capital structure of company
DESCRIPTION
Corporate FinanceTRANSCRIPT
Introduction
1.1Introduction:
Every decision made in a business has financial implications, and any decision that involves
the use of money is a corporate financial decision. Broadly everything that a business does
fits under the rubric of corporate finance. All businesses have to invest their resources wisely,
find the right kind and mix of financing to fund these investments, and return cash to the
owners if there are not enough good investments. Principles that govern corporate finance -
The investment principle specifies that businesses invest only in projects that yield a return
that exceeds the hurdle rate. The financing principle suggests that the right financing mix for
a firm is one that maximizes the value of the investments made. The dividend principle
requires that cash generated in excess of good project needs be returned to the owners. These
principles are the core for corporate finance.
To analyze different aspects of corporate finance of a company industry analysis is done to
select the profitable industry. I have taken 3 companies from Fuel & Power sector including
Linde BD, Padma Oil, and Meghna Petroleum. There after all possible aspects of corporate
finance of aforesaid companies are analyzed and evaluated to employ the bookish knowledge
in empirical arena.
1.2 Objectives:
The main objective of the study is to analyze the different corporate finance Aspects of Fuel
& power sector of Bangladesh specially 3 selected companies of identical sector.
The specific objectives are as follows:
To analyze the corporate goal/objectives & CSR activities of the selected Companies.
To calculate the intrinsic value of the share of the companies.
To analyze the financial statements of the selected Companies.
To analyze the capital structure pattern of the aforesaid companies.
To evaluate the divided policy and dividend pattern of the companies.
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CHAPTER1
1.3 Methodology
Methodology is the way to come out with solution systematically. This paper has been
completed by following systematic and sequential steps.
1.3.1Data Source:
This report is mostly based annual report and Dhaka Stock Exchange. The data collection
method was based on the secondary data, which were available on the web and also collected
DSE library. My main source of secondary data was the DSE (web& Library) and company’s
web and stockbangladesh.com.
1.3.2 Time Frame
To prepare the report I took the data set of previous 5-6 years data of my selected companies
1.4 Scope of Report
Our main focus of this report is to analyze:
Corporate goal
Valuation
Financial and statement and performance analysis
Cost of capital and capital structure
Dividend policy
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Industry Analysis & Selection
2.1 About Fuel & Power Sector:
Energy is the driving force behind all economic activities and most importantly the economy
can be seen as a system of energy flows, as a sequence of energy conversion that culminate in
the production of goods and services. Hence economic growth of a country is directly linked
to energy growth of the country.
Energy Sector Structure of Bangladesh
According to the source of energy, we can represent the sector in the following structure:
2.2 Industry Analysis
2.2.1 Porter’s five forces model
Industry analysis helps to measure the profit potential of the industry in which the firm is
competing because the profitability of various industries differs systematically and
predictability over time. To analyze the industry situation `Porters Five Forces Model’ has
been used. By using this analysis the present Fuel and Power industry situation is determined
to make further decision. The result of industry analysis by using Porters Five Forces Model
is given below:
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CHAPTER2
1. Threat from New Entrants:
High capital requirements: High capital requirements positively affect Energy
sector/industry because it limits the competition.
Industry is highly dominated and guided by the government. So, the scope of
private sector companies is limited.
High sunk costs limit competition: High sunk costs make it difficult for a competitor
to enter a new market especially in the energy sector. High sunk costs positively
affect Energy industry because the new entrants must have to spend huge money on
R&D
Industry requires economies of scale
2. Rivalry among Existing Firms:
Degree of product differentiation is low.
Government policies limit competition: Government policies and regulations can
dictate the level of competition within the industry. When they limit competition, this
is a positive for Energy
There are a very good number of big companies in this industry. Their earnings and
market capitalization is very strong.
Competitive Supply businesses were highly susceptible to changes in the price of
electricity
3. Threat from Substitute Products:
Little substitute: The substitute produced by other sector may be coal. In terms of
Gas, petroleum, the substitute is not much alike. Moreover, the collection of coal from
the coalmine is required large investment and it may not be an environmental friendly
investment. So the threat of substitute product produced by other sector is also very
low.
Switching cost: It’s a very essential product and customer switching cost is high
4. Bargaining Power of Buyers:
• Large number of Consumers: There are huge number of consumers of Energy
industry which limit the bargaining power of the consumers
• Low buyer price sensitivity: when buyers are less sensitive to prices, prices can
increase and buyers will still buy the product. Inelastic demand positively affects
Energy
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• Product is important to customer: When customers cherish particular products
they end up paying more for that one product. This positively affects Energy.
5. Bargaining Power of the Supplier:
• There are few sellers
• Suppliers have the bargaining power over their buyers and they set the price of petroleum products. Thus, the bargaining power of the suppliers is high.
2.3 Selection Company:
Linde BD: Linde Bangladesh Limited (Formerly BOC Bangladesh Limited) is a part of The
Linde Group, world leading supplier of industrial, process and specialty gases. Linde
products and services can be found in nearly every industry, in more than 100 countries. BOC
Bangladesh re-branded as Linde Bangladesh in November 2011 since its parent company
Germany's Linde Group acquired BOC Group. LindeBD’s principal activities are the
manufacture and supply of industrial and medical gases, anesthesia, welding equipments and
products and ancillary equipments. The product line is categorized into three segments based
on the sectors the company serves its products and services such as Bulk Gases, Package
Gases (PG&P) and Hospital Care. PG&P is the main revenue driver which contributes Appx.
81.64 percent of revenue of Linde BD.
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Padma Oil: The Padma Oil Company Limited formerly is a Bangladeshi-state owned
petroleum company. It is a descendant of the historic Burmah Oil Company in the British
Empire. Burmah Oil sold the company to the Bangladesh Petroleum Corporation in 1977. It
was renamed as the Padma Oil Company in 1988 after the Padma River. Today, the company
is one of the largest distributors of petroleum products in Bangladesh, and is listed on the
Dhaka Stock Exchange and the Chittagong Stock Exchange. The prime activities of the
company include the procurement, storage and marketing of petroleum products, lubricants &
greases, bitumen, LPG & manufacturers and marketing of agro chemicals
Meghna Petroleum: The prime activities of the company include the procurement, storage
and marketing of all petroleum oil and lubricating products, Bitumen, Liquefied Petroleum
Gas (LPG) and Battery Water across the national terrains of Bangladesh. The lubricants
products that MPL markets include BP Super V, BP Visco 5000, BP Energol HD 40, BP
Vanellus C3 40, BP Vanellus C3 Multigrade and others.
