Term paper

Introduction

Rational of the study.

We have calculated the ratio analysis and from this analysis we made decision, we also

calculated the stock valuation and make decision on the basis of this analysis. From this analysis

we found intrinsic value of the stock.

Objective of the study.

To find out different types of ratio analysis.

To find out Stock valuation of the share.

Make correct decision about stock.

To gain Knowledge.

To submit this term paper.

To get good marks.

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Term paper

Methodology.

Sources of information

Both primary and secondary sources of data are used to complete the study. They are-

1) Primary Data

2) Secondary Data

Primary DataWe have collected primary information through our calculation on Microsoft excel. We have

used different types of ratio formula to calculate the ratio and to measure stock we used stock

valuation formula.

Secondary Data

We have collected Secondary information by these ways

Visiting ACI limited’s home page in internet.

Studying relevant books, annual report, books.

Limitation.

We have a very little knowledge about share. We cannot collect sufficient information about ACI

Ltd. We cannot find sufficient data from the annual report. And we also have time limitation for

the term paper.

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Ratio analysis

Introduction to ratio.

Ratio analysis is used to evaluate a firm’s current financial position and the direction of this

position is expected to take in the future. By determining the firms’ financial position, investors

form opinion about future condition of the firm and the safety of their investment. Managers use

the information provided by ratio analyses to plan the actions that will correct the firm’s

weaknesses and take advantage of its strengths.

Purpose of ratio analysis

To evaluate the management performance in three areas

1. Profitability

2. Efficiency.

3. Risk.

Importance of financial ratio

1. Compare to the other entities

2. Examine the firm’s performance.

Limitation of Financial ratios

1. For the firms with different divisions, it is difficult to identify ratios.

2. Industry leader’s ratio should be standard.

3. Inflation may distort the balance sheet.

4. Seasonal factor may distort the financial statement.

5. Different accounting practice may distort the financial statement.

6. It is difficult to generalize about whether a particular ratio is good or bad.

7. Results may not be consistent. Some ratios are good some are bad.

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Liquidity ratio.

Liquidity ratio is a ratio analysis that provides quick, easy to use measures to liquidity by relating

the amount of cash and other current assets to the firm’s current obligations. It indicates a firm

capability to repay short term debt.

Current ratio: The current ratio is a widely used measure for evaluating a company’s liquidity and short term debt paying ability. The ratio is computed by,

Year Ratio2002-03 1.152003-04 1.162004-05 1.012005-06 1.012006-07 1

Here we can see that current ratio is lower. The current ratio indicates that company hasn’t enough capability to measure liquidity position.

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Current Ratio

0.90

0.95

1.00

1.05

1.10

1.15

1.20

2002-03 2003-04 2004-05 2005-06 2006-07

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Quick ratio: A measure of a company's liquidity and ability to meet its obligations. Quick ratio,

often referred to as acid-test ratio, is obtained by subtracting inventories from current assets and

then dividing by current liabilities. Quick ratio is viewed as a sign of company's financial

strength or weakness (higher number means stronger, lower number means weaker).

Year Ratio

2002-03 0.502003-04 0.552004-05 0.55

2005-06 0.582006-07 0.65

Here we can see that quick ratio is higher. So this ratio measures higher the liquidity.

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Accounts receivable turnover: The number of times in each accounting period that a firm

converts credit sales into cash. A high turnover indicates effective granting of credit and

collection from customers by the firm's management. Accounts receivable turnover is calculated

by dividing the average amount of receivables into annual credit sales.

Year Ratio2002-03 13.902003-04 9.882004-05 9.45

2005-06 8.572006-07 5.47

Here we can see that accounts receivable turnover ratio is not higher. So this ratio measures lower the liquidity.

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Receive collection period: The amount of receivables turnover (net sales divided by average

receivables) divided by the average receivables to calculate how many times during the year that

accounts receivable turns over. Average receivables are equal to the sum of beginning

receivables and ending receivables, divided by two. The number alone doesn’t provide much

information. It must be compared to average receivable collection periods for other companies in

the industry, as well as past collection periods, to find out if collection times are increasing or

decreasing.

Year Ratio2002-03 25.92003-04 36.422004-05 38.12005-06 422006-07 65.81

Here we can see that receive collection period ratio is higher. So this ratio measures lower the liquidity.

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Inventory turnover: The ratio of a company's annual sales to its inventory; or equivalently, the

fraction of a year that an average item remains in inventory. Low turnover is a sign of

inefficiency, since inventory usually has a rate of return of zero.

