Off Job and on Job Analysis Essay

Introduction of Topic The subject study is aimed to investigate an issue i. e. â€Å"Comparative Analysis of on-job & off-job training effects on employee performance† for this I have select to method of training off job training and two moderate variables environment and trainers which control on employee performance. On job training and off job training variable are conducted as comparative variable while other variable conducted as moderate variables. In general the organizations are using performance appraisals in order to appraise their employees and to assess their annual performance. Performance Appraisals have become a management craze over the past decade whereby every organization seems to think that by faithfully adhering to this practice, people within the organization will grow and develop in the company image. Nothing could be further from reality. Experience has proved to me that since those who are carrying out the assessment are usually poorly trained, poorly prepared and with an ‘ I am your boss so I must be more effective than you’ attitude. The result is often than not highly subjective and of very little value to either the organization or to assess. Every human resource manager knows that through training they can improve the skills or performance of employees or work force. But I want to clear which training method is most beneficial for work force. So that human resource manger would provide that training method which is most suitable for improve the performance of employees. For this purpose I conduct my research and comparative analysis that which training method is efficient and which factor influence more on performance of an employee. Problem Statement: Comparative Analysis of on-job & off-job training effects on employee performance Objective Statement: From side to side training can get better the skills or achievement of employees. My objective of conduct a comparative research is to find out efficient method of training to enhance or improve the skill of employee. Introduction to Variables: Dependent variable: Performance of Employee Independent Variables: On job training, Off job training Moderate Variables: Environment, Trainers Chapter 2 REVIEW OF LITERATURE. Training on the job has become a major source of skill buildup for workers in the last two decades due to the rapid pace of technological change. Studies by Bishop (1994) and Bartle and Lichtenburg (1987), among others, establish that a well-trained workforce provides returns to employers in the form of higher productivity and better flexibility to technological change. Hence, there is a strong incentive for employers to sponsor training for their workforce. However, employers also need to think with the possibility that workers may quit before employers can fully realize the benefits of the training that was provided. For nearly three decades since Becker (1964) classified training as general training (training that builds skills transferable to other firms) or specific training (training that builds firm-specific skills), researchers have assumed that employers would be more willing to sponsor specific training as opposite to general training that could be used elsewhere. However, many recent experimental studies have failed to provide any evidence for this idea. Instead, experimental research has consistently found that most employer-sponsored training does, in fact, provide employees with skills that are transferable to other employers (i.e. , that most employer-sponsored training should be classified as general training). Studies by Barron, Berger and Black (1999), Lowenstein and Splatter (1999), Booth and Bryan (2002) find, that most or all the training that is sponsored by employers result in workers acquiring general skills that can be used at other firms. Such recent findings have sparked a changed interest in the following question: do workers who acquire transferable skills from employer-sponsored training continue working in the same job or do they seek better returns for their newly acquired skills from other  employers? While this question has been explored in many recent studies, most of this research (possibly due to the nature of the survey data available) has focused on younger workers or a cross-section of workers. In doing this, workers who are in the middle of their careers – a subset of workers who enjoy a considerable benefit from training – have been overlooked; it is well-understood that the type of training undergone by young workers is considerably different from the re-training of mid-career workers. De Grip and Van Loo (2002) detail the various ways, in which a workers skill may degrade over the course of a career, necessitating corrective on-the-job training is often essential to maintaining worker productivity. In this context, it could be reasonably expected that the nature of training mid-career employees receive would take fundamentally different forms than training for the labor force at large. Also, workers tend to be highly mobile between jobs early in their careers; Topel and Ward (1992), for example, show that a typical worker holds seven different jobs during the first 10 years of his/her career, with the rate of job mobility then declining significantly. Hence, employers may be more willing to sponsor general training for such workers, believing that they would be more likely to experience the rewards of this training due to the decreased job mobility at this stage of the worker’s career. Effective training programmers’ require the dedicated support of top management (Motwani, Frahm et al. 1994). Such organizations provide training mapped to employee and organizational needs (Mann, 1997), and provide this at the proper time. Yet, not all companies place the same emphasis on, or show the same commitment to employee training (Roberts and McDonald, 1995; Hughey and Mussnug, 1997). Some companies work hard to recruit the best people and yet spend relatively little effort to retain them once hired (Cappelli, 2000). There is evidence to show that benefits follow to organizations that are committed to employee training (Wills, 1994). Organizations that place a high value on training give resources to the management of the training process. They devote time to ensuring that employees get the training programmers’ that is most appropriate for them given their existing IT skill sets (Eighteen, 1999). Such firms are most successful at maximizing the effectiveness of their training programs (Huang, 2001). Organizations that commit effort and finances to training programmers’ and employee development do so with the  objective of a pay-off in terms of increased skill-sets, increased motivation, increased knowledge transfer (Pate, Martin et al. , 2000), more positive psychological and organizational dynamics, as well as a measurable aggressive edge. The use of training courses future outstrips what is known of their usefulness (Foxon, 1989; Schonewille, 2001). Mann (1996) maintains that despite heavy investment in training, organizations can frequently fail to evaluate adequately the value or success of their training programmes. Organizations that devote considerable resources to training also understand the value of evaluating the training process (Motswana, Frahm et al. , 1994; Mann, 1996). Such evaluation is a key phase in any proposed training and development process (Al-Khayyat and Elgamal, 1997). While such appraisal is desirable in principle it is difficult in practice (Morris, 1984). Even those companies who do carry out evaluations often use measures later considered ineffective (Schonewille, 2001). The most common metric of evaluation is trainee perceptions . Such assessments are random, informal, and unstructured evaluations of training programmers, which tend to be post training appraisals rather than approaching the evaluation of training programmers from their design stages (James and Rolfe, 2000). Many forms of training exist ( Switzer and Kleiner, 1996; Huang, 2001). The range of training techniques has been expanded by the application of technology in its â€Å"hard† (for example through computing technology) and â€Å"soft† (for example through instructional design) (Sadler-Smith, Down et al. , 2000). In relation to IT training, many methodologies for the approach to and delivery of training can be used: forms of training include instructor console training in a classroom situation, stand-alone terminals with remote instruction, computer based training (CBT) without instructor, hypermedia training (a computer based method of non-sequential reading and writing, a technique with which chunks of information can be arranged and rearranged according to an individual’s needs, previous knowledge, and curiosities (Higginbotham-Wheat, 1992; Murray, 1998)), self-paced training using a variety of delivery methods (Compeau, 1995), distance learning (whether by videoconferencing, email, or other method). Learning networks, simulations, groupware communication, use of mentors or coaches, job rotation, management games, role playing and behavior modeling (Williams, 2001), or Internet based training. While many new training approaches based on new technology  exist, these modern training methods have been subjected to comparatively little empirical or critical study (Sadler-Smith, Down et al. , 2000). The literature suggests that that some of the most effective training techniques are not new, but are merely the application of old-fashioned common sense to the assessment of training needs (Switzer and Kleiner, 1996; Sadler-Smith, Down et al. , 2000; Smith, 2002). Sadler-Smith et al. (2000) believe that flexibility of delivery is a fundamental issue for smaller firms, to which open/distance/technology-based learning may present a workable solution; however, the modernity of some delivery methods may in itself lead to assumption of applicability and efficiency. Bostrom at all (1988) argue that the delivery method can directly influence the effectiveness of, and the benefits accrued from training. Read and Kleiner (1996) present the most commonly used training methods across non-industry specific U. S Companies. They found that the top ten training methods used in business, listed in order from highest to lowest use, were: videotapes, lectures, one-on-one instruction, role plays, games/simulation, case studies, slides, computer-based training, audio tapes, and films. In a survey carried out by 450 respondents, Mathews et al. (2001) studied the incidence of training delivery methods across non-industry specific organizations in the U.K. , Portugal, and Finland within the context of benefits accrued. They found that training methods most commonly used tended to be traditional, with little impact evident of more HITECH methods. Traditional methods