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CHAPTER3
Analysis & Interpretation
3.1 Corporate Goal
A. Corporate Goal:
a) Linde Bangladesh Ltd:
Corporate Vision: We shall be recognized as the leader in all the business sectors in which
we compete in Bangladesh. Our success will be built on our absolute dedication to the
satisfaction of our customers, through constant innovation, operational efficiency, cost
effectiveness and the talents of our people. We shall always apply high standards of integrity
and responsibility in our activities.
b) Padma Oil Company Ltd:
Vision: To build our Company into an efficient, market driven, customer focused institution
with good Corporate Governance structure. Continuous improvement in our business
policies, procedure and operations through Integration of technology at all levels.
Mission: To be the Leader in Oil Marketing Industries in Bangladesh in terms of efficiency,
capital adequacy, asset quality, sound management and profitability having strong liquidity.
Corporate Goals
To ensure steady supplies of POCL products and others commodities of company’s
marketing list to the door-steps of consumers in the best possible way and cost
effective manner.
To maintain the process of attaining excellence for the time honored management
system set by the predecessors who were the pioneers of oil industry in the part of the
world.
To ensure reasonable dividend for the investors and safeguard the interest of the
consumers as well.
To create efficient manpower for country’s oil industry.
Analysis of Goal & Strategies:
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Corporate Goal of the Linde BD has well defined but subsequent issues are not well defined
specially the time frame. They should have well time defined objectives and mission that will
entice the most to achieve their goal. The motto of Linde BD is “to ensure optimum
conditions in health, safety and the environment for employees, customers and stakeholders”
which is consistent with their goal.
Padma Oil has well defined corporate goal which is backed by its distinct objectives and
mission. According to its mission statement all except asset quality has been up to the mark.
The company has Appx 95% current asset where only little percent of total asset is fixed
portion.
B. Corporate Social Responsibility:
Corporate responsibility policy of Linde BD:
Linde Group’s Corporate Responsibility policy builds on the values and principles set down
in the Linde Spirit. It outlines our sense of responsibility to our stakeholders, such as business
partners, employees and society. It also addresses our commitment to protecting natural
resources. Linde BD’s corporate responsibility programme “HELP” (ie Healthcare,
Education, Local Community Development & Protecting the Environment).
Analysis of CSR Activities:
Linde BD has performed few CSR activities by their HELP program but Linde didn’t get any
sort of tax benefit for these activities. It’s getting 10% tax rebate for giving more than 20%
divided according to the Income Tax Ordinance. On the other hand, Padma oil and Meghna
petroleum are not directly involved with CSR activities as they are distribution channel of
Bangladesh Petroleum Corporation (BPC). If BPC asked to participate any sort of CSR
activities then they join but according to the ISO 26000 these are not yet CSR rather
philanthropy. I recommend these companies to follow ISO 26000(CSR) to practice true CSR
activities. Because, implementation of 7 core principles of ISO 26000 (CSR) including –
Accountability, Transparency, Ethical Behavior, Respect for Stakeholder Interest, Respect for
rule of Law, Respect for International norms of Behavior and Human Rights – may ensure a
firm’s true intention to practice CSR activities.
2. Valuation
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2.1 Book Value of the Firm:
Book value of the firm = Book Value of Equity + Book Value of Interest Bearing Debt
Linde Bangladesh Ltd.
Particulars/Years 2007 2008 2009 2010 2011 2012
Book Value of Equity 1,394 1,511 1,839 1,995 2,165 2,191
Book Value of long term
debt
2 0 0 0 0 0
Total Book Value of the
Firm
1,397 1,511 1,839 1,995 2,165 2,191
No of Shareholders 15.22 15.22 15.22 15.22 15.22 15.22
Book Value Per Share 91.77 99.28 120.81 131.13 142.29 144.00
Padma Oil Company:
Particulars/Years 2008 2009 2010 2011 2012
Book Value of Equity 1342 1769 2358 3235 4330
Book Value of long term
debt
0 0 0 0 0
Total Book Value of the
Firm
1342 1769 2358 3235 4330
No of SH after BSA 9.80 29.40 44.09 66.14 89.32
Book Value Per Share 137.02 60.20 53.49 48.91 48.48
Industry Average 2008 2009 2010 2011 2012
Book Value of Equity 1938 2733 3238 3847 4531
Book Value Firm 4034 5128 6078 7926 6395
(All numbers in Millions)
Interpretation: Book Value of Equity of Linde BD & Padma Oil gradually increased and it
indicate it will increase in future time. BVPS of the Linde BD was in positive trend where as
Padma Oil’s BVPS went down because the company has declared Bonus Share in last couple
of years especially in 2008 to 2013. Industry Avg. Book Value of Equity was in increasing
since 2008
2.2 Market Value of the Firm:
Market value of firm = Market Value of Equity + Market Value of Long Term Debt
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Linde Bangladesh Ltd
Particulars/Year 2008 2009 2010 2011 2012 2013
MV Per Share 265.8 486.9 692.30 612.20 549.1 630
No of Shareholders 15.22 15.22 15.22 15.22 15.22 15.22
MV of Equity 4044 7409 10535 9316 8356 9587
MV of Finance
Lease
2 0 0 0 0 0
Total MV of the firm 4047 7410 10535 9316 8356 9587
Padma Oil Company:
Particulars/Year 2008 2009 2010 2011 2012 2013
Market Value Per Share 727.7 620.2 828.10 509.2 187.5 260.4
No of Shareholders 9.80 29.40 44.09 66.14 89.32 89.32
Market Value of Equity 7132.
5
18233.
4
36513.9 33679.
4
16747.
0
23254.
4
MV of long Debt - - - - - -
Total MV of the firm 7132.
5
18233.
4
36513.9 33679.
4
16747.
0
23254.
