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Assignment -1st

11/09/2013

(Equity Research)

Date

CASE STUDY 4 (UNSOLVED) Atlas Corporation was set up 20 years ago. After few years of initial turbulence the company found a few market segments in which it had some competitive advantage. The financials of the company for the last five years are given below: Rs. in million Income Statement 20 x 1 20 x 2 20 x 3 20 x 4 20 x Summary 5 1500 1620 1700 1800 1920 Net sales 225 235 250 261 285 Profit before interest & tax 50 54 59 62 67 Interest 175 181 191 199 218 Profit before tax 49 52 56 58 64 Tax 126 129 135 141 154 Profit after tax 44 45 50 52 59 Dividends 82 84 85 89 95 Retained earnings Balance Sheet Summary 150 150 150 150 150 Equity Capital (Rs.10 par) 700 784 869 958 1053 Reserves and Surplus 300 340 350 375 425 Loan Funds 1150 1274 1369 1483 1628 Capital employed 800 825 860 880 940 Net fixed assets 100 108 110 120 130 Investments 250 341 399 483 558 Net current assets 1150 1274 1369 1483 1628 85 83 97 103 107 Market price per share(year end) The year 20 x 5 has just ended. The current market price per share is Rs.107. The market price per share at the beginning of 20 x 1 was Rs.75. (a) What was the geometric mean return for the past 5 years? (b) Calculate the following for the past 2 years: return on equity, book value per share, EPS, PE ratio (Prospective),market value to book value ratio. (c) Calculate the CAGR of Sales & EPS for the period 20 x 1 20 x 5. (d) Calculate the sustainable growth rate based on the average retention ratio and the average return on equity for the past 2 years. (e) Decompose the ROE for the last two years in term of five factors. (f) Estimate the EPS for the next year (20 x 6) using the following assumptions. (i) Net sales will grow at 8% (ii) PBIT / Net sales ratio will improve by 0.5% over its 20 x 5 value. (iii) Interest will increase by 10% over its 20 x 5 value. (iv) Effective tax rate will be 30%. (g) Derive the PE ratio using the constant-growth model. For this purpose use the following assumptions. (i) The dividend payout ratio for 20 x 6 will be equal to the average dividend payout ratio for the period 20 x 4 20 x 5. (ii) The required rate of return is estimated with the help of the CAPM (Risk free return = 6% Market risk premium = 8%, Beta of Atlas Corporations Stock = 0.9). (iii) The expected growth rate in dividends is set equal to the product of the average return on equity and average retention ratio for the previous 2 years.

Ans- CASE STUDY 4


(A) (B) 2004 ROE= PAT/Equity (Reserve+Surplus) Book Value per share = net assests / no.of equity shares EPS = profit after tax/no.of 141/15 = 9.4 equity share PE Ratio = market price per share for last year/ earning per share Profit has increased, ROE. EPS, Book value per share showing increasing that indicates company doing well. (C) CAGR of Sales & EPS= CAGR of Sales 2001 to 2005 = 41920/1500-1 = (1920/1500)1/4 -1 = 1.0636-1 CAGR of EPS 2001 to 2005= EPS 2001 = PAT/N= 126/15= 8.40 = 410.2667/8.40 1 = (10.2667/8.40)1/4 1 = 1.05146-1 (D) Sustainable Growth Rate = 2004 Dividend Par out rat = Div./PAT Retention ratio= 1-DP 1-.3688= .6312 52/141= .3688 2005 Average = .05146 or 5.146% = .0636 or 6.36% 97/9.4 = 10.319 154/15 = 10.2667 103/10.2667 = 10.0325% 141/1108= .1273 12.73% 1108/15 = 73.8667 2005 154/1203 = .1281 12.81% 1203/15 = 80.20 Rs. in million

59/154 = . = (.3688+.3822)/2= .3760 3832 1-.3832= . =(.6312+.6168)/2= .6240

6168 ROE .1273 .1281 .1277


Sustainable Growth Rate= Avg. Retention X Average ROE

.1277 X .6240 = .0797 or 7.97%

(E) Decompose of ROE Last 2 Years= (ROE= PAT/Equity) PBIT/Sales X Sales/ Assets X PBT/PBIT X PAT/ PBT X Assets/ equity(Net worth) 2004= 261/1800 X 1800/1483 X 199/261 X 141/199 X 1483/1108 = .1273 or 12.73% 2005= 285/1920 X 1920/1628 X 218/285 X 154/218 X 1628/1203= .1281 or 12.81% (F) Estimated EPS for 2006= Net Sales= (1920+8%= 1920+153.60) PBIT/Net sales= (218/1920= 11.35+.5) PBIT (-) Interest (67+10%) PBT (-) Tax @ 30% PAT 172.0216 (51.6065) 120.4151 EPS= PAT/No. of Equity share= 120.4151/15=8.0277 (G) PE ratio= DP/Ke-g Rf= 6%, = .9 , Average D/P= .3760 = 6+(8).9 =6+7.2 = 13.2 % 245.7216 (73.70) 2073.60 11.85%