included external short courses, internal lectures and seminars, issuing of training manuals and materials to be self-taught, using training videos, short demonstrations, and the delegation of training responsibilities to training consultants. This study found that in-house participative seminars were the preferred training delivery method in the UK, whereas external short courses were the preferred method in Finland and Portugal. Impersonal methods such as training videos, and internet or Computer-based training, were viewed across the UK, Finland, and Portugal as poor methods. In contrast, highly personal methods of training such as participative courses and seminars were viewed as the most effective and highly regarded methods. From a company perspective, training and development of company employees are essential for organizational operation, and organizational development. From an employee perspective, these same factors are both vital and critical for skill development and for career advancement. Retention of employees, and the retention of valued skill sets, is important for continued business achievements (Mak and Sockel, 1999). The successful retention of employees leads to knowledge conservation within the organization (Cappelli, 2000). Employee turnover may lead to a loss of human resources weakening competitive positions. At a company level, mechanisms that allow for and promote knowledge transfer amongst employees can help minimize the effect of the loss of skilled staff to other companies (Cappelli, 2000). Training employees leads to increased employee satisfaction, facilitates the updating of skills, leads to an increased sense of belonging and benefit, increased employee commitment to the organization (Bushardt, Fretwell et al. , 1994), and strengthens the organization’s competitiveness (Hughey and Mussnug, 1997; Burden and Proctor, 2000). Job-related training increases an employee’s ability to perform job-related tasks. Job satisfaction is an important motivator for employee performance and is negatively related to turnover (Mak and Sockel, 1999). Company commitment to the training needs of its employees positively influences employee satisfaction, leading to an increase in employee motivation and an increase in retention (Mak and Sockel, 1999; Ranft and Lord, 2000). Such commitment culminates in employee exposure to quality job-related training, leading to better employee morale, an increased sense of employee achievement and accomplishment (Elizur, 1996), and ultimately to an increase in organizational competitiveness. Whilst company commitment to training for its employees positively affects retention and leads to desirable outputs, there are many different categories and types of training (Switzer and Kleiner, 1996; Huang, 2001; Mathews, Ueno et al. , 2001). To have positive results, organizational commitment to training must tie closely to appropriate effective training methods and training delivery mechanisms. In terms of training methodologies, what may be appropriate for one company (or employee) may not be for another. This paper describes a descriptive study, which assesses the impact of training on employee retention, and examines the relationship between organizational commitment to training and benefits accrued. Results of the study demonstrate that organizational attitudes and provision for training relate positively to employee expectations and requirements. Findings indicate that well-engineered training initiatives lead to increased organizational strength, job-related employee competencies, and job satisfaction. The study finds that training helps in retaining knowledge within the organization, but may not help in retaining employees. The main method of training delivery is by instructor-led formal sessions, followed by self-training and workshops. Findings show that more modern methods such as web-based and computer based training are not pervasive. Almost one third of respondents believe that training received has not helped to reduce job-related stress. More than one quarter of respondents indicate that their organization does not structure training based on employee feedback on requirements. There are many cases where the training needs of employees have not been sufficiently addressed and cases where organizations have not evaluated the quality or effectiveness of training programmers, making return on investment hard to measure. To succeed, an organization must create an environment that not only attracts people to join and give their best every day, but one that also strives to retain existing staff. The retention of talented experienced, productive and knowledgeable employees can be a source of competitive advantage for companies (King, 1997; Cheng and Brown, 1998; Roepke, Agarwal et al. , 2000). The maintenance of employees provides staff stability, which aids organizational knowledge retention (Cappelli, 2000), offers the opportunity to raise quality standards through continuous improvement practices (Motwani, Frahm et al. , 1994) and facilitates the achievement of more reliable customer care (Rowley and Purcell, 2001). It is important for employers to identify and to understand their employees’ viewpoints on what the employees consider to be the most important aspects of their jobs, if employees are to be more content (Ventakesh, 1999; Mulder, 2001). While staff retention in general is important, the retention of IT employees is vital for business success (Mak and Sockel, 1999; MacDonald, Gabriel et al. , 2000). understanding IT leaders recognize that the greatest impediments to success are often related to people rather than to information, technology, and systems (Roepke, Agarwal et al. , 2000). Considering the high costs associated with replacing IT staff and their experience, it makes sense for companies to invest in mechanisms designed to keep IT staff longer (Mak and Sockel, 1999; Moore, 2000). One such staff retention mechanism is the use of employee training programmes for existing members of staff (Mulder, 2001). The use of such programmes in recent times by employers may have more to do with securing employee commitment in uncertain times than about transforming skill levels (Hallier and Butts, 1999). As such, for some organizations the key objective of training is to increase employee commitment to the organization and to create a culture that underlines the value of long-term employment. Mak and Sockel (1999) found that most employees consider career development a priority motivational tool; and once motivated, they are more likely to be devoted to their job and the company’s retention rate should improve. As such, management commitment to the development of the employee can significantly affect retention, even in situations where economic incentives such as incremental salary increases do not (Ranft and Lord, 2000). Specific training initiatives have specific goals. These include the improvement of employee job performance, employee development (Burden and Proctor, 2000), the development of skills, knowledge, and attitudes (Al-Khayyat and Elgamal, 1997), and a means of achieving a competitive edge (Hughey and Mussnug, 1997; Hallier and Butts, 2000). Given the fast obsolescence of IT specific skills there is a repeated need to provide opportunities for employees to update their technical skill sets. The failure to provide such training increase the chance of failure and such companies may pay more in the long run (Auer, 1995). Organizations must respond to demands for change while at the same time realizing that advances in technology and knowledge are rendering many traditional employee skills obsolete, while simultaneously developing needs for new ones (Read and Kleiner, 1996). It is this continuous risk of knowledge obsolescence that makes training and retraining necessary, not only for individual growth but also for organizational growth (Read and Kleiner, 1996). Within the IT sector, training can be considered to encompass organized, structured, formal events and sessions offered to IT employees as a company initiative. This paper does not consider on-the-job daily experiences to be classed as formal training, although such experiences can aid the development of skills related to job functions (Sadler-Smith, Down et al. , 2000; Smallbone, Supri et al. , 2000). The beginning of the modern concern about skills and economic competitiveness in the United States came perhaps with the government report, A Nation at Risk (National Commission on Excellence in Education, 1983), which documented the poor academic performance of U. S. students compared to those of major competitor nations. Studies such as Baumol, Blackman, and Wolff (1989) focused attention on the long-run and comparative performance of the U. S. economy. Piore and Sabel (1984), Cohen and Zysman (1987), and others drew attention to the importance of production work to an economy and to the fact that work organization and employee skills influenced the competitiveness of manufacturing firms and their ability to adapt to changing markets. Dertouzos, Lester, Solow, and the Industrial Productivity (1989) developed these views into an argument about declining U. S. competitiveness that became almost a standard for future studies. The work organization and management structures of U. S. firms rely too much on outdated scientific management approaches. They are hierarchical, based on narrow job titles and unskilled workers, and, as a result, are not as flexible in adjusting to changing markets as the competitor firms in other countries. The more flexible techniques of Japanese management in particular demand higher skills from the labor force. Other studies soon pounced on the connection between skills, productivity, and economic performance. Both America’s Choice (1990) and the Office of Technology Assessment’s report (1990) argued that higher levels of skills in the workforce were necessary in order to develop the new, more productive systems of work organization and compete successfully with other nations. With these reports as a backdrop, the Secretary of Labor’s Commission on Achieving Necessary Skills (SCANS) was established in 1990 to identify the skills that the workplace was demanding. In its various reports, the Commission has argued forcefully that new types of organizations and new arrangements for organizing work—employee empowerment, teams, and new work technologies—require new skills and a higher level of existing skills from workers. Furthermore, the skills that are required are at least in part general work skills that translate across employers and industries. Both employers and individual workers are seen as benefiting from those higher skills (SCANS, 1992). Arguments like these have in large measure been responsible for a new thrust in public policy toward