4
Source: DSE (*All numbers in Millions)
Market Capital of Fuel & Power Sector 259964 Million
Industry Avg. MV of Equity 17331
Interpretation: Both Linde BD and Padma Oil’s MV was all time high in 2010 but it’s
reflection of market unrest in 2010-11 market value of equity increased from year 2008 to
2010, it fell in 2011 and 2012.. Then both companies MV were decreasing to adjust the
market actual Value. This declining of market value of equity was due to collapse in capital
market in 2010-11 coupled with the declining of profitability of the companies. According to
the MV of the equity TITAS Gas is the Market leader and Industry Average MV is 17331
Million TK.
3. Price-Earnings Multiple:
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Particulars/Years 2008 2009 2010 2011 2012
Padma Oil 42.8x 56.5x 62.5x 55.3x 18.7x
Meghna Petroleum 22.4x 30.3x 26.7x 13.3x 12.5x
Jamuna Oil 17.8x 21.6x 39.1x 17.9x 10.9x
Linde BD 11.3x 12.2x 15.8x 13.7x 17.3x
DESCO 11.9x 14.0x 26.7x 30.0x 32.5x
BD Welding 83.6x 63.0x 246.8x 118.1x 23.2x
Eastern Lubricants 117.3x 85.0x 144.6x 75.1x 49.5x
Summit Power 46.7x 48.0x 45.5x 14.6x 16.8x
Industry Avg. (P/E
Multiple)
44.2x 41.3x 75.9x 42.3x 22.7x
Particulars/Years 2008 2009 2010 2011 2012
Industry Avg. (P/E Multiple) 44.2x 41.3x 75.9x 42.3x 22.7x
EPS- Linde BD 23.61 40.08 43.90 44.78 31.71
Stock Price of Linde BD 1044 1657 3334 1892 718
EPS- Padma Oil 23.90 15.36 14.46 13.25 16.38
Stock Price of Padma Oil 1056.49 634.79 1098.18 559.99 371.28
Interpretation: Average P/E of the Industry was 22.7x on December 31, 2012. And the EPS
of the Linde BD was Tk 31.71 per share at that time. Using the industry P/E multiple, we
have found the price of the share of Linde BD is 718 and Padma Oil price is 371.28. P/E
ration of the sector in 2010 was 75.9x which reflect the unusual situation.
4.1 Valuation of Linde BD
In calculation of free cash flow, there are some assumptions that we need to consider. These
are given in tabular form apart the result of valuation also given:
Particulars Amount/Rate
Value of the Firm 10640.2Cash in Hand 412
Debt 0Equity Value 10228.3
No of shareholders 15.2Intrinsic Value Per share 672.1Market Value Per Share 629.1 Undervalued (As on 30th Dec-13)
Terminal Growth rate 0.02Cost of Equity 12.05%
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Cost of Debt 0WACC 12.05%
Tax Rate 24.75% (10% tax Rebate for 20% or above Dividend)
Inflation rate 5%Inflation Adjusted Discount rate ((1+.1205)*(1+.05))-1 = 17.65%
Details Calculation: Valuation of Linde Bangladesh Ltd.
Particulars/Years 2012 2013
P
2014 P 2015
P
2016 P 2017 P Inflation G rate GEO
M
Revenue 3,817 4,365 4,992 5,709 6,529 7,467 5% 8.92%
Cost of sales -2,527 -2,722 -3,113 -3,560 -4,071 -4,656 62.4% 62.2%
Gross profit 1,290 1,643 1,879 2,149 2,458 2,811 37.6% 37.5%
Operating expenses -514 -551 -631 -721 -825 -943 13% 12.4%
EBITDA 777 1,092 1,249 1,428 1,633 1,868 25% 25.0%
Depreciation & Amortization 150 191 219 250 286 327 4% 4.4%
EBIT 627 901 1,030 1,178 1,347 1,541 21% 20.5%
Gain on disposal of PPE 0 2 2 3 3 4 0.14% .049%
Interest income, net 33 69 79 90 103 118 2% 1.6%
EBT 660 972 1,111 1,271 1,453 1,662 23% 22.9%
Taxation -178 -240 -275 -315 -360 -41124.75% 6% 5.6%
NOPAT 483 731 836 956 1,094 1,251 17% 17.3%
Add-Dep. & Amortization 191.20 218.66
250.07 285.98 327.05
Changes in Working Capital -42.83 -42.83 -42.83 -42.83 -42.83Operating Cash Flow 879.5
7 1012.1163.
5 1336.8 1534.9Capital Expenditure -286 -353 -435 -536 -661 TV
FCF to Firm 594 659 729 800 873 8863Present Value of FCF 505 560 619 680 742 7533
I have valued Linde BD by applying discounted cash flow (DCF) model with two stages of
growth where I have forecasted free cash flow for equity holder (FCFE) for next five years
over which I have reasonable estimates. By discounting the free cash flow for equity holder
of the forecasted five years and the terminal free cash flow of equity holder at the cost of
equity, I get an intrinsic price of share of the firm. For the valuation date December 30 2013,
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the intrinsic value of Linde BD’s stock was tk. 672.1 BDT. But in the market, it was sold at
629.1 BDT. So, we can infer that Linde BD’s stock was underpriced in the market.
3. Financial Statements and Analysis
1. Analysis of Firm & Performance of the Industry:
Performance of Industry:
The Bangladesh economy maintained a growth of about 6% in last fiscal year in the face of
weak global recovery from earlier economic down turn. However it registered lower growth
compared to the previous year (2011). Some improvement in power sector was made through
investment in the quick rental power and private sector power plants. On the other hand
shortage of natural gas and upward price adjustment in fuel and power adversely affected
growth in some sectors. High import cost of food and non food commodities and devaluation
of local currency caused high inflation in the economy. Weighted average costs of the major
raw materials were much higher, compared to the previous year. Selling price of some
products was revised upward to recover high inflation impact on raw materials. But due to
competitive environment, entire inflation impact could not be recovered from the market
through price adjustment.
Analysis of Firms’ Performance:
Linde BD: LindeBD’s principal activities are the manufacture and supply of industrial and
medical gases, anesthesia, welding equipments and products and ancillary equipments. The
product line is categorized into three segments based on the sectors the company serves its
products and services such as Bulk Gases, Package Gases (PG&P) and Hospital Care. PG&P
is the main revenue driver which contributes Appx. 81.64 percent of revenue of Linde BD.
