Table of Contents

Description Page

Letter of transmittal 2

Profile of GlaxoSmithKline Bangladesh Ltd 3

Part I: Ratio Analysis 4-15

Du-pont Analysis 15-20

Overall Comparison 21

Part II: Pro-Forma Statements 22-23

Part III: Annual rate of return, Beta coefficient, Treasury bill rate, CAPM, WACC.

24-25

Part IV: Free cash flow, Enterprise Value 26

Value of the companies 27

Conclusion 28

Reference 28

1

Letter of Transmittal

May 4, 2015

Mr. Kamrul Huda Talukdar

Here is the group project report on “Financial Statement Analysis” of GlaxoSmithKline that you

have asked us to prepare as a part of requirement for our Corporate Finance course.

In presenting this report, we have contributed our level best to include all information and

explanation to make the report informative and comprehensive.

It was a very enriching and enthralling experience for us to prepare this report. Our excel

working and report writing skills have improved a lot while doing it. If further any report is

required, we will be available by any means.

Thank you Sir for believing in us and giving us this opportunity.

Sincerely,

______________ ______________

Nusrat Jahan Heaba Abdur Rouf Khan

______________ __________________

F.M.SafiulAlam Salma Akter

______________

Ismat Zerin Sachi

2

1. Profile of GlaxoSmithKline Bangladesh Ltd:

GlaxoSmithKline Bangladesh Limited carries with it an enviable image and reputation for the

past 6 decades. GSK Bangladesh as a subsidiary of GlaxoSmithKline plc- one of the world’s

leading research based pharmaceutical and healthcare companies continues to be committed

to improve the quality of human life by enabling people do more, feel better and live longer.

The organization’s principle activities include secondary manufacturing of pharmaceutical

products and marketing of vaccines, pharmaceutical healthcare products and healthcare drinks.

One of the pioneering pharmaceutical companies in Bangladesh, GlaxoSmithKline started its

operation in 1967.

The most important fact of GSK is:

1. GSK is a secondary producer, principally packaging and distributing advanced

pharmaceuticals products produced by its parent company. Consequently, local value added is

low.

2. In certain novelty products such as asthma and dermatology, GSK enjoys a clear advantage

because of its parent’s excellent research efforts and product development. However, a

significant part of the GSK’s pharmacy portfolio comprises of price-controlled “essential

products”. So, GSK Bangladesh does not enjoy price advantage for such products.

3. Local pharmacy companies of Bangladesh take advantage of liberal patent regime for least

developed countries (LDCs), sanctioned by the WTO, which shall remain in place till 2016. They

produce copies of patented products for the local market. As the subsidiary of a global

company, GSK does not take advantage of this liberal patent regime and does not produce copy

drugs.

4. Although GSK has trailed the overall industry in sales growth before a few years at a stretch

due to the dominance of local manufacturers, they have managed to recover from that with

large growth in the last couple of years.

3

Part I

Ratio analysis of GSK:

1. Liquidity Ratio Analysis:

1.1 Current Ratio:

Current ratio is a financial ratio that measures whether or not a company has enough

resources to pay its debt over the next business.

Year 2010 2011 2012 2013 2014

Current

Ratio

2.59 1.89 1.74 1.69 1.73

Interpretation: In 2010, GSK’s current assets were 2.59 times of current liabilities. In 2011,

current ratio was 1.89. That means, their current asset decreased and current liabilities were

increased in relation to previous year, which is not good sign indeed. However, in 2012 it fell

down 1.74, and again in 2013 it decreased slightly and became increased in 2014 at 1.73.Still,

from 2010-2014, GSK’s current ratio was greater than 1, which is good.