raising skill levels, especially through schooling. The National Goals for Education, for example, is an effort to raise educational standards in the country at least in part to improve competitiveness. The list of skills identified by SCANS as reasonably generic to the U. S. economy has been used to drive the curriculum in high schools and in training programs such as the Job Corps and those funded by the Job Training Partnership. The School-to-Work Opportunities Act, passed by Congress to establish school-to-work change programs like youth apprenticeships, is also designed to raise work-related skills. Given the speed with which these arguments have moved forward, it is indeed surprising to find so little experiential research that examines the relationship between skills, worker productivity, and economic performance. It is not obvious, in the absence of empirical evidence; those higher levels of skills will necessarily lead to better economic performance. Unless jobs require or allow workers to make use of higher skills, for example, one should not expect performance to improve when skills increase. Further, jobs that require higher levels of skills now than in the past still may not tax the skills that employees already have. In assembly jobs, for example, the initial skill requirements are so low that they could rise substantially and still be within the set that virtually all workers possess. Loewenstein and Spletzer (1999), Booth and Bryan (2002) find, that most or all the training that is sponsored by employers result in workers acquiring general skills that can be used at other firms. Such recent findings have sparked a renewed interest in the following question: do workers who acquire transferable skills from employer-sponsored training continue working in the same job or do they seek better returns for their newly acquired skills from other employers? While this question has been explored in many recent studies, most of this research (possibly due to the nature of the survey data available) has focused on younger workers or a cross-section of workers. Finally, where skills are in shortage, the relevant skills may be job-specific ones that are typically seen as being the responsibility of the employer to provide. Perhaps the main reason for the lack of research on skills and performance is the difficulty in obtaining direct measures of an employee’s skill. What are typically available are aggregate measures of the amount of education and training workers receive. These are the inputs that should produce skill and that are related to indirect measures of performance. The body of research on the economic returns on education is particularly wide and may have some relevance for these questions. Human capital research clearly finds that employees with more education earn more, suggesting that the skills they have are valued in the market. Whether education is simply a alternate or screen for some other desirable characteristic, such as resolve, is a complicating factor in the argument. The fact that the return on education appears to be rising over the past decade—rising rapidly for college graduates and falling sharply for high school dropouts— suggests that such education is increasingly valuable in the labor market (cf. Levy & Murnane, 1992). The fact that both initial and further education and training earn a higher return suggests that some of the skills associated with education are increasingly valuable (see Tuijnman, 1992, for references to research in Colombia, the Netherlands, Sweden, Norway, and the United States). But for which specific skills is the return being earned? Research on the relationship between vocational course work and subsequent job performance may shed some light on this question. Vocational education programs typically provide training for specific occupations, and research on the labor market outcomes for students in these programs can help in understanding the effects of general or vocational skills on the economy. Altonji (1992) found that students who took more vocational courses earned higher wages, other things being equal. Other studies find that enrollment in vocational education programs improves participants’ labor market experience but only for those who find jobs in the field for which they received training (e. g. , Campbell, Eliot, Laughlin, & Suesy, 1987). High school students who participate in vocationally oriented programs like workstudy and co-op substitute on-the-job training for academic classes, andstudies suggest that they do not necessarily do better in the labor market than those who did not participate in such programs (Bishop, Blakemore, & Low, 1985). Hollenbeck (cited in Stern, Stone, Finkelstein, Latting, & Martinez, 1993) found that students enrolled in occupationally based technical training following high school did better in the labor market than did those who pursued a baccalaureate program. It is difficult to draw reliable conclusions from these studies about the skills needed to improve economic performance (Berryman, 1994; Stern & Tuijnman, in press). The fact that vocational skills pay off when graduates find jobs in their field of training but not otherwise may indicate, for example, that the programs help simply by giving access to a well-paying job market. In one of the few studies that attempts to sort out the source of higher wages, Grubb (1991) concludes that the return on a two-year college degree comes mainly from access to better paying occupations than are available to non-degree workers and not from obtaining higher paying jobs within the same occupation. The latter measures the extent to which education produces higher performance for the economy as a whole. The complication noted above about interpreting evidence on returns from education is that education may function as a screen for some other desirable characteristic, such as persistence, that covaries with educational attainment and drives success. One way around this problem is to examine individuals’ skills directly, as opposed to their educational attainment. Bishop’s (1991) comparison of workers’ wages with their scores on the Armed Services Vocational Aptitude Battery is one example of this approach. (Al-Khayyat and Elgamal, 1997) He finds that higher competencies were not associated with higher starting wages. Basic academic competencies such as mathematical ability actually received a negative premium from the labor market while vocational skills such as typing speed earned a considerable premium. , (Hughey and Mussnug, 1997; Hallier and Butts, 2000). These competencies were related, however, to performance on the job as measured by the reports of supervisors. SCANS conducted its own, although indirect, test of the relationship between skills and performance by examining the current wages for a sample of jobs and the SCANS competencies associated with them (SCANS, 1992, p. 9). Not surprisingly, it was found that jobs requiring higher skills pay more. As noted above, however, it is not clear what to conclude from this. It does not indicate, for example, that workers with higher skills perform better in the same job or that the economy would be better off if skills levels rose. A second complication about interpreting evidence from the economic returns on skills as measured by wages is that such skills raise wages in two ways. The first is by providing access to higher paying occupations, and the second is by helping improve performance within occupations. The policy interest associated with the arguments above is mainly with the second relationship. While jobs in medicine, for example, require higher skills and pay individuals more, the economy as a whole cannot grow by making more and more people into doctors. Even for individuals, the gains from expanding access to higher wage occupations face the well-known fallacy of composition. If the supply of workers with the skills needed to fill a particular job rose, the wages associated with that job would fall, as would its desirability. Performance and wages can grow, however, if all workers become more productive at their current jobs. An alternative approach, therefore, is to examine the relationship between skills and job performance within one’s current job, using actual job productivity measures for the estimates. Most of these studies come from personnel psychology where they form the basis of attempts to validate selection procedures (see, e. g. , American Psychological Association, American Educational Research Association, & National Council on Measurement in Education [Joint Committee], 1985). Studies of skills that might generalize across settings concentrate mainly on academic material of the kind associated with classroom instruction. Academic skills as measured by aptitude tests can be reasonably good predictors of job performance (cf. Barrett & Depinet, 1991). The best known of these tests is the General Abilities Test Battery (GATB), which is used extensively by the employment service. The cognitive composite scale from GATB measures traditional academic skills such as verbal and numeric skill. It is related to job performance at roughly the same level as vocational skills, which correlate at levels between . 20 and . 30 (see National Research Council, 1989). Academic performance as measured by grades in school, however, is a substantially worse predictor of job performance (cf. Hunter & Hunter, 1984; Schmitt, Goodling, Noe, & Kirsch, 1984). Other studies use organizational performance measures to examine the relationship with skills. Bartel and Lichtenberg (1987) find, for example, that the rate of innovation is higher in industries that have more educated workers. Cohen and Levinthal (1990) also find that firms that have made a greater investment in learning experience greater innovations. Overall, the results surveyed above suggest that job performance—and ultimately economic performance—might be improved by raising academic skills in the workforce as a whole. 2 With respect to the policy arguments above, however, it is not clear which skills are the important ones for performance or whether new work systems are creating higher demands for skills. SCANS essentially performed a job analysis for the economy as a whole, producing a set of basic skills that are said to generalize across virtually all jobs in the workplace. While all job analyses are somewhat subjective, the SCANS skills are similar to those generated by other widely used job analyses such as the Position Analysis Questionnaire (McCormick & Jeanneret, 1988). SCANS identified two categories of these general skills: foundation skills associated with traditional academic education and interpersonal skills, and workplace competencies, which are more practical and vocational, applying skills to a workplace context.

