes Our base case scenario assumptions includes a cost of Euity of 11.86%based on risk-free rate of 6.3% and a Market risk premium of 5.7%, Firm risk premium 6.84%, cost of debt 15% and beta 0.91x The equity value based 1.5 million share (total outstanding) multiplied by 78.9 EGP (current market price 31/12/12) Return on Debt represent weighted average of Bond YTM 15% WACC= [(E/V)xRe] + [(D/V)xRd(1-Tc)]

E= Equity Value
D= Debt Value
V= Total Debt & Equity Value
Re= Return to Equity
Rd= Return to Debt
Tc= Effective Tax Rate Mobinil can adjsut Equity and debt ratio while the return on Equity & debt is uncontrollacbel as it sets by the Market Comments Mobinil Equity to capital ration is 62% which is good sign by being more that debt , however this ration will be most likely to increase as the share market price calculated at 78.9EGP while it was 171 a year ago and its current fair value range from 80 to 88 EGP (Hermes Recommended Price to keep the share) Due to mobinil 2011 results, mobinil produce return which is lower than the WACC, so the business is unlikely to secure investment & investors willn't be willing to enter the busness according to the current circumstances. The WACC (Discount rate) increase due increased poilitical risk which result in lowered the target share price The high beta 1.2 reflect that the share is more volatile than the market especially it is part of high technology, service industry (telecommunication). Just as two people will hardly ever interpret a piece of art the same way, rarely will two people derive the same WACC. And even if two people do reach the same WACC, all the other applied judgments and valuation methods will likely ensure that each has a different opinion regarding the components that comprise the company value. (ref. investopedia)
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