Under these circumstances the turnover registered a net growth of 2% as against operating
profit fall by 29% over the previous year. Operating profit dropped mainly due to inflation
impact on cost of raw materials and higher operating expenses. Interest income for the year
was much lower over last year due to fall in liquidity fund resulting from payment of
dividend, purchase of capital items and excess investment in working capital.
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Padma Oil: The Padma Oil is one of the largest distributors of petroleum products in
Bangladesh, the prime activities of the company include the procurement, storage and
marketing of petroleum products, lubricants & greases, bitumen, LPG & manufacturers and
marketing of agro chemicals. The firm’s last 3 years sales growth was 37.78%, 13.22% and
0.05% in 2010, 11, & 12 respectively. 05% growth in to 2012 reflects how adversely this
sector affected by macroeconomic factors.
2. Ratio Analysis of the Companies:
A. Liquidity Ratios:Particulars/Year Firm 2008 2009 2010 2011 2012
Current Ratio (Times) Linde BD 3.47 3.86 3.8 3.64 2.6Padma Oil 1.04 1.05 1.06 1.05 1.05
Meghna Petro 1.08 1.09 1.07 1.11 1.09Industry Avg. 1.75 1.95 1.93 1.88 1.72
Quick Ratio (Times)
Linde BD 1.91 3.21 3.02 2.28 1.35Padma Oil 0.89 0.84 0.84 0.88 0.93
Meghna Petro 0.75 0.58 0.77 0.87 0.86Industry Avg. 1.29 1.45 1.51 1.42 1.30
Interpretation: Current ratio refers how current assets cover short term obligations. All firms
CR are more than 1 which indicates good sign about the company’s current position or current
liquidity. Linde BD’s CR is higher than industry it shows it’s a cash cow company whereas
Padma oil and Meghna petroleum’s CR is below industry average.
Quick Ratio shows the ratio of cash and other liquid resources in comparison to current
liabilities. Quick ratio is an indicator of solvency of an entity and must be analyzed over a period
of time and also in the context of the industry the company operates in. As a Cash Cow company
Linde BD’s QR is more than industry avg. whereas Padma oil & Meghna Petroleum’s liquidity
position also good.
B. Efficiency & Activity Ratios:
Particulars/Year 2008 2009 2010 2011 2012
A/R Turnover (Times) 19.40 18.51 18.05 19.29 16.77
Collection Period (Days) 18.56 19.45 19.95 18.66 21.46
Inventory Turnover (Times) 3.59 3.98 5.80 4.48 3.45
Inventory Conversion time
(Days)
100.36 90.41 62.06 80.44 104.23
Operating Cycle (Days) 118.92 109.87 82.00 99.10 125.69
Payable Turnover (Times) 6.37 5.45 5.78 5.79 4.50
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Payment Deferred Time (Days) 56.47 66.03 62.29 62.22 79.92
Cash Conversion Cycle (Days) 62.45 43.84 19.71 36.88 45.77
Industry Average42.99 58.32 76.85 66.02 22.05
Interpretation: Accounts receivable turnover measures the efficiency of a business in
collecting its credit sales. A/R Turnover had been decreasing (increasing) trend from 2008 to
2010 and then had been increasing (decreasing) trend from 2010 to 2012. Credit Collection
period is also good as it took 18 to 21 days to collect its credit sales though its credit policy is
not sturdy.
“Inventory Turnover” indicates that Linde BD had the tendency to heap up its inventory. It is
said earlier that it may be due to the nature of business. Nevertheless, we can see that its
inventory management was becoming improved year to year from 2008 to 2011 though in
2012 it was in down. In 2012, inventory was produced and sold its inventory earlier than all
other. Operating Cycle was decreasing & increasing trend from year 2008 to 2012 (except
2009).
On the other hand, payable payment period has increased from 2008 to 2012 suggesting that
cash leaving the company over the years made slow down & indicates Linde had enough
cash. Overall, the cash conversion cycle (CCC) has been decreasing since 2008 to 2010 but
it was in increasing trend from 2011 to 2012. Compare with industry average we can see that
the Linde BD’s CCC was pretty good in 2010 & 2011.
Activity Ratios:
Particulars/Year Firm 2008 2009 2010 2011 2012
Total Asset Turnover (Times)
Linde BD 1.15 1.06 1.14 1.24 1.19Padma Oil 0.03 0.04 0.04 0.03 0.02
Industry Avg.
0.66 0.56 0.51 0.53 0.48Fixed Asset Turnover (Times)
Linde BD 2.59 2.95 3.05 3 2.51Padma Oil 2.49 2.28 3.25 3.63 3.80
Industry Avg.
2.48 2.39 2.48 2.61 2.49
Interpretation: The total asset turnover of Linde BD indicates by using 1tk of asset firm
generate 1.15 tk sales. From the total asset turnover ratio, we can see that Linde can use its
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total asset more efficient in 2011 to generate sales than that of all other years. On the other
hand, performance of Padma oil to generate sales by using total asset was tremendously low.
Fixed asset turnover ratios are higher than that of the total asset turnover ratios and following
the same trend from 2008 to 2012 but it was falling since 2011. It indicates that Linde was
more efficient in using its fixed assets to generate sales in 2010 than all over years where as
Padma Oil generate more sales in 2012.
C. Solvency Ratios:
Debt Ratio =
Debt-Equity Ratio =
Particulars Firm 2007 2008 2009 2010 2011 2012
Debt Ratio Linde BD 0.14% 0.10% 0.00% 0.00% 0.00% 0.00%Padma Oil 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Meghna 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Industry Avg. 26.01% 25.29% 22.40% 28.03% 37.44%
D to E Ratio
Linde BD 0.21% 0.15% 0.00% 0.00% 0.00% 0.00%Padma Oil 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Meghna 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Industry Avg. 27% 14% 11% 18% 23%
Interpretation: From this table, we can find that Linde BD is unlevered firm. We can also
find that the peer company i.e. Padma oil & Meghna Petroleum Limited is also all equity firm
but the industry average show few firms in the sector may took debt in their capital structure
but which is not tremendously high because debt capital range is 20-25% only..