Miller v. Alabama (2012) Supreme Court Case Essay

Introduction The Supreme Court reviewed the constitutionality of mandatory life sentences without parole enforced upon persons aged fourteen and younger found guilty of homicide. The court declared unconstitutional a compulsory sentence of life without parole for children. The states have been barred from routinely imposing sentences based on the crime committed. There is a requirement for individual consideration of the child life circumstance or the defendant status as a child. The court rejected the definite ban on life sentences without parole. This is because in some cases the instances may be uncommon, but jurors can find irreparably corrupted children. The Supreme Court declined to decide the subject whether there is age below which children with life sentences without parole is unconstitutional. Background of the case The judgment of the court is mainly based on consolidation of two cases. In Jackson vs. Hobbs, Jackson was at the age of fourteen when he and other two youth went to a store in Arkansas planning to steal from it. In this case, Jackson got charged as an adult and given a life term with no parole. In Miller v. Alabama, Miller was a fourteen year of age. Jackson and another boy set fire to a trailer where they had purchased drugs. Miller was convicted of murder and given a mandatory life sentence with no parole. The decision was reversed by the Supreme Court. The review of the above cases was approved by the Supreme Court presenting the subject of constitutionality of a life sentence without parole for fourteen year olds who committed murder crimes. The two cases follow two previous cases before the Supreme Court. In the case of Roper v. Simmons, it was held that imposition of death penalty on defendants below the age of eighteen violated the eighth amendment. In the case of Graham v Florida, it was held sentencing defendants below the age of eighteen to life without parole violated the eighth amendment. It was held juveniles are less liable in light of changeability, vulnerability and immaturity. Facts of the case In each of the cases above, a fourteen year old was found guilty of murder and sentenced to a mandatory life imprisonment with no parole. In the case of Jackson, the petitioner had accompanied two other boys went to a video store to commit robbery. Jackson learned that one of the boys was having a shot gun. He was on the lookout, once he entered the store one of the boys shot the store clerk. Therefore, Jackson was charged by Arkansas as an adult with aggravated robbery and capital felony murder. He was convicted by the jury of both crimes. A statutory sentence of life imprisonment was issued by the court with no parole. Jackson argued life imprisonment without parole for a fourteen year old violated the eighth amendment. In Miller case, after an evening of drug use and drinking the petitioner and a friend beat Millers neighbor and set fire to his trailer. The neighbor died in the process. At first, Miller was charged as a juvenile. The case was removed and moved to an adult court where he was charged with murder in course of arson. Miller was found guilty by the jury and a statutory life sentence without parole was imposed. The court of criminal appeal of Alabama stated that Millers sentence was not harsh compared to his crime. The mandatory nature was allowed under the eighth amendment. TheDecision The Supreme Court held that the eighth amendment outlaw sentencing system that direct life imprisonment with no parole for juvenile murder offender. The eighth amendment prohibits unusual and cruel punishment and provides assurance of individual right not to be put under extreme sanctions. In Roper v. Simons, it was established that the right stems from perception of justice, therefore punishment should be proportionate to the offence and the offender. There were two precedents that reflected on fair punishment. There was one that adopted definite ban on sentencing system based on differences in severity of penalty and culpability of the offenders. That is why in Roper v. Simons, capital punishment for children was prohibited by the eighth amendment. In Graham v. Florida the eighth amendment also prohibited life sentence without parole for juvenile found guilty of non-homicide cases. This case further associated life sentence without parole for juvenile to death sentence. This suggested the second line of precedent that the court requires sentencing system to consider the details of the offence and characteristics of the defendant before sentencing him or her to death. The two line of precedents guide the court to conclude that life sentence without parole for juveniles in fringeon theeighthamendment. The court decision was influenced by Graham and Roper cases that established for sentencing reasons children are different from adults under the constitution. Children lack maturity and have no developed sense of responsibility. This leads them to be impulsive and reckless. In Roper it was held children are exposed to outside pressure and negative influences from friends. Therefore, they have less control of their environment because the child’s nature is not2 well informed. Graham and Roper emphasized distinguishing traits of children weakening justification for inflicting harsh sentences to juveniles even when they commit outrageous crimes. The court held in 5-4 majority that the eighth amendment forbids unusual and cruel punishment. Justice Kagan reversed Alabama and Arkansas Supreme court decisions. It was held under the constitutionally children are different from adults when it comes to sentencing. Justice Breyer had a concurring opinion arguing there is need for further determination if the offender intended to kill or killed the victim during the robbery. Justice Sotomayor supported the argument. However, Justice Roberts had a dissenting opinion. He argued that the court duty is to apply the law accordingly and not answer questions of social policy and morality. He argued the majority did not prove the punishment to be unusual. In his opinion, he did not find the punishment infringing on the eighth amendment. The dissent was joined by Justices Antonin Scalia, Samuel A, and Clarence Thomas. My Opinion of the Case I personally think the ruling by the Supreme Court on Miller v. Alabama is a welcome decision. I concur with Justice Kagan that mandatory life imprisonment for juvenile is like a sentence children to die in prison. Mandatory life sentence also infringes on the eighth amendment. It is true youths lack maturity and have no sense of responsibility. They are exposed to outside pressure and negative influences from friends and therefore their reasoning is not the same as adults. In wake of my support for Miller v. Alabama decision, I am sensitive to family victims who want retribution. However, I must reiterate that sentencing juveniles for life is not the way3 to go. There is need to think about this juveniles who have been given life without parole as our children. They need to be given an opportunity to come out and prove themselves as better people in society. Friend and families of victims would ask me why they deserve a second chance. It is true they may be mourning but no matter how painful the mourning can be, that cannot change the reality that children are different from adults in society. Children have a great potential for growth, understanding and change. Our sentencing system should not be characterized with vengeance. There may be a need recognize the potential for change. The opportunity should be given to juveniles to experience joy, life, and find meaning. The ban on mandatory life sentence without parole will ensure juveniles become educated, be creative and impact on the society positively.