1.2 Quick Ratio/ Acid Test/ Liquid Asset Ratio:

The quick ratio/ the quick assets ratio / the acid-test ratio - is a liquidity indicator that further

refines the current ratio by measuring the amount of the most liquid current assets there are to

cover current liabilities

Year 2014 2013 2012 2011 2010

Quick Ratio 1.4 1.1 1.05 .96 1.60

4

Interpretation: The table shows that GSK Bangladesh Ltd had highest quick ratio in 2010 but

was dropped in 2011 and then again rose in 2012 and in 2013 it rose very little. Over these four

years GSK has maintained very efficient quick ratios these were quite high than 1 but in 2011

there was huge fall and the ratio was below 1 which is very disappointing. This means in 2011

GSK was not enough able to pay back its short term debt but if we analyze he trend then we

will find that GSK is capable to tackle liquidity crisis and to recover from bad situations. Another

important point is, the current ratio in 2011 was quite high than 1 which means it had enough

current assets but yes there were lacings in quick assets. It actually means that when the

current assets will generate cash then GSK will gain a high quick ratio. This impact we really can

see in 2012, as in this year the ratio is 1.05 so it means GSK has recovered from the lacings in

quick assets

1.3 Cash ratio: The cash ratio is effective and quick way to determine if a company could have

potential short-term liquidity issues.

Year 2014 2013 2012 2011 2010

Cash Ratio 1 .83 .71 .63 .97

Interpretation: Here, we can see that in first two years the cash ratio was very poor which

signals that GSK faced much liquidity crisis and had not sufficient cash in hand to pay back the

short term liabilities. On the other hand, from 2012 to 2014 the cash ratio took huge increase

and it was above 0.5 then. Highest cash ratio was achieved in 2014 which was 1 which indicates

that there were enough cash assets in this year. Although there was a fall in cash ratio in 2011

but still that was a satisfying figure.

1.4. NWC to Total assets: Net working capital asset to total assets a company’s ability to cover

its short term financial obligations total current liabilities by comparing its total current assets

to its total assets.

5

Year 2014 2013 2012 2011 2010

NWC to TA .16 .14 .10 .10 .216

Interpretation: Here we can see that GSK Bangladesh Ltd has maintained positive net working

capital which indicates their operational efficiency. In 2010 the working capital ratio was too

high and these were above 2 which is a sign that GSK is slow at payment collections and

operating cycle is not enough efficient.

2. Long term solvency:

2.1. Total Debt ratio:

This ratio measures the financial leverage of a company.

Year 2014 2013 2012 2011 2010

Times 0.578 0.592 0.573 0.529 0.385

Interpretation: A debt ratio less than .50 is considered as good, In2010 the debt ratio of GSK

was impressive as the debt ratio was less than .50 at those years. In 2011 the ratio was very

near to .5 and in 2012 it was more than .5 which is not fruitful for the business and it signals

towards higher dependency on debt. It rose higher and higher now which is not good for the

company.

2.2. Debt-equity ratio:

A high debt-equity ratio generally means that a company has been aggressive in financing its

growth with debt.

Year 2014 2013 2012 2011 2010

6

Times 1.1706 1.159 1.061 0.962 0.603

Interpretation: The greater a company's leverage, the higher the ratio. Generally, companies

with higher ratios are thought to be more risky because they have more liabilities and less

equity. The company, in 2014 year has 1.1706 and its means they’re has more liabilities than

2013 year.

2.3. Equity Multiplier:

The equity multiplier is a financial leverage ratio that measures the amount of a firm's assets

that are financed by its shareholders by comparing total assets with total shareholder's equity.

Year 2014 2013 2012 2011 2010

Times 2.17 2.16 2.06 1.96 1.60

Interpretation: The equity multiplier is a ratio used to analyze a company's debt and equity

financing strategy. A higher ratio means that more assets were funding by debt than by equity.

In other words, investors funded fewer assets than by creditors. So, 2014 year has more assets

than the previous year for 1.921.

2.4. Long-term debt ratio:

In risk analysis, a way to determine a company's leverage. The ratio is calculated by taking the

company's long-term debt and dividing it by the sum of its long-term debt and its preferred and

common stock.

Year 2014 2013 2012 2011 2010

Times 0.056 0.063 0.088 0.092 0.085

7

Interpretation: As the percentage gets higher, this means that a higher proportion of debt is

used for the permanent financing for the firm as opposed to investor funds (equity financing).

