Finance for Managers

Nitharsan Uwic BABM -53

Executive Summary

The main aim of this report is to inspect the stock performance of Browns Plc for the past two years. The companys share performance including the share volumes were analyzed at the beginning of the report. Finally the industry and the company itself was analyzed .CAPM model was used to find the share price of the organization . The WACC was inspected to choose on the rate the company is forecasted to pay on average to all its nominees. The project valued at 400 000 was analyzed using the suitable tools of project appraisals.

Table of Contents Executive Summary.1 Introduction..3 1.1 Stock performance..4 1.2 Financial performance 8 1.3 Stock performance Vs. Market performance..9 2. 1 Relevance of Capital Assets Pricing Model 11 2.2 The share price of browns company PLC12 2.3 Share Price Calculation.13 3. 1 Calculation of WAAC for Browns company Plc14 3.2 WACC and its usage 18 A. Pay Back Period 19 B. NPV 20 C. IRR (Internal Rate of Return)21 D. Comparison of Different investment Appraisal Methods24 Conclusion..25 References..26

Stock performance of Browns Company & Plc 2010 Introduction Company Profile
Brown & Company PLC is a diversified conglomerate with operations in seven key industry sectors. We use our deep understanding of Sri Lankan consumer needs derived from over 135 years in business, to deliver quality in products and services to Sri Lankans everywhere. The group works several leading global brands including: Austrian Airlines, BG, Continental Airlines, Eclipse, Exide Batteries, Intervet, Oce, Olympus, Sharp, Eukanuba, Tafe, Zagro, Yanmar Marine Engines, Ashok Leyland Marine, Pitney Bowes, Scandinavian Airlines, Makita, Maktec, F. G. Wilson, Yamasha, Daelim Royal Boiler Co, MFG, Sifang, and Massey Ferguson toname a few.

Stock Performance
The chart underneath is the share prices of Browns Company & Plc according to this chart there was a sudden boost in the share prices which has made the price of the shares to rise dramatically in the months of September , October , November and December. The share prices have increased from June and the increasing fashion has continued through year.

The companys share prices for the year 2011 are higher than the year 2010 which shows a positive outcome. There may be number of reasons for the companys share prices to go up in 2011. First reason would be the increase in the companys total revenue , the revenue of the company has gone up in 2011 from 5,274,68 Rs to 7810491Rs (See the Balance sheet in Appendix . The net profit which another crucial factor has also increased by 2.1 Billion (See Picture 2). It is obvious that increase in revenue and net profit can automatically increase the share price of the company . It can be concluded that the companys performance is far more better than the performance of 2010.

Comparison of stock performance 2010 2011

With the help of the chart and information presented in it can concluded that the company has performed well in 2011 than 2010 which enabled the share prices to rise.

Share volume 2010 2011

Financial performance

Earnings per share Earnings per share is one of the most important tools among the other ratios to analyze the overall profits of the company. Earnings per share states how much of profits are earned by the shareholders per share. The companys Earnings per share ratio for the year 2011 is much higher than the previous year. The Earnings per share for 2011 is 30.87Rs in 2010 this ratio was stated as 14.30Rs. This is really a good news to the organization .Through these figures we can easily arrive to a conclusion that the overall profitability of the organization has almost doubled.(See Balance Sheet in Appendix)

ROCE (Return on Capital Employed) Return on Capital employed ratio on the other hand Return is a ratio that indicates the efficiency and profitability of a company's capital investments. ROCE for the year 2011 for the company is much better than it was for the year 2010.The ROCE for 2011 is recorded as 16.10 % which is 5.10% more than the previous year.

Net assets per share This ratio is specifically used by the investors and industrial experts to determine the performance of the company. For Browns, this ratio has come up from 135.41 to 214.35 which means the performance of the company has almost doubled in 2011 when compared with the last year.