Year Ratio2002-03 2.022003-04 2.572004-05 3.032005-06 3.182006-07 2.98

Here we can see that inventory turnover ratio is lower. So this ratio measures lower the liquidity.

Inventory processing period: Inventory processing period is the average length of time require

to convert materials into finished goods and then to sell the goods. It is the amount of time the

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Inventory Tornover

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2002-03 2003-04 2004-05 2005-06 2006-07

Year

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product remains in inventory in various stage of completion. The inventory processing period,

this is the average age of the firm’s inventory.

Year Ratio

2002-03 181.142003-04 141.772004-05 120.482005-06 114.912006-07 122.55

Here we can see that inventory processing period ratio is higher. So this ratio measures lower the liquidity.

Payable turnover: A short-term liquidity measure used to quantify the rate at which a

company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total

purchases made from suppliers and dividing it by the average accounts payable amount during

the same period.

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Inventory Processing Period

0.0020.0040.00

60.0080.00100.00120.00140.00

160.00180.00200.00

2002-03 2003-04 2004-05 2005-06 2006-07

Year

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Year Ratio2002-03 75.482003-04 37.312004-05 28.032005-06 29.392006-07 24.57

Here we can see that payable turnover ratio is lower. So this ratio measures higher the liquidity.

Payable payment period: The ratio can be compared to previous years. A long period shows

that it represents a source of free finance, or indicts the company is unable to pay quickly

because of liquidity problems. If the accounts payable payment period is too long, you should

note the company maybe loses out on worthwhile cash discounts, and the existing suppliers

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Payable Turnover

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

2002-03 2003-04 2004-05 2005-06 2006-07

Year

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won't continue supply. As known, when you're operating a company, that pay more quickly or

pay more slowly is a double-edged sword. You must control it cautiously.

Year Ratio2002-03 4.842003-04 9.782004-05 13.022005-06 12.422006-07 14.85

Here we can see that payable payment period ratio is higher. So this ratio measures higher the liquidity.

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Term paper

Profit ability ratio.

Profitability ratios show the combined effects of liquidity management, assets management, and

debt management on operating results. It indicates the overall profitability conditions of the firm.

Gross profit margin: What remains from sales after a company pays out the cost of goods sold. To obtain gross profit margin, divide gross profit by sales. Gross profit margin is expressed as a percentage.

Year Ratio

2002-03 0.292003-04 0.292004-05 0.312005-06 0.332006-07 0.34

Here we can see that gross profit margin ratio is higher. So this ratio measures better the profit ability.

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Operating profit margin: Operating profit for a certain period divided by revenues for that

period. Operating profit margin indicates how effective a company is at controlling the costs and

expenses associated with their normal business operations.

Year Ratio2002-03 0.072003-04 0.092004-05 0.082005-06 02006-07 0.12

Here we can see that operating profit margin ratio is higher. So this ratio measures better the profit ability.

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Net profit margin: Net profit divided by net revenues, often expressed as a percentage. This

number is an indication of how effective a company is at cost control. The higher the net profit

margin is, the more effective the company is at converting revenue into actual profit. The net

profit margin is a good way of comparing companies in the same industry, since such companies

are generally subject to similar business conditions. However, the net profit margins are also a

good way to compare companies in different industries in order to gauge which industries are

relatively more profitable. Also called net margin.

Year Ratio

2002-03 0.042003-04 0.032004-05 0.042005-06 -0.052006-07 0.06

Here we can see that net profit margin ratio is higher. So this ratio measures better the profit ability.

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Term paper

Return on assets (ROA): An indicator of how profitable a company is relative to its total

assets. ROA gives an idea as to how efficient management is at using its assets to generate

earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is

displayed as a percentage. Sometimes this is referred to as "return on investment".

Year Ratio2002-03 0.042003-04 0.042004-05 0.042005-06 -0.062006-07 0.07

Here we can see that ROA ratio is higher. So this ratio measures better the profit ability.

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Term paper

Return on equity: A measure of how well a company used reinvested earnings to generate

additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but

before common stock dividends) divided by book value, expressed as a percentage. It is used as a

general indication of the company's efficiency; in other words, how much profit it is able to

generate given the resources provided by its stockholders. Investors usually look for companies

with returns on equity that are high and growing.

Year Ratio

2002-03 0.142003-04 0.12004-05 0.132005-06 -0.182006-07 0.25

Here we can see that ROE ratio is higher. So this ratio measures better the profit ability.

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Term paper

Effective ratio.