As the proportion of debt gets higher, so does risk and the chance of bankruptcy. So, in 2011

year had 0.092 % for the risk and 2014 year has low risk.

2.5. Time interest earned ratio:

The interest coverage ratio is used to determine how easily a company can pay interest

expenses on outstanding debt.

Year 2014 2013 2012 2011 2010

Times 382.374 169.792 79.498 123.790 674.097

Interpretation: In 2011 and 2012, the interest coverage ratio was relatively very low and it

indicates that then GSK was not much efficient to pay back its interests from the earnings but

there is a conflicting point and that is, the ratio is greater than 1 which means the firm can meet

up the obligation, yes of course more high the ratio then the firm is more capable but by the

two figures of 2011 and 2012 we cannot say that GSK failed, GSK then definitely had enough

capacity. So, we can say that it could have been better. In 2010 the ratio was abnormally high

which is also not good for business and indicates that the money is being spent much on

repaying debts rather than reinvesting. It means that the firm has now fewer debts so they can

concentrate on more business growth but they are not doing so. In 2011 and 2012 the ratio

decreased rapidly, which signals that the firm has less debts and at the same time now they

have realized the importance of business extension. In 2014 it went up at 382.374 tk.

2.6. Cash coverage ratio:The higher the coverage ratio, the better the ability of the enterprise

to fulfill its obligations to its lenders.

Year 2014 2013 2012 2011 2010

Times 631.933 326.830 192.851 262.720 1262.820

8

Interpretation: If the number is less than 1, this leaves the company in a bad place. This means

the company cannot pay all of its debts. A number less than 1 is seen as an indicator that the

business will go bankrupt, typically within a few years. The higher the number, the better the

company is doing. So, the company went the best position in 2010 of 1262.820 times and 2014

year it will be increasing.

3. Asset management or turnover ratios:

3.1. Inventory turnover:

Inventory Turnover ratio measures the activity of a firm’s inventory. It commonly measures the

activity, or liquidity, of a firm’s inventory. It is calculated comparing Cost of Goods Sold (COGS)

to average inventory. The higher the turnover the better the company is.

Year 2014 2013 2012 2011 2010

Times 5.156506493 3.688635777 3.742081499 2.973778674 3.437335217

Interpretation: In 2011 the ratio is very low, it may mean the company has much more

inventory than it really needs at any one time. Therefore it has too much of its capital tied up in

goods or raw materials that it will take a long time to sell or make a profit on. A high inventory

turnover ratio could mean the company has had unexpectedly strong sales. It is very high in

2014 it’s a good sign. Or it could mean the firm is not managing its buying as well as it might

and is having difficulty in administering its inventory.

3.2. Days sales in inventory:

This is an important to creditors and investors for three main reasons. It measures value,

liquidity, and cash flows. Both investors and creditors want to know how valuable a company's

inventory is. Older more obsolete inventory is always worth less than current, fresh inventory.

9

Year 2014 2013 2012 2011 2010

Days 70 98 97 122 107

Interpretation: A relatively small number of days' sales in inventory indicate that a company is

more efficient at selling off its inventory, while a large number indicates that a company may

have invested too much in inventory, and may even have obsolete inventory on hand.

However, a large number may also mean that management has decided to maintain high

inventory levels in order to achieve high order fulfillment rates

3.3. Receivable turnover:

An accounting measure used to quantify a firm's effectiveness in extending credit as well as

collecting debts.

Year 2014 2013 2012 2011 2010

Times 6.878332829 13.38748765 13.17721029 11.79954248 7.846324508

Interpretation: A low ratio is a sign of less liquid receivables and may reduce the true liquidity

of the business in the eyes of the analyst even if the current and quick ratios are satisfactory. In

2014 it is very low so that the company should re-assess its credit policies in order to ensure the

timely collection of credit sales that is not earning interest for the firm

3.4. Days sales in receivables:

The sooner cash can be collected, the sooner this cash can be used for other operations. Both

liquidity and cash flows increase with a lower day’s sales outstanding measurement.