D. Coverage Ratios:
Interest coverage ratio =
Interest Coverage Ratio 2008 2009 2010 2011 2012
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Linde BD N/A N/A N/A N/A N/APadma Oil Company N/A N/A N/A N/A N/A
Meghna Petroleum Limited N/A N/A N/A N/A N/A
Industry Average0.39 1.22 1.29 0.35 0.70
Interpretation: Interest Coverage ratio is the ratio of Operating Income to Interest Expense against Debt. This indicates a firm’s ability to pay interest on outstanding debt from its operating income. Since Linde BD, Padma Oil Company Limited, Meghna Petroleum Limited and the industry avg. interest coverage ratio is given as few firms taken debt.
Cash Flow Coverage Ratio 2008 2009 2010 2011 2012
Linde BD N/A N/A N/A N/A N/APadma Oil Company N/A N/A N/A N/A N/A
Meghna Petroleum Limited N/A N/A N/A N/A N/A
Industry Average N/A N/A N/A N/A N/A
Interpretation: Cash Flow Coverage ratio is the ratio of Operating Cash Flow to Interest
Expense and Principal Payment against Debt. This indicates a firm’s ability to pay interest on
outstanding debt and principal amounts when they become due from its operating cash flow.
Since Linde BD, Padma Oil Company Limited, Meghna Petroleum Limited and the industry
are unlevered, so the cash flow coverage ratio is not applicable for them.
E. Profitability Ratios:
Particulars Firm 2008 2009 2010 2011 2012
Gross Profit
Margin
Linde BD 33.39% 40.46% 41.94% 38.88% 33.81%
Padma Oil 21.90% 36.06% 47.26% 21.01% 37.23%
Meghna 1.40% 0.94% 1.20% 1.19% 1.03%
OPM
Linde BD 16.85% 22.05% 25.68% 23.26% 16.43%
Padma Oil 43.94% 66.88% 67.59% 80.54% 48.33%
Meghna 1.66% 1.48% 1.01% 0.87% 1.01%
Net Profit
Margin
Linde BD 14.38% 22.24% 20.88% 18.27% 12.64%
Padma Oil 29% 46% 47% 57% 96%
Meghna 1.58% 1.40% 0.96% 0.83% 0.96%
Industry Avg. 27.61% 33.72% 25.16% 24.25% 30.50%
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Interpretation: In 2008, GPM of was Linde BD the lowest. This was due to huge COGS. In
2008 revenue was sufficient but COGS was 66.61% of total revenue where in other years
COGS almost same. GPM of Meghna Petroleum is lower the all other peers company.
Operating profit dropped mainly due to inflation impact on cost of raw materials and higher
operating expenses. Interest income for the year was much lower over last year due to fall in
liquidity fund resulting from payment of dividend, purchase of capital items and excess
investment in working capital. OPM & NPM of both Padma oil and Meghna petroleum
increased because of non-operating income of these companies. NPM of Linde BD in downward
since 2011 but it was good in 2009 and 2010.
Particulars Firm 2008 2009 2010 2011 2012
ROE
Linde BD 23.78% 33.17% 33.48% 31.47% 22.02%
Padma Oil 16.9% 24.8% 26.5% 26.7% 33.4%
Meghna 38.71% 37.57% 31.32% 31.08% 37.36%
Industry Avg. 19.66% 24.60% 22.97% 22.87% 23.15%
ROA Linde BD 16.53% 23.58% 23.84% 22.72% 15.09%
Padma Oil 0.89% 1.74% 1.82% 1.66% 2.10%
Meghna 5.15% 5.58% 3.41% 4.24% 4.71%
Industry Avg. 5.70% 8.47% 7.56% 7.42% 6.44%
Interpretation: The return on equity ratio of Linde BD was the lowest in 2012 and was
increasing since 2008 to till 2010. Peers companies ROE also in good shape. ROA of Linde
BD was better but Padma Oil ROA is reflecting it excess of noncurrent asset. From this table,
we can find that the Return on Operating Asset is comparatively lower for Padma Oil
Company Limited than that of the peer and the industry average. We can also find that the
ROA of Padma Oil, Meghna Petroleum and the industry is showing mostly decreasing trend
over the years.
F. Marketability Ratios: Linde BD ltd.
Particulars/Year 2008 2009 2010 2011 2012
BV of Equity 99.28 120.81 131.13 142.29 144.00
MV of Equity 265.80 486.90 692.30 612.20 549.10
BV to MV Ratio 0.37 0.25 0.19 0.23 0.26
BV to MV Industry0.27 0.19 0.14 0.20 0.73
P/E Ratio 11.26 12.15 15.77 13.67 17.32
NAV per Share 99.28 120.81 131.13 142.29 144.00
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Price to NAV 2.68 4.03 5.28 4.30 3.81
BV to MV Ratio: We know that lower BV/MV ratio indicates that investors are willing to
pay relatively high for the firm’s stock than its book value. We see here that Linde BD’s
BV/MV ratio was lowest in 2010 where Linde BD stock price was highest. However, the fall
of market value, hence, the increase of BV/MV ratio can also be attributed to the overall
capital market condition of the firm.
Price to NAV: Price to NAV shows how many times an investor pay for a stock against it
NAV. NAV reflects an investor will get back this amount of money if company go to
liquidation right now.
4. Du Pont Analysis:
Particulars/Year 2008 2009 2010 2011 2012
OPM=EBIT/Sales 16.85% 22.05% 25.68% 23.26% 16.43%
TAT=Sales/TA 1.15 1.06 1.14 1.24 1.19
Interest Burden=EBT/EBIT 108.71% 127.77% 109.93% 108.37% 105.34%
Tax Burden= EAT/EBT 78.50% 78.94% 73.96% 72.49% 73.05%
Equity Multiplier=TA/TE 143.89% 140.66% 140.41% 138.55% 145.96%
ROE 23.78% 33.17% 33.48% 31.47% 22.02%
We can see that OPM is the highest in 2010 and the lowest in 2012. In case of tax burden,
Apex paid the highest tax in 2009 and the lowest in 2011. TAT is the highest in 2011
indicating that Linde BD is more efficient in utilizing its asset to generate sales and the
lowest in 2009 indicating lower efficient in its asset utilization. In analyzing ROE, we can say
that Linde BD is in better situation in 2010.