Financial Analysis on Aftab Auto Essay

Chapter 1 Introduction & Methodology 1: Introduction Aftab Automobiles Limited has been our selected company, which is one of the largest automobile assembling plants in the private sector in Bangladesh. Aftab Automobiles Ltd. is in this business since 1967. In 1981 the Company registered itself as a Public Limited Company. The Company was listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited in the year 1987 and 1996 respectively. The principal activities of the Company throughout the period were assembling of Toyota Land Cruiser soft top/ Pick-up, Land Cruiser Prado, Hino Bus, Hino Mini Bus / Truck Chassis with a production Capacity of 2400 units of vehicles in 3 shifts in Assembling Unit. But since inception, the Plant is running single shift considering the market demand. The Company has added four units namely Body Building Unit, Paint Unit, Battery Unit & Furniture Unit and the commercial production of which started in May 5, 1997, November 01, 1999, January 03, 2002 and May 01, 2002 respectively. Overall, it is a company with vision of maximizing shareholders’ wealth and its investors have already shown their confidence in the company. Its share price has increased over the years compared to its book value. Furthermore, it enjoys a positive signaling effect from the market and there is good news for Aftab Auto. In this report, we will try to find out few reasons behind the good news and the positive signaling effect. The main company that we are performing financial analysis is on Aftab Motors LTD. Since our major focus is to compare two companies’ financial performances over time, so we have selected Atlas Bangladesh LTD as the rival company of Aftab Motors LTD. According to the project instruction, we aimed towards rationalizing stock price through financial statement analysis, and in doing so we have seriously dealt with the book value and market value of shares. By comparing the book value and the market value of Aftab Motors LTD from the year 2005-2009, we found out following information: 2: Objectives †¢ Making a thorough analysis of the company’s financial statements over the last 5 years through ratio analysis, cash flow analysis and analysis of major components of the balance sheet and trying to identify the actual state of the company since its enlistment in Dhaka Stock Exchange (DSE). †¢ Find out the difference between book value and market value of the share price and to identify the possible reasons behind this difference, and find if there is any specific hidden discrepancy in the existing financial statements of the company. †¢ Find out the growth to make the Pro Forma Statements (The Income Statement and the Balance Sheet) and thus forecast the growth potentials of Aftab Automobiles Ltd along with the stated out the results yielding out after the 5 year long term projection (long term cumulative process)., as well as projection of stock price through financial analysis. †¢ To compare the firm’s financial status with one of its rival firm (Atlas Auto) through ratio analysis with the justification of balancing between the market price and book value of the shares. 3: Methodology: Information Source This study is based on the secondary financial data which is published in annual reports and monthly reviews of Dhaka Stock Exchange Ltd. by the respective companies. We have obtained the necessary information from the DSE (Dhaka Stock Exchange LTD), Motijjhil, Dhaka, and from the annual report of the company. Data Processing and Analysis We have calculated different ratio using sourced data from DSE, and showed the comparison between the two companies’ performances over the last five years. Here the positions of companies were compared to their previous year’s performance and then the analysis has been done between those companies current year’s situations. Period of Data We have used data of five consecutive years from 2005, 2006, 2007, 2008, 2009. Statistical Techniques We basically used two different statistical techniques. First we used the Time Series method for ratio analysis and then Cross-Sectional method for showing the comparison between Aftab Motor’s LTD and Atlas Bangladesh LTD. There is also couple of tables and charts to specifically present the data with comments. We also did the regression analysis using the Microsoft Excel. Standard of Comparison As we know that there are few competitors for Aftab Motors LTD in Bangladesh. Among them, we figured that Atlas Bangladesh LTD is one of the most challenging one for Aftab Motors in terms of market share and fiscal performance over time. 4: Limitations of the Study †¢ Due to different month of year closing date comparison may not be accurate. †¢ We faced problem while breaking down the actual balance sheet and sorting out the adjustments. †¢ Due to time constraints we could not visit the premise of Aftab Auto to  incorporate more recent information and views of the â€Å"Top Management† about the performance & position of the company. †¢ Another limitation was collecting the industry averages for the ratio analysis. No such data are readily available in context of Bangladesh. So, instead of the industry average data we have to take the best available rival data. †¢ Also we had some problem regarding what will be the future investment of the company. We had to depend on the secondary source for that. †¢ We did not find exact unit price of company’s products as it was not clearly mentioned in their annual report. †¢ Also the company’s official website is not very informative and organized through which we could collect the information about the company. †¢ Lack of technical knowledge-how in higher-level statistical techniques. †¢ Moreover, time constrains and other factors deterred us to anticipate highest concentration that we could have given to prepare this report. Chapter 2 Analysis & Interpretation 2.1: Revised Balance Sheet based on Market Value of Share Market Value & Book Value of Aftab Auto Ltd: From the Annual Report of the Aftab Automobiles ltd we calculated the Book Vale of their share from 2005 to 2009. Besides that we also collected the Market Value of the share from the library of the DSE (Dhaka Stock Exchange). The following Graph shows the Market Value and the Book Value per share of our proposed company. Figure-1: Market & Book Value of Aftab Ltd. From 2005 to 2009 From the above graph we see that in year 2005, 2008 and 2009 the market price is higher then the book value, which is really good news for us. But in 2006 and 2007 the market price is below then the market price, which indicates that the investors underestimated the company’s wealth. But as our last year in 2009, so our analysis will be based on year 2009. In year 2009, we found that the Market Value is far more then the Book value which is Taka 1,530 and taka 390.38248 respectably. This figure indicates that the investors are willing to pay more for per share for the company then the book value shows because the investors may think that the company may underestimated the company’s wealth. So we constructed a new Balance Sheet compared with the current year (2009) Balance Sheet based on the Market Value of the corporation. Revised Balance Sheet Based on the Market Value in 2009: |Aftab Automobiles Ltd | |Balance Sheet | |2009 | | |Based on Book Value | Based on Market | Increase / Decrease | | | |Value | | |Assets | |Current Assets | | |Stock And Stores (Inventory) | | | | | | | | | | | |Total Stock & Stores | 737,517,274 | 1,281,969,612 | 544,452,338 | | |Total Accounts Receivable | 993,547,199 | 993,547,199 | – | | |Income Tax Deducted at Source | 93,002,081 | 93,002,081 | – | | | | | | | | |Advance, Deposits & Prepayments | 149,320,158 | 149,320,158 | – | | |Cash & Bank Balances | 27,881,100 | 27,881,100 | – | |Total Current Assets | 2,001,267,812 | 2,545,720,150 | 544,452,338 | |Non-Current Assets | | |Property, Plant & Equipment | | | | | | |Land | 58,959,642.00 | 58,959,642 | 648,556,062 | 589,596,420 | | |Building | 169,846,130.00 | 142,270,645 | 213,405,968 | 71,135,323 | | |Shades | 2,682,800.00 | | | | | |Less: |Accumulated | 1,529,591.00 | | | | | |Depreciation till 2008 | | | | | |Tools & Equipment | 45,965,960.00 | | | | | |Less: |Accumulated | 17,743,259.00 | | | | |Depreciation till | | | | | |2008 | | | | |Office Equipment | 31,021,242.00 | | | | | |Less: |Accumulated | 7,323,987.00 | | | | |Depreciation till | | | | | |2008 | | | | |Furniture & Fixture | 16,953,271.00 | | | | | |Less: |Accumulated | 2,973,873.00 | | | | | |Depreciation till 2008 | | | | | |Less: |Accumulated | 26,595,111.00 | | | | |Depreciation till | | | | | |2008 | | | | |Investment (4109300 Share Of Navana CNG) | 33,961,309 | 796,793,270 | 762,831,961 | | |Intangible Assets | – | 1,263,853,978 | 1,263,853,978 | |Total Assets | 2,438,883,896 | 5,744,380,219 | 3,305,496,323 | |Liabilities & Owners Equity | – | – | |Current Liabilities | | | – | – | | |Short Term Loan | | 229,914,219 | 229,914,219 | – | | |Total Accrued & Other Current Liabilities | | 1,275,342,755 | 1,263,853,978 | (11,488,777) | | |Dividend Payable for Preference Share | | 1,179,500 | 1,179,500 | – | |Total Current Liabilities | 1,506,436,474 | 1,494,947,697 | (11,488,777) | |Non-Current Liabilities | | | | – | | |Loan & Deferred Liabilities | | 17,100,000 | 17,100,000 | – | | |Preference Share Capital including Premium | | 9,827,929 | 9,827,929 | – | |Total Liabilities | 1,533,364,403 | 1,521,875,626 | (11,488,777) | |Equity Attributable to Equity Holders | | |Paid up Share Capital (Ordinary Shares – 2319570 Shares) | | 231,957,000 | 3,548,942,100 | 3,316,985,100 | | |Share Premium | | 250,191,730 | 250,191,730 | – | | |Reserve | | 107,100,735 | 107,100,735 | – | | |Retained Earnings | | 316,270,028 | 316,270,028 | – | |Total Assets & Liabilities | 2,438,883,896 | 5,744,380,219 | 3,305,496,323 | Justifications: 1. Stock & Stores: The investors may think that the company underestimates the price of the finished goods. As the company use to measure the finished goods based on the Cost of Production basis. But the original market price is higher then the value written in the Annual Report. Also the market price of the Raw Materials, Store & Spares, Goods in Transit, L/C Margin, Work-In-Process is underestimated. So in Revised Balance Sheet we increase the value of the Stock & Stores. 2. Land: The Land value is underestimated as we know that the land value is calculated as per the purchase price, not as per the market value. We know that the value of the land always increases. So we increase the value of the land. 3. Buildings: The value of the Building is calculated as per the establishment cost and the current value is calculated by deducting depreciation. So in this case the investors may find the Market value of the Building is more then the value used in the annual report. The investors may find the Building in better condition and able to offer the higher price than the value calculated in the balance sheet. So we also increase the value. 4. Plant & Machinery, Tools & Equipment, and Transport Vehicle: As all of these items value is written on the basis of the purchase price and also by deducting the accumulated depreciation. So the investors may find these items in better condition and also think that the market price is higher than the written in Balance sheet. 5. Investment: This Company purchased 4,109,300 pcs of share from Navana CNG Ltd. The value written on the Balance Sheet is from the purchased price. But the Current market price of this share is taka 193.90. So we also increased the value of the investment by using the market value of the stock. 6. Intangible Assets: The market price of the share is increased. This value increased may be the reason is the value increasing of the company’s intangible assets like Patent, Trademark etc. 7. Goods Supplied Account: We are decreasing this account on the basis is that, the company may get some purchase discount from the vendors. So the value of the accounts receivable is decreasing. Overall Comments: In year 2009, we see that the Market price is much higher then the Book Value of each share. Investors are willing to pay more than the book value of each share. The major reasons of the higher market value are the underestimation of the assets, as the assets are calculated based on the purchase price; not on the basis of the market price. Besides that investment to the other shares are also calculated on the purchase price. But the market price is also higher. Moreover, Aftab Automobiles ltd enjoys a better reputation on the market. So the Intangible assets like, Patent, Trade mark should be considered. So we can say that the company’s financial position is good. 2.1: Cash Flow Analysis: Cash flows are the cash receipts and the cash disbursement of the company. Since money does not flow in and out at an equal rate, so in most of the businesses, an analysis of cash flow is important. In our case we are working with the Cash Flow Statement of Aftab Automobiles Ltd from the year 2005 to 2009. After analyzing the statements we can have an idea of the cash dealing of the company of the years under our study. |Sources |2005 |2006 |2007 |2008 |2009 | | | | | | | | |EBIT |55,369,060 |61,681,543 |43,530,063 |79,204,842 |125,312,761 | | | | | | | | |Depreciation | 26,964,852 | 26,964,852|26,964,852 |26,964,852 |26,964,852 | |Tax |-7,179,527 |-14,602,650 |-13,059,019 |-21,781,331 |-51,261,009 | |Operating cash Flow |75,154,385 |74,043,745 |57,435,896 |84,388,363 |101,016,604 | | | | | | | | |Capital Spending: | | | | | | |Ending Net Fixed Investment |30,149,974 |26,582,937 |23,015,900 | |Less Beginning Fixed Investment | |-30,531,889 |-30,531,889 |-23,666,305 |-23,666,305 | |Deprecation | |26,964,852 |26,964,852 |26,964,852 |26,964,852 | |Net Fixed Investment | |26,582,937 |23,015,900 |26,314,447 |29,612,994 | | | | | | | | |Changes In Net Working Capital: | | | | | | |Ending Net Working Capital | |425,800,770 |260,925,322 |298,947,675 |905,519,493 | |Less: Beginning Net Working Capital | |171,666,619 |425,800,770 |260,925,322 |620,450,571 | |Changes In Net Working Capital: | |254,134,151 |-164,875,448 |38,022,353 |285,068,922 | | | | | | | | |Free Cash Flow from Assets | | | | | | |Operating Cash Flow |75,154,385 |74,043,745 |57,435,896 |84,388,363 |101,016,604 | |Net Fixed Investment | |-26,582,937 |-23,015 ,900 |-26,314,447 |-29,612,994 | |Changes In Net Working Capital | |-54,134,151 |-164,875,448 |-38,022,353 |-285,068,922 | |Free Cash Flow | |-6,673,343 |-130,455,452 |20,051,563 |-213,665,312 | |Cash Flow from/to Creditors | | | | | | |Interest Paid |34,992,217 |44,619,538 |48,012,628 |54,362,263 |90,846,346 | |Less New Long Term Borrowing |17,100,000 |17,100,000 |17,100,000 |117,100,000 |26,927,929 | |Cash Flow From Creditors |17,892,217 |27,519,538 |30,912,628 |-62,737,737 |63,918,417 | | | | | | | | |Cash Flow From Investors | | | | | | |Dividend Paid |24,000,000 |12,000,000 |12,000,000 |12,000,000 |1,179,500 | |New Equity |439,792,483 |701,016,976 |685,748,820 |621,050,571 |905,519,493 | |Cash Flow To Investors |463,792,483 |713,016,976 |697,748,820 |633,050,571 |906,698,993 | †¢ As we can see from the cash flow statement that, in 2006, 2007 & 2009 the free cash flow figures are negative. This might happen because of high investment in inventory and R&D departments, means the company used more cash than they had sourced of. †¢ Also the cash flows to Investors were sufficient for the company over the years. The company had sufficient fund to pay out dividends and that would eventually maximize the value of the firm. †¢ Fixed investments were consistent and consumed huge cash over the years. Overall we see that the Sales of the company are increasing which is a good sign. Besides that the company is investing heavily on the fixed assets, which may used to generate more revenue for the company. They are also offering cash dividend each year and also the company paid its short term load and also taking short term loans, which indicates that the company is enjoying a favorable environment in terms of the short term credit situation. So, we can conclude that the Aftab Automobiles Ltd is financially sound based on the Cash Flow analysis. Ratio Analysis and Interpretations To evaluate a firm’s financial condition and performance, the financial analyst usually performs analyses on various aspects to find out the financial health of the firm; among which ratio analysis is one of the most important and commonly used methods. Ratio analysis is a tool frequently used during the analysis to relate two pieces of financial data by dividing one quality by the other. In this study various ratio analyses will be done to understand the financial condition of the company and to compare this condition with its rival firm to get a clear picture. The analysis of financial ratios involves two types of comparison: ↠ Time–Series Analysis: First, the analyst compares a present ratio with past and expected future ratios for the same company. The current ratio (the ratio of current assets to current liabilities) for the present year could be compared with the current ratio for the previous year-end. When financial ratios are arranged over a period of years, the analyst can study the composition of change and determine whether there has been an improvement or deterioration in the firm’s financial condition and performance over time. Here we will conduct time series only on the Aftab Auto Ltd. ↠ Cross-Section Analysis: The second method of