Year 2014 2013 2012 2011 2010

Times 53.0651844

1 27.26426418 27.69933787 30.93340277 46.51859602

10

Interpretation In 2013 it is low so it’s a good sign for the company. A higher ratio indicates a

company with poor collection procedures and customers who are unable or unwilling to pay for

their purchases. In 2014 the ratio is higher; it’s a bad sign for the company. Companies with

high day’s sales ratios are unable to convert sales into cash as quickly as firms with lower ratios.

3.5. NWC turnover:

Working capital is defined as the amount by which current assets exceed current liabilities. A

higher working capital turnover ratio is better. It means that the company is utilizing its working

capital more efficiently i.e. generating more revenue using less investment.

Year 2014 2013 2012 2011 2010

Times 8.69305303

2 12.40253438 22.76460341 16.78716125 0.885493335

Interpretation: Generally, a high working capital turnover ratio is better. A low ratio in 2010 it

indicates inefficient utilization of working capital. The ratio should be carefully interpreted

because a very high ratio may also be a sign of insufficient working capital.

3.6. Fixed Asset turnover:

A higher fixed asset turnover ratio is generally better. However, there might be situations when

a high fixed asset turnover ratio might not necessarily mean efficient use of fixed assets.

Year 2014 2013 2012 2011 2010

Times 12.4281302

4 11.55384106 9.868724112 9.851248903 9.31050968

11

Interpretation: Generally, a high fixed assets turnover ratio indicates better utilization of fixed

assets and a low ratio means inefficient or under-utilization of fixed assets. The level of ratio has

generally same over the first three years but in 2014 it is very high and it’s a good sign for the

company.

3.7. Total asset turnover:

Asset turnover ratio is the ratio of a company's sales to its assets. It is an efficiency ratio which

tells how successfully the company is using its assets to generate revenue.

Year 2014 2013 2012 2011 2010

Times 12.813024.4

2 11.55384106 9.868724112 9.851248903 92.87582786

Interpretation: In 2011, a low asset turnover ratio suggests problems with excess production

capacity, poor inventory, or lax collection methods. Increases in the asset turnover ratio over

time may indicate a company is "growing into" its capacity and in 2010 the total asset turnover

ratio is high, it is good for the company to earn profit.

4. Profitability Ratios:

4.1 Profit margin:

The profit margin ratio is a profitability ratio that measures the amount of net income earned

with each dollar of sales generated by comparing the net income and net sales of a company.

Year 2014 2013 2012 2011 2010

Profit

Margin

.11 .08 .043 .60 .11

12

Interpretation: Over the last years, the gross profit margin has increased gradually by slight

amount every year but in 2011 there was a downfall and in 2012 it decreased by only one point.

In 2011 the sales were higher than previous four years but the costs associated with the sales

were also too high, for this reason the margin was low. From this result, GSK tried to control the

cost and as a result the situation was little better in 2013 than that of 2012. One positive thing

we can notice that the performance of GSK was quite stable in terms of gross profit margin

which means throughout these years the GSK Bangladesh Ltd faced less fluctuations.

5.4.4| Earnings per Share (EPS):

EPS represents the number of currency amount earned on behalf of each outstanding share of

common stock.

Year 2014 2013 2012 2011 2010

EPS 34.05 23.42 20.25 45.35 68.63

Interpretation: In the year 2010, the EPS was very high but 2011 it decreased a lot which

indicates that earnings against each share were low on those years. In 2011 the EPS dropped by

45.35tk and in 2012 it again dropped by 20.17 tk. So, GSK should take initiative to increase the

EPS otherwise it may create confusion about the financial condition to the general public.

5.4.5| Return on Total Assets (ROA):

The higher the return, the more efficient management is in utilizing its asset base. The ROA

ratio is calculated by comparing Earnings Available for CS Holders to Total Assets, and is

expressed as a percentage.