Return on ordinary share holders funds This ratio states what is given in return to the share holder for the shares they hold . This ratio shows significant improvements in 2011 for the company when compared with the previous year . The ROSF for the year 2011 is 14.40 which is higher than the ROSF for the year 2010 .During the year 2010 this ratio was 10.55.

Current Ratio The current ratio of the firm which consists of The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. The current ratio for the company is 3.03 times this higher than the previous year which was recorded as 1.12 times.

Conclusion According to the information derived from the ratios presented in the annual report of the company it be concluded that the company is in a strong financial position and the company has performed very well in 2011 than the previous year.

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Stock Performance vs. Market Performance

By looking at these figures it can be concluded that the companys stock performance of the company for the year 2011 is much better than the previous year since the share prices have been almost doubled. The industry on the other hand has been performed very well in 2011. This may be because of the powerful organization in the industry. Finally it is evident that Browns have become a powerful entity in the industry in 2011 with its high share prices.

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2 .Capital Assets Pricing Model (CAPM)

The concept behind CAPM is that the investors should be paid back in two manners time value of money and risk. The time value of money is denoted by the risk-free (RF) and pays the investors for their money. The other part of the formula denotes the risk and calculates the amount of compensation required by the investor for him to undertake additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf) (Investopedia,2012). The CAPM says that the probable return of a security or a portfolio equals the rate on a riskfree security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks.

Pros of CAPM When comparing the other methods ,CAPM can result in better investment decisions. CAPM has most efficient way when it comes to the calculations
CAPM is more superior than WAAC since it helps calculating discount rates for

use in investment appraisal

Cons of CAPM
The decisions made through CAPM may not be applicable in reality.

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CAPM Calculation Ke = Rf + B ( Km - Rf) Ke = The Required Rate of Return Rf = The Risk Free Rate B = Beta Km = The expected return on the overall stock market (This has to be predicted)

CAPM
0.11 +0.59 (0.15-0.11) 0.133 13.30%

Share price Calculation Formula Dividend/ KE

KE= 13.3

1.32/0.133

Share Price Last traded Price Average

9.92 155.1 288.83

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The beta value (0.59) was taken from the CSE website and the market return was determined by assumption. The reason for the variance between the share price and the last traded price is the company performed very well and it led to the increase in the overall share prices.

3. WACC for Browns and Company PLC.

Cost of equity: 13.3

Equity= 21,991,688 (see the Balance Sheet attached to the Appendix)

Debt = 24,200,936

Cost of Debt= 0.1344 (The interest rates for borrowings taken from the central bank)

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3.1 WACC and its usability

The weighted average cost of capital (WACC) processes the capital discount of a companys revenue and expenditure. It is a module of the formula used for calculating the anticipated cost of new investment and it signifies the rate that a business is projected to pay to finance its assets. It is therefore the least return that a company must earn on its current asset base to content its creditors, owners, and other providers of capital.

WACC is considered by taking into account the relative weight of each component of a companys capital arrangement. The calculation typically uses the market values of the modules, rather than their book values, which may vary significantly. Components may include equity (both common and preferred), debt (straight, convertible, or exchangeable), warrants, options, pension liabilities, executive stock options, and government subsidies.

WACC expresses us the return that both stakeholders equity proprietors and moneylenders can expect.WACC, in simple words, signifies the investors opportunity cost of taking the risk of placing money into a business (investopedia,2012).

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A.

Payback period
Pay cash (400,000) 110,000 120,000 120,000 120,000 180,000 Outflow (400,000) 290,000 170,000 50,000 70,000 ( exceeded)

Year 0 1 2 3 4 5 50,000 / 120, 000, = 3 years and 5 months

Net present value

Year 1 2 3 4 5 Total 400,000 463,200 = -63200 Pay cash 120,000 120,000 120,000 120,000 180,000 Discount factor 0.89 0.79 0.71 0.63 0.56 Pv value 106800 94800 85200 75600 100800 463200

As we can see the NPV is negative so the project should not be continued.