Suggested Actions to Boost up ROE:
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To increase ROE, Linde BD should try to increase in ROA more. To do this, the company
can focus on NPM. It can increase its OPM by reduction its COGS. It is now trying to reduce
in COGS. COGS are very high for Linde BD in every year. On the tax burden also increased
from 2011 to 2012. So, it should take some long term debt as industry follows moderate debt
to equity ratio. Currently it doesn’t have any long term debt. It should focus on TAT means
increase its efficiency to generate more sales by using its total Asset.
4. Cost of Capital and Capital Structure
1. Weighted Average Cost of Capital:
Cost of Equity:
1. Cost of Equity using CAPM:Cost of Equity Rate
Ke= Rf+ (Rm -Rf)* β
RF ( 91 days T-bill) 6.40%
RM (Market Return) 13.12%
Beta= (COVlm/VARm)= 0.0048/0.0092 0.5161
Adjusted Beta (.33*historical beta + .67*1) 0.840
CAPM Ke= Rf+ (Rm -Rf)*β = 6.40% + (13.12% -6.40%)* 0.840 12.05%
Risk Free Rate: I have take average Risk free rate of last five Years 91 days T-Bill rate.
Market Return: Market return is calculated from DGEN return.
Calculation beta: we have calculated the covariance between average DSEN return and
average Linde BD’s return and we have also calculated the variance of the Linde BD’s return.
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Then, we have divided the covariance by variance. The calculation of beta has been given in
Appendix.
Beta Adjustment: Adjusted Beta = (.33*historical beta + .67*1)
2. Cost of Equity using DDM:Year Cash Dividend Growth2008 17.72009 17.7 =(P1/Po)-1=0.0002010 35 0.9772011 35 0.0002012 31 -0.114
Expected Divided =((17.7+17.7+35+35+31)/5)*(1+.216)=33.17
=(.0+.97+.0-.114)/4=0.216
Current Market Price 630Cost of Equity =(D1/Po)+g=(33.17/630)+.216 =26.84%
Cost of Debt:
Cost of Debt Interest Bearing debtBefore Tax (Kd) 0%
After Tax (Kd) = 0%* (1-.2475) 0%*Marginal Tax rate for Linde BD= .2750*(1-.10) = 24.75%.
Weighted Average Cost of Capital (Hurdle Rate):
WACC= We*Ke + Wd*Kd(1-T)
=1*.1205 + 0 *0
=12.05%
Capital Structure:
Firm Capital Structure
Linde Bangladesh Ltd All-Equity Firm
Padma Oil Ltd All-Equity Firm
Meghna Petroleum All-Equity Firm
2. Analyze Optimum Debt-Equity Ratio of Linde BD using Checklist:
1. Tangibility
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Tangibility 2008 2009 2010 2011 2012
Linde BD 44% 36% 37% 41% 46%
Padma Oil 1.25% 1.65% 1.18% 0.80% 0.58%
Meghna Petroleum 3.19% 2.93% 2.04% 1.95% 1.66%
Industry Avg. 16% 13% 13% 15% 16%
Interpretation: From this table, we can find that the tangibility of Linde BD, Padma Oil
Company Limited, Meghna Petroleum Limited and the industry is showing gradually mostly
decreasing trend from time to time and but Linde BD’s tangibility has been increasing since
2009. The percentage of operating fixed asset in terms of total asset of Padma Oil and
Meghna Petroleum are very low because the firms are engaged in marketing (distribution) of
Oil as these firms are subsidy of BPC, so they have no need to acquire large amount of
operating fixed asset. The tangibility of Linde BD is higher than industry avg. and Peer
companies.
2. Growth
2.1 Sustainable Growth (in a Discrete Growth) = ROE*RR
Particulars Firm 2008 2009 2010 2011 2012
Sustainable Growth Linde BD 5.96% 18.52% 6.78% 6.88% 0.49%
Padma Oil 15.60% 22.71% 20.81% 22.57% 23.86%
Meghna Oil 27.52% 16.72% 17.28% 30.42% 30.81%
Industry 16.09% 17.85% 16.09% 18.77% 16.63%
Interpretation: From this table, we can find that the sustainable growth rate of Linde BD is
around 6% but it was tremendously lower in 2012, Padma Oil Company Limited, Meghna
Petroleum Limited showing gradually increasing trend from time to time that may indicate
these firm may take debt for operating business. Reason: All of our concerned firms in this
industry are unlevered. But the total equity of Padma Oil Company Limited is higher than
that of the Meghna petroleum company and the industry in most of the years. But the Net
Profit after Tax of Padma Oil Company Limited is not that much higher than that of the peer
company and the industry. So the Return on Equity of Padma Oil Company Limited is
comparatively very lower than that of the peer company and the industry. For this reason in
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spite of slightly higher retention ratio of Padma Oil Company Limited than that of the peer
company and the industry, the discrete growth of Padma Oil Limited Company is lower than
that of the peer company and the industry because of very lower Return on Equity of Padma
Oil.
2.2 Tobin's Q = Total Market Value of Firm / Total Asset Value of Firm
Particulars/Year 2008 2009 2010 2011 2012
MV of Equity 4047.18 7409.64 10535.42 9316.46 8356.20
Total Asset 2,174 2,586 2,802 3,000 3,199
Replacement Cost of Asset 1008 966 929 1048 1243
Tobin's Q Linde BD 1.86 2.87 3.76 3.11 2.61
Linde BD 4.02 7.67 11.35 8.89 6.73
Padma Oil0.27 0.70 1.04 0.64 0.24
Meghna Oil 1.58 1.79 1.55 1.31 1.26
Industry Avg.1.95 3.19 4.51 2.84 1.91
Interpretation: We know that Tobin’s Q-ratio greater than 1 indicates the firm has done well
with its investment decisions; thus the firm has significant competitive advantage. In case of
Linde BD, we see that the Q ratio was well above 1 and increased from year 2009 to 2011.
From 2010, it was in a decreasing pattern. This can be due to the capital market collapse.