Year 2014 2013 2012 2011 2010

ROA .164 .134 .18 .10 .18

Interpretation: In 2010 the ROA was 18% and then it fell down to 10% in 2011 which indicates

unsuccessful management policies of GSK. Then in 2012 the ROA was 18% which is very

13

impressive but in 2013 it decreased and became 13.4%. In 2014 the ROA was 16.4%, so there

was again downfall but this year the percentage of downfall was lower than that of 2013.

5.4.6| Return on Equity (ROE):

This ratio indicates how profitable a company is by comparing its Earnings Available for CS

Holders to its Stock holder’s Equity.

Year 2014 2013 2012 2011 2010

ROE .35 .29 .16 .19 .29

Interpretation: The graph interprets that, from 2010 to 2014 there was a huge improvement in

ROE, over these 3 years it increased by almost 29% but in 2011 it decreased by 19.83% which is

not a good indication. In 2012 the downfall continued which indicates that GSK’s management

efficiency is lower than previous years and it is earning less profit from the equity capital. But

the impressive part is that in 2014 it rose high and become 35%.

5.4.8 DPS (Dividend per Share):

The amount of dividend that a stockholder will receive for each share of stock held. It can be

calculated by taking the total amount of dividends paid and dividing it by the total shares

outstanding.

Year 2014 2013 2012 2011 2010

DPS (TK) 42 30 15 15 20

Interpretation: In 2010, the DPS for the common shareholders was 20tk but in 2011 it fell

down. It became constant up to 2013. In 2014 shareholders receive 42tk for each shares

outstanding which is greater than the previous year.

5.5| Market Ratio:

5.5.1| P/E Ratio:

14

The price/earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E

ratio has its imperfections, and commonly used to assess the owner’s appraisal of share value.

Year 2014 2013 2012 2011 2010

P/E ratio 22.04 21.08 28.15 28.37 33.17

Interpretation: A higher price earnings ratio of GSK indicates better expectations of investors. It

signifies that the investors of GSK are willing to pay more but P/E ratio decreases from 33.17 to

22.04 at the year 2014.

5.5.2| Market/Book Ratio:

The M/B ratio provides an assessment of how investors view the firm’s performance. It relates

to the market value of the firm’s shares to their book values.

Year 2014 2013 2012 2011 2010

Market to book ratio

151.23 95.57 57.00 66.45 112.96

Interpretation: In 2010, market to book ratio was 112.96 times then it decreased over the year

and it became 66.45 at the year 2011. That means firm sold its share at a lower rate. In 2012 it

decreases at a greater amount and became 57. But in 2013 it rises and GSK sell its share at a

higher value 151.23.

Du-pont analysis

The Du-pont analysis also called the Du-pont model is a financial ratio based on the return on

equity ratio that is used to analyze a company's ability to increase its return on equity. In other

words, this model breaks down the return on equity ratio to explain how companies can

increase their return for investors. The Du-pont analysis looks at three main components of the

ROE ratio

15

Operating efficiency - as measured by profit margin.

Asset use efficiency - as measured by total asset turnover.

Financial leverage - as measured by the equity multiplier

Analysis

2010

In 2010, GlaxoSmithKline Bangladesh Limited ROE was 29% due to an increase in the net profit

margin. The profit margin was 11%. This is a very positive sign for the company. From (2010-

2014) Du-pont analysis this is the second highest rate of return on equity. ROE could be

leveraged up by increasing the amount of debt in the firm but GSK has low amount of debt

which indicates that the interest expense is also low. The profit margin is high because of the

low interest expense. In 2010, the interest expense was only $820.

16

2011

In 2011, GlaxoSmithKline Bangladesh Limited ROE goes down from 29% to 19% due to

decrease in the net profit margin. The profit margin is decreased by 10%. This is a negative sign

for the company. From last five years Du-pont analysis this is the second lowest rate of return

on equity. ROE could be leveraged up by increasing the amount of debt in the firm but GSK has

high amount of debt which indicates that the interest expense is also high. The profit margin is

low because of the high interest expense. In 2011, interest expense increased. The profit

margin is reduced because the net income significantly goes down from $410177 to $282068.