comparison involves comparing the ratios of one with those of similar firms or with industry averages at the same point in time. Such a comparison gives insight into the relative financial condition and performance of the firm. It also helps us identify any significant deviation from any applicable industry average (or standard). Here we will discuss and calculate different types of ratios. Then we will  compare the ratios between Aftab Auto Ltd. and Atlas Auto Ltd. The reason for doing this is that the industry average is not available in perspective of Bangladesh. ââ€" ª Liquidity Condition Analysis: Ratios that show the relationship of a firm’s cash and other current assets to its current liabilities are known as liquidity ratios. Different types of liquidity ratios are discussed below. Current Ratio: The ratio that relates current assets to current liabilities is the current ratio. The current ratio indicates the ability of a company to pay its current liabilities from current assets and shows the strength of the company’s working capital position. [pic]s Figure-1: The Current Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Current ratio for Aftab is higher than 1 and it is consistent for all five years. In 2006 it has increased a lot from the previous year but in 2007 it dropped for two consecutive years but again in 2009 it has increased again and is in a good satisfactory condition. Cross-Section Analysis: However, comparing to the ratios of Atlas, we see significant difference the two companies’ ratios. Aftab’s ratios seem to be much weaker than Atlas’s. None of the years it has made the benchmark of 2. However, the last 3 years results are not satisfactory at all because none of them is showing benchmark of 2 or the increasing manner. So, we can conclude that Aftab is showing poor trend in its quick ratio. Quick Ratio: Inventories typically are the least liquid of a firm’s current assets – they are the assets on which losses are most likely to occur in the event of liquidation. Therefore, it is important to measure the firm’s ability to pay off short term obligations without having to rely on the sale of inventories. This is why quick ratio is used. [pic] Figure-2: The Quick Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Quick ratio of Aftab is less than 1 which means it has piled up inventories as its current assets. The trend of quick ratio of Aftab shows that the ratio had been increasing from 2005 to 2006 but then suddenly fell significantly in year 2007 and 2008. Then it has increased in 2009. So, we can conclude that Aftab is showing low quick ration but increasing trend in its quick ratio. Cross-Section Analysis: Comparing with Atlas, Aftab has a very poor quick ratio even though it has increased but its running with risky conditions in terms its quick ratio. Cash Ratio: It is another measure of liquidity of the firm. It shows cash solvency of the firm. Figur-3: The Cash Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Aftab’s cash ratio has seen a fluctuating matter. The ratio is very low. Even though the ratio improved in 2008 than previous year, the ratio is significantly lower. Too much inventory pile up and poor credit collection policy may led to such deteriorating trend in cash ratios. Cross-Section Analysis: Comparing with Aftab, Atlas has a very high cash ratio which indicates Atals has a better credit collection policy and lower piled up inventories. Asset-Management Efficiency Analysis: A set of ratios that measure how effectively a firm manages its assets compared to its sales. These ratios are designed to find out whether the total amount of each type of asset as reported on the balance sheet appear reasonable, too high, or too low considering current and projected sales levels. Asset Management Ratio is done based on inventory turnover ratio, day’s sales outstanding and fixed asset and total asset turnover ratio Total Asset Turnover: The total asset turnover ratio is calculated by dividing sale by total assets. The total assets turnover ratio measures the turnover of all the firm’s assets. [pic] Figure-4: The Total Asset Turnover Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Total turnover of Aftab is not very satisfactory which means its not generating enough revenue by using its total assets which indicates it may some inefficient assets in its stock which deteriorating the total revenue. It’s in decreasing trend till 2007 but after that it as an increasing trend which is a very good sign in fact. Cross-Section Analysis: Atlas has a very high asset turnover ratios which indicates its assets efficient enough to generate more revenues and its in increasing trend for both the firm. Fixed Asset Turnover: The fixed asset turnover ratio is calculated by dividing sale by total fixed assets. The total fixed assets turnover ratio measures the turnover of all the firm’s fixed assets. [pic] Figure-5: Fixed Asset Turnover Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Fixed Asset Turnover of Aftab is very low and it’s in decreasing trend which indicates that it has very inefficient fixed assets in its stock to generate enough sales. . It means it is becoming more efficient to utilize its short term assets to generate sales and even though it’s fixed asset is generating more sales than does the short term assets Cross-Section Analysis: in terms of Fixed Assets Turnover Atlas has a very high fixed asset turnover ratio compare to Aftab which indicates Atlas is doing well in terms of using its fixed assets and generating revenue. Inventory Turnover: This ratio indicates how active the company has been. It talks about the efficiency as well as the management of the company. This ratio indicates the number of times in a trading year a firm sells the value of its stocks. [pic] Figure-6: Inventory Turnover Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Inventory Turnover of Aftab is very low but it’s in increasing trend till 2006 then there was a drop in 2007 after that it increased in 20008 then again it increased in 2009. So tells us that its inventory turnover is fluctuating and it doesn’t have efficient inventory to generate sales properly. This means Aftab was suffering from poor inventory management which is also evident from the balance sheet. But, recently it improving and overcoming the situation which is a good indication. Cross-Section Analysis: comparing with Atlas Aftab has a very low inventory turnover ratio whereas Atlas’s inventory turnover is very high which indicates that Atlas is efficient in managing its inventory. But Atlas’s inventory turnover has a decreasing trend whereas as Aftab’s is in increasing trend Days Sales Outstanding (DSO): DSO indicates the average length of time it takes the firm to collect its credit sales. It is also called the average collection period, is used to evaluate the firm’s ability to collect its credit sales in a timely manner. [pic] Figure-7: DSO of Aftab and Atlas for the years 2005-2009 Time Series Analysis: From the graph it’s been seen that initially low but then there were increasing trend in DSO but after 2007 it’s again starts to decrease which us a good sign that indicates that’s they are being more efficient in collecting its receivables. Cross-Section Analysis: Comparing with Aftab, Atlas has a very low collection period which means Atlas take less time to collect its receivable. ââ€" ª Debt-Management Efficiency Analysis: This ratio measures how effectively a firm is managing its debts. Debt Management ratios include analysis of two types of ratio: debt ratio and times interest earned ratio. Debt to Asset Ratio: It measures the percentage of the firm’s assets financed by creditors. [pic] Figure-8: Debt Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Debt ratio of Aftab is fluctuating trend. It has high debt ratios which indicate that they a high leveraged firm and since interest on debt enjoy tax advantage, this is evident in the gradual increment in EPS figures. This is good news for the investors. Cross-Section Analysis: Comparing with Aftab, Atlas has a very low debt ratio which indicates they have a long-term solvency and low risk but at the same time they don’t have much leverage power to generate more profit and enjoy the tax benefits. Times Interest Earned (TIE) Ratio: The TIE ratio measures the extent to which earnings before interest and taxes (EBIT), also called operating income, can decline before the firm is unable to meet its annual interest cost. Failure to meet this obligation can bring legal action by the firm’s creditor, possibly resulting in bankruptcy. It measures the ability of the firm to meet its annual interest payments [pic] Figure-09: TIE Ratios of Aftab and Atlas for the years 2005-2009 Time Series Analysis: TIE ratio of Aftab is