Padma oil’s Q-ratio is below 1 except in 2010 Meghna petroleum Q-ratio is also above 1 in
last 5 years, High Tobin's q values encourage companies to invest more in capital because
they are "worth" more than the price they paid for them. From the ratio we can see that this
premium is lower for Padma Oil compared to Meghna Petroleum as well as the industry over
the year.
2.3 Growth (continues time Frame) =
Particulars/
Year
2008 2009 2010 2011 2012
NPM 14.38% 22.24% 20.88% 18.27% 12.64%RR 25.04% 55.83% 20.27% 21.85% 2.23%Equity/TA 0.69 0.71 0.71 0.72 0.69
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NPM*RR*(E/TA) 0.03 0.09 0.03 0.03 0.00TA/Sales 0.87 0.94 0.88 0.80 0.84Growth 3% 9% 3% 4% .23%
3. Operating Leverage:
DOL (Times) 2008 2009 2010 2011 2012
Linde BD 1.98 1.84 1.63 1.67 2.06Padma Oil 4.8 2.8 2.1 4.7 2.7
Meghna Petroleum 4.12 3.91 8.97 1.95 0.40
Industry Avg. 3.63 2.85 4.23 2.77 1.72
Operating Leverage is the ratio of Change in Operating Income (EBIT) to Change in Sales.
The higher the degree of operating leverage, the more volatile the EBIT figure will be relative
to a given change in sales, all other things remaining the same.
4. Sales Growth:
Sales Growth 2009 2010 2011 2012 GEOMEAN
Linde BD 9.77% 16.65% 16.58% 2.34% 8.92%Padma Oil 19.13% 37.78% 13.22% 0.05% 4.55%
Meghna Petroleum 11.39% 4.65% 31.36% 37.16% 15.76%
From this table, we can find that the sales growth of Linde BD, Padma Oil Company Limited,
Meghna petroleum Limited and the industry is showing gradually mostly increasing trend
from time to time though the sales growth of Padma Oil Company Limited is decreased from
year 2010-2012. The growth rate of sales of the peer company and the industry is higher in
most of the years than that of Padma Oil Company Limited.
5. Size of The Companies:
Market Capital:
Size Price No of Share Market Capital in million
Ranking
Linde BD 619 15,218,280 9420 10
Padma 274.3 89,302,500 24496 2
Meghna 225 81,981,900 18446 5
DESCO 58.9 299,318,506 17630 8
EL 307.5 994,000 306 15
KPCL 49.5 344,080,676 17032 9
BDWELDING 23.5 40,876,290 961 14
POWERGRID 52.8 460,912,991 24336 3
SUMITPOWER
38.7 591,540,246 22893 4
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TITASGAS 73.6 989,221,831 72807 1
BEDL 35.4 131,115,600 4641 12
GBBPOWER 30.3 73,312,485 2221 13
JAMUNAOIL 200.8 91,260,000 18325 6
MJLBD 74.3 238,473,200 17719 7
SPPCL 63.2 138164276 8732 11
Market Capital of Fuel & Power Sector 259964 Million
Industry Avg. MV of Equity 17331
6. Ownership:
Sponsor Ownership: Sponsor ownership represents the sponsor’s shareholding position in
percentage form for any firm.
Sponsor Ownership 2008 2009 2010 2011 2012
Linde BD 60% 60% 60% 60% 60%
Padma Oil 50.35% 50.35% 50.35% 50.35% 50.35%
Meghna Petroleum 70.88% 70.00% 70.00% 70.00% 58.67%
From this table, we can find that the Sponsor shareholding is pretty high for this industry
because government is the sponsor of these companies. Though this ratio is falling for the
peer Meghna Petroleum Limited but steady for Padma Oil Company. The industry average is
also falling for the change in Meghna Petroleum shareholding position.
Free Float Ownership: Free float ownership means the shares other than the sponsor
holding, strategic holding and any government ownership within the company.
Free Float Ownership 2008 2009 2010 2011 2012
Linde BD 40% 40% 40% 40% 40%
Padma Oil 49.65% 49.65% 49.65% 49.65% 49.65%
Meghna Petroleum 29.12% 30.00% 30.00% 30.00% 41.33%
Industry Average 39.56% 39.86% 39.86% 39.86% 43.63%
From this table, we can find that the free float ownership is overall lower for the industry as
the major shares are hold by the sponsor company, BPC. The government agency holding
may decrease in near future but till that time the tradable shares will be remain low for the
entire industry. We have seen the free float ownership is increasing for Meghna Petroleum
over the time period.
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7. Uncertainty of Operating Income: We have measured the uncertainty of income for the
firms by calculating Co-efficient of Variation of EBIT of these firms.
Uncertainty of Operating Income
Linde BD Padma Oil Meghna Petroleum
Industry Average
CV of EBIT .54 0.27 0.36 0.39
From this table, we can find that the Co-efficient of Variation figure is lower for Padma Oil
Company Limited than that of the peer company and the industry. As we know the higher the
CV value the more risk is there for single unit of expected return, so the Linde BD is more is
more risky peer company in this industry.
8. Profitability
Basic Earning Power =EBIT/Total AssetsBasic Profit Margin 2008 2009 2010 2011 2012
Linde BD 19.4% 23.4% 29.3% 28.9% 19.6%Padma Oil 1.31% 2.40% 2.46% 2.22% 3.12%
Meghna Petroleum 4.10% 1.95% 1.84% 2.53% 1.73%Industry Avg. 8.26% 9.24% 11.21% 11.22% 8.15%
Basic earning power (BEP) ratio is a measure that calculates the earning power of a business
before the effect of the business' income taxes and its financial leverage. It is calculated by
dividing earnings before interest and taxes (EBIT) by total assets.
5. Dividend Policy
1. Last 5 years’ Dividend Pattern of Linde BD
Particulars 2008 2009 2010 2011 2012
NI (in Millions) 359.34 609.87 668.02 681.52 482.51No of SH(in Millions) 15.22 15.22 15.22 15.22 15.22
EPS 23.61 40.08 43.90 44.78 31.71Industry Average 38.6 42.9 36.9 29.3 13.7
Dividend 177% 177% 350% 350% 310%Cash Dividend 17.7 17.7 35 35 31
Industry Average 12.6 10.2 14.5 13.3 8.6
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Earnings per Share (EPS): Earning per Share is the ratio of net profit after tax to total
number of outstanding common shares of the company. It is a measure of how much earnings
a company can generate for each share after payment of all the current expense. This ratio
provides an idea of the profitability of a firm. A stable growth in EPS indicates a solid
performance of the company. EPS is the portion of a company's profit allocated to each
outstanding share of common stock. EPS serves as an indicator of a company's profitability.