17

2012

In 2012, GlaxoSmithKline Bangladesh Limited ROE goes down from 19% to 16% due to

decrease in the net profit margin. The profit margin is decreased by 3%. This is a very negative

sign for the company. From last five years Du-pont analysis this is the lowest rate of return on

equity. ROE could be leveraged up by increasing the amount of debt in the firm but GSK has

high amount of debt which indicates that the interest expense is also high. The profit margin is

low because of the high interest expense. In 2011, interest expense increased and the highest

interest expese. The profit margin is reduced because the net income significantly goes down

from $282068 to $243967. This year the total asset turnover ratio is higher than the last year.

18

2013

In 2013, GlaxoSmithKline Bangladesh Limited ROE goes up to 29% due to an increase in the net

profit margin. This is good comeback for the company. The profit margin is increased by 13%.

This is a very positive sign for the company. From last five years Du-pont analysis this is the

second highest rate of return on equity. ROE could be leveraged up by increasing the amount

19

of debt in the firm but GSK has low amount of debt which indicates that the interest expense is

also low. The profit margin is high because of the low interest expense.

2014

In 2014, GlaxoSmithKline Bangladesh Limited ROE goes up to 35% due to an increase in the net

profit margin. The profit margin is increased by 6%. This is a very positive sign for the company.

From last five years Du-pont analysis this is the highest rate of return on equity. ROE could be

leveraged up by increasing the amount of debt in the firm but GSK has low amount of debt

which indicates that the interest expense is also low. The profit margin is high because of the

20

low interest expense. This year the net income is also high which helps to maintain higher profit

margin. But the total asset turnover rate is decreased due to increase in total asset.

Overall Comparison

1. Although GSK is maintaining a fair current ratio, but from 2011 to 2014 it is gradually

decreasing which is an indication that current liabilities are increasing. So, GSK must

concentrate on this issue and should be careful to control the debts.

2. The debt ratio of GSK is not so high but it is increasing gradually and in 2012 it was

above .52. Although the figure is no so violent but if it is below .5 then more secured

condition is expressed. So, from now GSK should check that its dependency on the trade

creditors is increasing or not. If it is increasing then GSK must take effective steps to

reduce it.

3. There is an upward trend in debt to equity ratio, again it is pointing out that debts are

increasing. Although higher debts can give financial leverage but there is also a risk of

meeting up the debt obligations. So, GSK should realize that higher debts can lead it to

higher risk. From now it should be little conservative in case of taking debts.

4. Most of the profitability ratios are decreasing. So, it means the growth is lowering day

by day. In this case GSK must needs to think that how more profit can be achieved and

needs to find ways to capture the significant portion of the market thus profit level goes

up.

5. GSK needs to change its policy of not pursuing the doctors to prescribe its drugs,

otherwise it will not be able to cope up with the local giants.

21

Part II

Pro-Forma Income Statement:

A Pro-Forma Income statement is planned and prepared in advance to of a transaction to

project the future status of the company. Pro forma income statement includes revenue, COGS,

operational expenses and non-operational expenses. To prepare the Pro-Forma Income

statements; we have forecasted the Sales revenue with the help of Forecast function in

Microsoft Excel. To make a simple pro forma income statement by evaluating this year's sales to

date as compared to last year's total sales. Then we calculate the percentage change of this

year's sales compared to last year's sales. Taking the current "Total Sales," divide by the

number of months into the year it represents and multiply by 12 to annualize the number. After

that we compare that number to "Total Sales" for last year and figure out the percentage

change: In 2015 the growth rate was 6% and 2016 it was 13%

By multiplying the tax rate with consecutive year’s Sales we have calculated the total amount of

tax. Next to find the Finance cost (Interest expense) we have kept the ratio of Interest expense

to Long term debt constant. Then we have calculated each year’s interest expense by

multiplying that ratio with the consecutive year’s Long term debt. Addition to Retained Earnings

is calculated by multiplying the Net Income with the Retention Ratio. Other components of

Income Statement were just changed according to the growth rates.

Retained earnings represent what is left after expenses, taxes, and dividends are paid.