Total asset turnover: Net sales divided by average total net assets. The resulting number shows

how often assets turnover, which can indicate how effectively a company is managing all of its

assets. The number by itself isn’t informative; it must be compared to other companies in the

industry, as well as to the company’s historical data. If the asset turnover is high relative to other

companies in the industry, it may indicate that too few assets for potential sales are being used or

suggest that the company is using too many old and fully depreciated assets. A low asset

turnover can indicate that capital is tied up in too many assets relative to what is needed.

Year Ratio2002-03 1.112003-04 1.082004-05 1.152005-06 1.212006-07 1.04

Here we can see that total asset turnover ratio is lower. So this ratio measures lower the efficiency.

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Term paper

Fixed asset turnover: Measure of the productivity of a firm, it indicates the amount of sales

generated by each dollar spent on fixed assets, and the amount of fixed assets required to

generate a specific level of revenue. Changes in the ratio over time reflect whether or not the

firm is becoming more efficient in the use of its fixed assets.

Year Ratio

2002-03 3.662003-04 2.472004-05 2.722005-06 3.032006-07 3.05

Here we can see that fixed asset turnover ratio is higher. So this ratio measures higher the efficiency.

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Term paper

Risk ratio.

Debt equity ratio: A measure of a company's financial leverage. Debt/equity ratio is equal to

long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal

year is used in the calculation. Investing in a company with a higher debt/equity ratio may be

riskier, especially in times of rising interest rates, due to the additional interest that has to be paid

out for the debt.

Year Ratio2002-03 0.282003-04 0.412004-05 0.292005-06 0.212006-07 0.26

Here we can see that debt equity ratio is higher. So this ratio measures higher the risk of the firm.

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Debt Equity

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

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Debt ratio: Debt capital divided by total assets. This will tell you how much the company relies

on debt to finance assets. When calculating this ratio, it is conventional to consider both current

and non-current debt and assets. In general, the lower the company's reliance on debt for asset

formation, the less risky the company is since excessive debt can lead to a very heavy interest

and principal repayment burden. However, when a company chooses to forgo debt and rely

largely on equity, they are also giving up the tax reduction effect of interest payments. Thus, a

company will have to consider both risk and tax issues when deciding on an optimal debt ratio.

Year Ratio

2002-03 0.692003-04 0.642004-05 0.662005-06 0.672006-07 0.73

Here we can see that debt ratio is higher. So this ratio measures higher the risk of the firm.

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Term paper

Interest coverage ratio: A calculation of a company's ability to meet its interest payments on

outstanding debt. Interest coverage ratio is equal to earnings before interest and taxes for a time

period, often one year, divided by interest expenses for the same time period. The lower the

interest coverage ratio, the larger the debt burden is on the company. Also called interest

coverage.

Year Ratio2002-03 2.452003-04 2.62004-05 3.132005-06 02006-07 4.82

Here we can see that interest coverage ratio is higher. So this ratio measures lower the risk of the firm.

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Term paper

DuPont ratio or analysis.

=

Year Ratio2002-03 0.142003-04 0.12004-05 0.132005-06 -0.182006-07 0.25

Here we can see that DuPont ratio or analysis is higher.

Growth Ratio

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Term paper

Growth ratio: This is the rate at which a company, economy, earnings, etc. is currently growing at or expected to grow at.

Relation rate Return on equity

Year Ratio2002-03 0.092003-04 0.162004-05 0.232005-06 -0.42006-07 0.44

Here we can see that growth ratio is higher. So this ratio measures higher the performance of the company.

Cost of money.

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Growth Ratio

0.00

0.10

0.20

0.30

0.40

0.50

2002-03 2003-04 2004-05 2005-06 2006-07

Year

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Concept of cost of money:

Factors that affect the cost of money: four fundamental factors affect the cost of money.

(1) Production opportunity: the returns available within an economy from investment

in productive (cast generating) assets.

(2) Time preferences for consumption: The preferences of consumers for current

consumption as opposed to saving for future consumption.

(3) Risk: In a financial market context, the chance that a financial asset will not earn the

return promised. The higher the perceived risk, the higher the required rate of return.

(4) Inflation: The tendency of prices to increase over time. The higher the expected rate

of inflation, the greater the required return.

Determinates of cost of money:

(1) Nominal or quoted or Risk free rate: The rate of interest on a security that is free of

all risk. Risk free rate is peroxide by the t bill rate or t bond rate and an inflation

premium. The risk free rate has two components one is real risk free rate and

inflation.

(i) Real risk free rate: This is the rate of return considering there are no risk and

no inflation in the economy. It is determined based on the overall demand and

supply of funds. It is designated by r.

(2) Inflation premium: A premium for expected inflation that investors add to the real

risk free rate of return.