Ke= Rf+(RM-RF) PE ratio = DP/Ke-g

.376/.132-.079= 7.0943%

CASE STUDY 5 (UNSOLVED) Innovative Industries Ltd was set up 15 years ago. After a few years of initial turbulence, the company found a few market segments in which it had some competitive advantage. The financials of the company for the last 5 years are given below: Rs. in million Income Statement 20 x 1 20 x 2 20 x 3 20 x 4 20 x Summary 5 2000 2400 2760 3310 3905 Net sales 700 840 995 1195 1480 Profit before interest & tax 140 151 198 215 282 Interest 560 689 797 980 1198 Profit before tax 162 193 220 272 333 Tax 398 496 577 708 865 Profit after tax 160 175 200 269 320 Dividends 238 321 377 439 545 Retained earnings Balance Sheet Summary 200 200 200 200 200 Equity capital (Rs.10 par) 800 1121 1498 1937 2482 Reserves and Surplus 200 220 298 320 450 Loan funds 1200 1541 1996 2457 3132 Capital employed 800 950 1140 1432 1892 Net fixed assets 150 160 170 185 200 Investments 250 431 686 840 1040 Net current assets 1200 1541 1996 2457 3132 248 259 352 506 Market price per share(year 180 ended) The year 20x5 has just ended. The current market price per share is Rs.506. The market price per share at the beginning of 20x1 was Rs.160. (a) What was the geometric mean return for the past 5 years? (b) Calculate the following for the past 2 years? return on equity, book value per share, EPS, PE ratio, (Prospective), market value to book value ratio. (c) Calculate the CAGR of Sales & EPS for the period 20 x 1 20 x 5? (d) Calculate the sustainable growth rate based on the average retention ratio and the average return on equity for the past 2 years? (e) Decompose the ROE for the last 2 years in term of 5 factors. (f) Estimate the EPS for the next year (20 x 6) using the following assumptions. (i) Net sales will grow at 25% (ii) PBIT as a percentage of net sales ratios will improve by 2% This means that if itwere x%, it will become x + 2%. (iii) Interest will increase by 3% over its 20 x 5 value. (iv) Effective tax rate will be 30%. (g) Derive the PE ratio using the constant growth model. For this purpose use the following assumptions. (i) The dividend payout ratio for 20 x 6 will be equal to the average dividend payout ratio for the period 20 x 4 20 x 5. (ii) The required rate of return is estimated with the help of the CAPM (Risk free return = 9%, Market risk premium 12% Beta of Innovative Industries Stock = 1.2).

(iii) The expected growth rate in dividends is set equal to the product of the average return on equity and average retention ratio for the previous 2 years.

Ans- CASE STUDY 5


(A)
(B) Rs. in million

2004 ROE= PAT/Equity (Reserve+Surplus) Book Value per share = NA/ No. of Eq. share EPS = PAT/No. of Eq. share PE Ratio = MPS Last Year/ EPS 708/20 = 35.40 259/35.40 = 7.3164 708/2137= .3313 33.13% 2137/20 = 106.85

2005 865/2682 = .3226 32.26% 2682/20 = 134.10 865/20 = 43.25 352/43.25 = 8.1388%

Profit has increased but ROE decrease due to increase in Reserve & Surplus. But profits & other Ratio showing increasing that indicates company doing well. (C) CAGR of Sales & EPS= CAGR of Sales 2001 to 2005 = 43905/2000-1 = (3905/2000)1/4 -1 = 1.18208-1 CAGR of EPS 2001 to 2005= EPS 2001 = PAT/N= 398/20= 19.90 = 443.25/19.9 1 = (43.25/19.9)1/4 1 = 1.2141-1 (D) Sustainable Growth Rate = 2004 Dividend Par out rat = Div./PAT Retention ratio = 1-DP ROE 1-.380= .620 .3313 1-.370= .63 .3226 269/708= .380 2005 320/865 = .370 Average = (.380+.370)/2= . 375 =(.620+.63)/2= .625 .327 = .02141 or 21.41% = .18208 or 18.208%

Sustainable Growth Rate= Average. Retention .625 X .327 = .2044 or 20.44%

X Average ROE (E) Decompose of ROE Last 2 Years= (ROE= PAT/Equity) PBIT/Sales X Sales/ Assets X PBT/PBIT X PAT/ PBT X Assets/ equity(Net worth) 2004= 1195/3310 X 3310/2457 X980/1195 X 709/980 X 2457/2137 = .3313 or 33.13% 2005= 1480/3905 X 3905/3132 X 1198/1480 X 865/1198 X 3132/2682= .3236 or 33.26% (F) Estimated EPS for 2006= Net Sales= (3905+25%= 3905 +976.25) PBIT/Net sales= (1480/3905= 37.90%+2%) PBIT (-) Interest (67+10%) PBT (-) Tax @ 30% PAT 1947.6188 (290.460) 1657.1588 (497.1477) 1160.0111 EPS= PAT/No. of Equity share= 1160.0111/20=58.0001 or 58 Rs. (G) PE ratio= DP/Ke-g Rf= 9%, = 1.2 , Average D/P= .375 Ke= Rf+(RM-RF) = 9+(12)1.2 ke=9+14.40 = 23.40 % .375/.2340-.2044= 12.669% PE ratio = DP/Ke-g 4881.25 39.9%

Harshita Kabra (PGDM-Finance)