However, if there is a loss and the retained earnings from a previous period will not be enough

to cover it, there may be a negative retained earnings figure.

Pro-forma Balance Sheet:

22

A pro forma balance sheet is similar to a historical balance sheet, but it represents a future

projection. Pro forma balance sheets are used to project how the business will be managing its

assets in the future. For example, the pro forma balance sheet can quickly show the projected

relative amount of money tied up in receivables, inventory, and equipment. It can also be used

to project the overall financial soundness of the company.

Pro forma total assets:

Cash obtain the company’s estimated cash position, and need to do a careful cash flow

projection. Accounts receivable estimate the accounts receivable on December 31, and need to

take into consideration the average collection time of receivables and the sales projections for

prior periods. Property, plant and equipment are the easiest of pro forma asset values to

calculate. Because land does not depreciate, it will always have the same value. Just enter the

value of the land at its original purchase price. Buildings do depreciate. The company has

increasing their total assets form 2012 year to next 5 years.

Pro forma total liabilities:

Pro forma trade and others payable are determined by figuring out how much they will spend

on supplies during the last years and how long it takes them to pay their bills. It should be easy

to determine a pro forma accrued payroll. Just check your payroll calendar to find out what

employee pay periods will remain unpaid by the beginning of the pro forma balance sheet

period. The size of a pro forma mortgage note payable is calculated by taking the mortgage

note payable at the end of the current year and subtracting the principal, not interest,

payments that will be made during the upcoming year. To obtain that portion of the mortgage

that will be classified as a long-term liability, they subtract what is classified as current liability.

Pro forma owners’ equity:

The share capital and others reserve portion of the owners’ equity will not change from year to

year unless new stock is issued. Pro forma retained earnings can be tricky to determine. They

are the last item to be calculated on a pro forma balance sheet. Total assets must balance the

total liabilities and owners’ equity.

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Part III

Annual & Market Return:

Recession can have a negative effect on company’s annual rate of return. For example, in 2010

GSk’s annual rate of return is 55% where in 2011 it has a yearly return on -41% and later on

negative value goes down at 2012 at 14%. In 2013 ARR rises 67.7% and 50.51% in 2014. But DSE

yearly rate of return is 81.4% in 2010 and -36.7% in 2011. If we compare to DSE index then we

will get a clear view that in 2011 and 2012 both have negative value and in 2013 and 2014 both

of them positive. So GSK is slightly in better position in annual rate of return than DSE index as

in 2013 GSK’s ARR was higher than DSE’s ARR.

We use Excel formula to calculate Annual Rate of Return. ((last day of year price – first day of

year price) / first day of year price.)

GlaxoSmithKline Bangladesh Limited2010 2011 2012 2013 2014

First day cl 725.10 ### 664.50 570.00 955.7

GSK Last day cl ### 664.50 570.00 955.7 1,438.50

Annual rat0.557854 -0.41174 -0.14221 0.676667 0.505179

Dhaka Stock Exchang First day cl 4568.4 8304.59 5351.75 4190.99 4266.55

Beta Co-efficient:

We know if the stock’s price experiences movements greater (more volatile) than the stock

market, then the beta value will be greater than 1. If a stock’s price movements are less than

the market fluctuations then the beta value will be less than 1. And if the stock price is moving

24

along with the market movement then the beta will be near about 1. Since beta also represents

risk factor then a beta value higher than 1 will indicate more risk and in turn more expected

return for invest. GSK has a beta value of near 75.6% So, GSK is riskier and investors will expect

more return in GSK. Companies’ growth opportunities are a very important determinant of

their beta value. Generally firms with more growth opportunities tend to have higher betas.

Another indicator is GSK has a beta near to 1 so their stock price is moving according to market

movement.

We use Excel to find Beta Co-efficient which is attached with this project later on.

Treasury bill Rate

We searched it on the Bangladesh Bank website to find out the Treasury bill rate of 365 year

government bonds. The Treasury bill rate is 9.85% for 365 days bonds in 2014.