Two companies could generate the same EPS number, but one could do so with less equity
(investment) - that company would be more efficient at using its capital to generate income
and, all other things being equal, it would be a "better" company. From this table, we can see
that Linde BD’s NI was increasing and company increased its dividend though its NI become
down in 2012.
Dividend Payout Ratio (DPR): Dividend Payout Ratio is the ratio of Dividend per Share (DPS) to
Earnings per Share (EPS). It is a measure of how much earnings a company is paying out to its
shareholders as compared to how much it is retaining for reinvestment. This ratio provides an idea of
how well earnings support the dividend payments. A stable Dividend Payout Ratio indicates a solid
dividend policy by the company's board of directors. The dividend payout decision will depend on
personal and corporate tax rates. If personal tax rates are higher than corporate tax rates, a firm will
have an incentive to reduce dividend payout. But if personal tax rates are lower than corporate tax
rates, a firm will have an incentive to pay out any excess cash as dividends.
2. Table on the Computation:
Year 2008 2009 2010 2011 2012
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Cash dividend Per Share 17.7 17.7 35 35 31
Industry Average 12.6 10.2 14.5 13.3 8.6
Stock Dividend Per Share - - - - -
Industry Average 52.5% 78.3% 33.3% 33.3% 20.8%
EPS 23.61 40.08 43.90 44.78 31.71
Diluted EPS 0 0 0 0 0
Dividend Payout Ratio 74.96% 44.17% 79.73% 78.15% 97.77%
Industry Average 39.1% 27.9% 38.7% 39.1% 45.3%
Retention Ratio 25.04% 55.83% 20.27% 21.85% 2.23%
Industry Average 70.7% 72.1% 70.9% 70.7% 54.7%
Dividend Yield 6.66 3.64 5.06 5.72 5.65
Operating CF Per Share 25.1 68.4 45.5 34.6 31.8
Industry Average 131.96 69.37 100.85 106.89 34.38
Free Cash Flow Per Share 18.9 62.0 28.3 13.5 6.3
Industry Average 136.2 12.0 73.2 85.9 25.5
Market Price 265.8 486.9 692.3 612.2 549.1
Price-Earnings Ratio (Times) 11.3 12.2 15.8 13.7 17.3
P/E Multiple of the Industry 44.2 41.3 75.9 42.3 22.7
Book Value Per Share 99.28 120.81 131.13 142.29 144.00
Reserve & RE Per Share 89.3 110.8 121.1 132.3 134.0
Sustainable Growth Rate (G) 5.96% 18.52% 6.78% 6.88% 0.49%
Industry Average 16.09% 17.85% 16.09% 18.77% 16.63%
Inflation R (Avg. of 12
months)
9.34% 5.20% 8.15% 10.68% 8.79%
GDP Growth Rate 6.19% 5.88% 5.93% 6.71% 6.32%
The stylized facts of the dividend behavior:
Firms smoothen the dividend. From 2008 to 2012, company paid dividend in an
increasing rate in respect to increase in earning. They have created dividend equalization
fund to smooth dividend.
we see the dividend per share of Linde BD which increased every year, we can say Linde
BD’s management are concerned with changes in dividend rather than absolute of
dividend because they believe changes in dividend conveys information of the
marketplace.
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Managers are increasing dividend which indicates that earnings are sustainable in long
run.
Managers are reluctant to cut the dividend as we see here all the firms managers were
cutting the divided only it’s required but they tried out to increase the dividend over last
couple of years
3.6 CRG Score of Linde BD I have found the Credit risk score of Linde BD by using Excel software.
Conclusion
4.1 Conclusion:
Energy is the driving force behind all economic activities and most importantly the economy
can be seen as a system of energy flows, as a sequence of energy conversion that culminate in
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CHAPTER4
the production of goods and services. This paper is about the different Corporate finance
aspects of a Fuel and power sector of Bangladesh specially analysis of five major areas. For
doing this I have to first analyze the selected industry and then selected 3 companies to
complete aforesaid corporate finance aspects. Firstly, I have analyzed the corporate goal and
CSR activities of the companies. Secondly, MV, BV and Valuation of the companies have
taken place to make out the intrinsic value of the stock of selected companies. Thirdly, firms’
performances are analyzed by using different ratio analysis. Fourthly, cost of capital and
capital structure and checklist of the optimal capital structures are analyzed and finally,
dividend policy and stylized factors of divided policy are analyzed.
References
1. Palepu K. G., Hearly P., and Bernard V. L., Business Analysis & Valuation: Using
Financial Statement (Second Edition), South-Western College Publishing, Ohio, 2000.
2. Ross S. A., Westerfield R. W., and Jaffe J., Corporate Finance (Seventh Edition),
McGraw- Hill/ Irwin, Singapore, 2005.
3. Linde Bangladesh Ltd, Annual Report 2008, Dhaka, 2008.
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4. Linde Bangladesh Ltd, Annual Report 2009, Dhaka, 2009.
5. Linde Bangladesh Ltd, Annual Report 2010, Dhaka, 2010.
6. Linde Bangladesh Ltd, Annual Report 2011, Dhaka, 2011.
7. Linde Bangladesh Ltd, Annual Report 2012, Dhaka, 2012.
8. Padma Oil Company Ltd, Annual Report 2008, Dhaka, 2008.
9. Padma Oil Company Ltd, Annual Report 2009, Dhaka, 2009.
10. Padma Oil Company Ltd, Annual Report 2010, Dhaka, 2010.
11. Padma Oil Company Ltd, Annual Report 2011, Dhaka, 2011.
12. Padma Oil Company Ltd, Annual Report 2012, Dhaka, 2012.
13. Five Years Annual Report of Meghna Petroleum ltd. (2008 to 2012)
14. http://www.dsebd.org
15. http://www.tradingeconomics.com
16. www.stockbangladesh.com
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