(3) Risk premium:

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Term paper

I. Default risk premium: Defaults risk premium means the borrower’s credit the

worthiness is not high. That is the borrower may be unwilling or unable to

repay the borrow fund. The premium charge for this risk is default risk

premium. Treasury securities have no default risk because everyone believes

that the U.S government will pay its debt on time. Default risk is the risk that

issuer will fail to make promised payment. The greater the defaults risk the

higher the interest rate lenders charge.

II. Liquidity risk premium: Liquidity risk is the risk that a security cannot be sold

at a predictable price with low transaction cost on short notice. The liquidity

risk premium charged for liquidity risk or premium added to the rate on a

security if the security cannot be converted to cash on short notice and at close

to the original cost. The more easily an asset can be converted to cash at a price

that recovers the initial amount invested, the more liquid it is considered.

Financial assets generally are more liquid than real assets, and short term

financial assets generally are more liquid than long term financial assets.

III. Maturity risk premium: A premium that reflects interest rate risk, bonds with

longer maturities have greater interest rate risk. Everything else being equal,

maturity risk premium raise interest rates on long term bonds relative to those

on short term bonds.

Stock Valuation

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Term paper

In this section, we try to show the way of stock valuation and try to find out the intrinsic value of

stock. For this reason, we need to consider some factors which are given below. Here we can

show the calculation of the stock valuation from 2003 to 2007

Dividend: Cash distribution made to stockholders from the firms earnings, whether the earnings

were generated in the current period or previous period.

Year 2003

Proposed dividend: 64680000

Issued shear: 16170000

Dividend=

=

= 4.00

Year 2004

Proposed dividend: 68722500

Issued shear: 16170000

Dividend=

=

= 4.25

Year 2005

Proposed dividend: 72765000

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Term paper

Issued shear: 16170000

Dividend=

=

= 4.50

Year 2006

Proposed dividend: 97020000

Issued shear: 16170000

Dividend=

=

= 6.00

Year 2007

Proposed dividend: 137445000

Issued shear: 16170000

Dividend=

=

= 8.5

Here we can see that dividends per share Increased year after year because of number of the

share outstanding is same compare to the amount of providing dividends. In 2003, dividends per

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Term paper

share was 40.00, whereas in 2004 was 42.5, in 2005 it was increased to 4.50 After that time

period, dividends per share was increased gradually and it came to 60.00 and 85.0 in year 2006

and 2007 respectively.

Growth rate:

Year 2003 0.00%

Year 2004 14.21%

Year 2005 20.76%

Year 2006 13.83%

Year 2007 39.86%

Average

g =

g = 17.732%

After calculating growth rate (g) of the stock we need to determine required rate of return(r) to

find out the intrinsic value of stock.

Required Rate of return

Here, Real risk free rate that means Treasury bill= 4.25%

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Term paper

Inflation rate of Bangladesh = 5.1%,

Default risk premium= 1.5%

Liquidity risk premium= 1%

Maturity risk premium = 2%

Required rate of return = Real risk free rate + Inflation + Default risk premium + liquidity risk

premium + maturity risk premium

=4.25+5.1+1.5+1+2

=13.85% (assumption)

We found Treasury bill rate and inflation rate from the Bangladesh Bank websites. Default risk

premium is determined 1.5% because there is a possibility that the company will not capable to

pay dividend periodically .we also consider 1% as the liquidity risk premium which indicate that

there is a possibility that the investment on stock can not converted into cash without lose at very

short notice. The maturity premium is considered as 2% which arises when the investment is

made for a longer time period

Value of the stock

g= 17.732%

k= 13.85%

Do= 8.50

vb=

=

=257.786

Here, we find the intrinsic value of the stock 257.786 which indicates the actual market price of

the stock today. We find that intrinsic value based on estimation of stock expected dividends

stream and the risky ness of the stream.

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Term paper

Findings and conclusion

From the ratio analysis we find that the liquidity position in terms of current ratio was not good

because there is a large amount of inventory in current asset. We also know that more inventories

at hand are not good. To measure the liquidity position quick ratio is more important then current

ratio. In case of asset management ratio, the firm financial position is good in terms of inventory

turnover ratio, average collection period, fixed asset turnover ratio. We also see that the firms

financial position has less riskier because the firm debt ratio is very insignificant as well as long

term debt portion is decreasing every year and it come to insignificant amount. The firm’s

profitability position is satisfying in terms of gross profit margin, operating profit margin, net

profit margin, return on total assets because all of these ratio is increasing, but in case of return

on equity the firm’s profitability position is good because it is increasing every year, although

earning per share is increasing from this period of time.

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