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nternal rate of return

The Internal Rate of Return, or IRR for short, is a portion of the investment performance, and is communicated as percent profit per year. It is fundamentally equivalent to the annual interest rate a bank would have to pay to duplicate the performance of the portfolio.IRR takes into account the amount of time that has gone since making an investment. IRR can be used to grade numerous potential projects a firm is considering. Assuming all other issues are equivalent between the various projects, the project with the highest IRR would possibly be reflected the as the best.

Year 1 2 3 4 5 Total Less:- Investment [400,000]

Cash flow Rs. 120,000.00 Rs. 120,000.00 Rs. 120,000.00 Rs. 120,000.00 Rs. 180,000.00

5% 0.95 0.90 0.86 0.82 0.78

PV @ 5% 114000 108000 103200 98400 140400 564000 (400,000.) 64000

30% 0.76 0.59 0.45 0.35 0.26

PV @ 30% 91200 70800 54000 42000 46800 304800 (400,000) (95200)

IRR = i1 + NPV 1 /(NPV 1 - NPV 2) * (i1*i2) IRR 0.02%

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D. Comparison of Different investment Appraisal Methods A project can be appraised for its viability using Payback, NPV and internal return.
Payback When undertaking a project for appraising the very first step is identifying the payback period. The payback period is simply finding the time period needed for the initial investment invested to equal the cash flows. The other steps such as NPV and IRR are calculated right after the payback is calculated.

Merits of the Payback method Applicable to assess the project or investments that involve risks or instability

Ease of use and anybody who is having limited financial knowledge can apply it.

it is also helpful for those businesses who are recently established and want to know the

time frame in which they would recover their original investment, therefore those companies which do not want to take risk and want quick return on their investments can select those projects which have low payback period and ignore those projects which require long gestation projects.

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Demerits of Payback period Ignores an important concept which is time value of money and therefore may not present true picture when it comes to evaluating cash flows of a project.

It also disregards cash flows outside the payback period and so it does not take into account the whole return which a project can generate and then it may reject a project which in the long term might be supportive for a company.

Net Present Value The NPV adds the whole sum of the investment in the present with the present value of the upcoming earnings of the investment. The net present value (NPV) or net present worth] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the separate cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of upcoming cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to assess long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing duties are met.
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Internal Rate of Return (IRR) The discount rate often used in capital budgeting that creates the net present value of all cash flows from a certain project equal to zero. Usually speaking, the higher a project's internal rate of return, the more needed it is to assume the project. As such, IRR can be used to rank several potential projects a firm is considering. Assuming all other factors are equal amid the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

Conclusion
When the stock performance of Browns was analyzed the writer concluded that the performance of the company in 2011 has seen a boost where the overall profits including the share prices have been doubled. It is clear that upsurge in revenue and net profit can routinely increase the share price of the company. It can be concluded that the companys performance is far more better than the performance of 2010. When the companys performance was analyzed by combining it with the industrial performance it is evident that Browns have become a powerful entity in the industry in 2011 with its high share prices apart from that the company seems to be growing along with the industry itself.

When the ratios of the company were analyzed suitably it was concluded by the writer of tis report that the company is financially powerful and has better returns in the year of 2011. The CAPM model was used to calculate the share price of the company when the share price was calculated the writer concluded that the reason for the variance between the share price and the last traded price is the company performed very well and it led to the increase in the overall share prices. The writer analyzed the 400 000 worth project using payback , NPV and IRR techniques and concluded that the project should not be undertaken since the NPV is negative .

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References

Investopedia, Investors Need A Good WACC(Cited 22th March 2012) Available from

<URL:http://www.investopedia.com/articles/fundamental/03/061103.asp#axzz1 qR2k1gOJ >

Browns group, Annual Report 2011 (Cited 21st March 2012) Available from

http://www.brownsgroup.com/Browns_Annual_Report_2010_2011.pdf

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Appendix
Balance Sheet (Revenue)

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Picture 2

Dividend per Share

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Earnings per share

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