Required Rate of Return:

GSK has a required rate of return 14.8%. We calculate this by using CAPM formula. Here the

Treasury bill is used as risk free factor which is 9.85% and beta is 75.6%. The time value of

money is represented by the risk-free (rf) rate in the formula and compensates the investors for

placing money in any investment over a period of time. The other half of the formula

represents risk and calculates the amount of compensation the investor needs for taking on

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).

WACC:

Investors use WACC as a tool to decide whether to invest. The WACC represents the minimum

rate of return at which a company produces value for its investors. If the company’s return is

less than WACC, the company is shedding value, which indicates that investors should put their

money elsewhere. Here, GSK has a required rate is 14.79% and WACC is more than 11.7% that

means for every dollar company invest in capital company can generate .11 dollar value for the

company surely a good sign for the company and later on company is generating more value

than the previous year. GSk is in positive side .

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Why it matters:

It's important for a company to know its weighted average cost of capital as a way to gauge the

expense of funding future projects. The lower a company's WACC, the cheaper it is for a

company to fund new projects. A company looking to lower its WACC may decide to increase its

use of cheaper financing sources. For instance, GSK may issue more bonds instead of stock

because it can get the financing more cheaply. Because this would increase the proportion of

debt to equity, and because the debt is cheaper than the equity, the company's weighted

average cost of capital would decrease.

Part IV

Free Cash Flow

In order to calculate the free cash flow of both of the companies, we have followed the straight

forward direction. We took the earnings before income and tax for both of the companies and

found out the after tax value of it. As there was no depreciation mentioned in the annual

reports, we have taken the amortization of deferred IPO expense. In order to find the capital

expenditure for GSK, we have subtracted the previous year fixed asset from the current year

fixed asset for the three forecasted year. Then we just applied the formula mentioned to us

which is FCF= EBIT (1-T)+Amortization of deferred IPO-Capital expenditure-Change in net

working Capital.

Stock price of the last pro-forma year

In order to calculate the stock price of the last pro-forma year, firstly we have found out the

earnings per share of the last pro-forma year. We have calculated it by the formula of net

income/ number of shares. As we are supposed to keep the price earning ration constant, we

have not changed it. Then, we have just us the formula of Price earnings ratio to calculate the

stock price of both of the companies. Stock price of GSK is 280.96tk.

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Enterprise Value of the last pro-forma year

In order to calculate the enterprise value, we have firstly found out the market capitalization for

both of the companies. We have multiplied stock price of last pro- forma year with the number

of shares. Then we have calculated the enterprise value by adding both the market

capitalization and book value of debts as it would be difficult for us to calculate the market

value of it. Then, we have subtracted the cash and bank balances of the last pro-forma year to

calculate the enterprise value. In case of GSK, it is Tk. 1,272,160,821 in the last pro-forma

income statement.

Value of the Companies

In order to calculate the value of GlaxoSmithKline in 2014, we have found out the present value

of all the forecasted free cash flow. In this case, we have taken the weighted average cost of

capital for each of the preceding year for both of the companies. Then, we have found out the

present value of the enterprise value using the 2019 of the weighted average cost of capital.

Then, we have just added both of these values to calculate the value of each of the companies.

The value of GSK is1,310,334,618 which means in order to acquire the company the acquirer

needs to have that amount of value.

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Conclusion

First of all we have calculated their ratios to understand their financial statements. In part 1, we

calculated their liquidity ratios to understand whether they have the capability to pay their

short term obligations, then we calculated their asset management ratios to compare their

assets to their sales revenue, then we calculated their profitability ratios to generate their

earnings as compared to its expenses. In part 2 we make pro forma income statement, balance

sheet and EFN for both companies. In part 3, we calculated their cost of capital. In part 4 we

calculated their value of the enterprise. Thus we completed the whole project.

References:

1. http://www.gsk.com.bd/publications/annual-reports.aspx

2. http://www.dsebd.org/

3. http://www.dsebd.org/latest_share_price_scroll_l.php

4. We collect information from Dhaka Stock Exchange.

5. Fundamentals of Corporate Finance by Randolph W. Westerfi eld

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