very low which means it has low ability to meet its annual interest payments. Aftab is covering its interest charges by a low margin of safety. This affects the potentiality of raising further debt in future. Cross-Section Analysis: Compare to Atlas, Aftab has a very low TIE ratio which means Atlas has very high safety of margin to cover its interest payment. ââ€" ª Profitability Condition Analysis: A group of ratios showing the effect of liquidity, asset management, and debt management on operating results. Profitability is the net result of a number of policies and decisions. Profitability ration are of three types- Net profit margin on sales, Return on Asset (ROA) and Return on Equity (ROE). Net Profit Margin: This ratio measures how much the sales is contributing to the net profit of the company, which belongs to the shareholders. [pic] Figure-10: Net Profit Margin of Aftab and Atlas for the years 2005-2009 Time Series Analysis: Net Profit Margin of Aftab gradually decreased in the first three year then it started rising and continue to rise. This is a very good indication for the company and as well as the investors. This increasing trend in Aftab’s profit margin ratio will help to attract the investors. Cross-Section Analysis: from the figure we can see that initially Atlas net profit was higher than the Aftab but later on Aftab’s net profit gradually increased and Atlas’s started to decrease. This indicates that Aftab earning more than Atlas does. The decreasing trend in Atlas’s profit margin ratio will not help to attract the investors. Operating Profit Margin: [pic] Figure-11: Operating Profit Margin of Aftab and Atlas for the years 2005-2009 Time Series Analysis: From the graph we can see that Aftab’s operating profit is in increasing trend which is a good indication of the fact that Aftab is becoming more efficient is its operation thus it has been able to reduce the operating cost which enable for higher and increasing operating profits. Cross-Section Analysis: Comparing with Atlas, Aftab is doing well in terms of making operating profit and Afatb has an increasing trend in its operating profit margin whereas Atlas has a decreasing operating profit margin. Earnings Per Share (EPS): [pic] Figure-12: EPS of Aftab and Atlas for the years 2005-2009 Time Series Analysis: EPS of Aftab has a decreasing trend for the first three years and then it followed and increasing trend and a big jump in EPS in 2009. So Aftab is earning more per share of its then it was previously earned. Cross-Section Analysis: From the graph we can see that Aftab has higher EPS then Atlas. Thus Aftab will be able to attract more investors then Atlas as its earning more than Atlas for its per share. Return On Asset: [pic] Figure-13: ROA of Aftab and Atlas for the years 2005-2009 Time Series Analysis: From the table we can see that return on total asset of Aftab is decreasing from the very start period. But from 2007 it starts increasing and it’s a positive factor for the company and the investors’ as well Cross-Section Analysis: ROA ratio of Aftab is lower than Atlas all through the five years. Aftab has faced a severe downfall at 2007 which may be triggered by the high interest charges on its huge amount of debt. So, it is very poor compare to Atlas but its improving for the last three years. Return on Equity: ROE measures the rate of return on stockholder’s investment. [pic] Figure-14: ROE of Aftab and Atlas for the years 2005-2009 Time Series Analysis: From the table we can see that return on total equity of Aftab is decreasing from the very start period. But from 2007 it starts increasing and it’s a positive factor for the company and the investors’ as well. This improvement indicates firm’s improving liquidity position, efficient asset management and efficient use of high debt amount. Cross-Section Analysis: ROE ratio of Aftab is lower than Atlas all through the five years. Aftab has faced a severe downfall at 2007 which may be triggered by the high interest charges on its huge amount of debt. So, it is very poor compare to Atlas but its improving for the last three years. ââ€" ª Market Condition Analysis: The market value ratios represent a group of ratios that relates the firm’s stock price to its earnings and book value per share. These ratios give management an indication of what investors think of the company’s past performance and future prospect. If the firm’s liquidity, asset management, debt management, and profitability ratios are all good then market value ratios will be high which will lead to an increase in the stock price of the company. Market value ratio is of two types- Price/Earnings Ratio and Market/Book value Ratio. Market to Book Ratio: The ratio of a stock’s market price to its book value gives another suggestion of how investors regard the company. Companies with relatively high rates of return on equity generally sell at higher multiples of book value than those with low returns. [pic]Figure-15: M-B Ratio of Aftab and Atlas for the years 2005-2009 Time Series Analysis: It is noticeable that Aftab has an increasing trend in its M/B ratio after 2005 which is good indicator. This indicates investors are gaining confidence on Aftab’s share and are now ready to pay more for Aftab’s book value of its share. Cross-Section Analysis: Even though there are increasing trend in the M/B ratio of Aftab it is much lower than the Atlas’s. It indicates that Atlas is gaining more investor’s trust over the years then Aftab. This justifies the high riskiness of Aftab’s securities due to its huge debts. But its M/B is increasing which means investors are gaining the confidence which is a good indicator to compete with Atlas Price-Earnings Ratio: This is the ratio of the price per share to earnings per share. It shows the dollar amount investors will pay for $1 of current earnings. It is computed by market price per share and earnings per share (EPS). [pic] Figure-16: P/E Ratio of Aftab and Atlas for the years 2005-2009 Time Series Analysis: P/E ratio of Aftab was decreasing trend for the first two years then it experienced a rise in 2007 which indicates the firm’s high growth potential. After that it starts to decrease. This shows firm’s huge riskiness which we have already seen by its increasing debt financing and overall poor management and other ratios. This indicates that investors are now willing to pay less for 1taka of current earnings. Cross-Section Analysis: Aftab has a lower P/E ratio then Atlas but both the company has the same decreasing trend in its P/E ratio. So both the company is losing investors’ confidence and investors are now willing to pay less for 1taka of current earnings. Summary of all the Ratio Calculation: The calculation of the following ratios has been done following the particular formulas. In the Appendix section we have attached the calculation procedures in details. Aftab Automobiles Limited |Type of Ratios |2005 |2006 |2007 |2008 |2009 | |Liquidity Ratio | |Current Ratio |1.19 |1.39 |1.20 |1.20 |1.33 | |Quick Ratio |0.39 |0.83 |0.79 |0.78 |0.84 | |Cash Ratio |0.027 |0.014 |0.019 |0.020 |0.019 | |Asset-Management Efficiency Ratio | |Total Asset Turnover |1.03 |0.86 |0.65 |0.83 |0.87 | |Fixed Asset Turnover |5.00 |5.31 |2.95 |4.22 |4.86 | |Inventory Turnover |1.7 |2.0 |1.9 |2.7 |2.5 | |DSO |38.3 |135 |210 |178.2 |128 | |Debt Management Ratio | |Debt-Asset Ratio |68.13 |61.22 |66.09 |72.23 |62.87 | |Time Interest Earned |2.5 |2.7 |2.0 |2.6 |2.4 | |Profitability Ratio | |Net Profit Margin |3.38 |3.03 |2.33 |3.10 |14.90 | |Operating Profit |6.19 |6.17 |6.37 |6.95 |10.30 | |Earnings per Share |28.58 |27.91 |18.06 |24.76 |136.50 | |Return on Assets |3.5 |2.6 |1.5 |2.6 |13.0 | |Return on Equity |11.0 |6.7 |4.4 |9.2 |35.0 | |Market Ratio | |Price Earning Ratio |14.8 |10.9 |20.3 |15.8 |11.6 | |Market/Book Ratio |1.62 |0.73 |0.90 |1.46 |4.07 | Atlas Bangladesh Limited |Type of Ratios |2005 |2006 |2007 |2008 |2009 | |Liquidity Ratio | |Current Ratio |2.46 |2.45 |2.55 |2.12 |1.86 | |Quick Ratio |2.07 |1.82 |1.86 |1.33 |1.11 | |Cash Ratio |1.08 |0.77 |0.94 |0.55 |0.40 | |Asset-Management Efficiency Ratio | |Total Asset Turnover |2.22 |2.53 |2.73 |3.34 |3.31 | |Fixed Asset Turnover |114.72 |121.53 |111.04 |170.57 |237.08 | |Inventory Turnover |11.0 |12.1 |10.0 |10.6 |9.4 | |DSO |4.08 |6.20 |2.87 |2.16 |3.32 | |Debt Management Ratio | |Debt-Asset Ratio |46.50 |46.59 |44.46 |51.69 |56.85 | |Time Interest Earned |1510.2 |539.6 |3477.4 |363.4 |827.3 | |Profitability Ratio | |Net Profit Margin |4.60 |3.84 |4.69 |3.21 |5.22 | |Operating Profit |4.73 |5.93 |3.95 |6.94 |4.73 | |Earnings per Share |17.33 |11.97 |12.63 |9.69 |22.39 | |Return on Assets |10.2 |9.7 |12.8 |10.7 |17.3 | |Return on Equity |19.1 |18.2 |23.0 |22.2 |40.0 | |Market Ratio | |Price Earning Ratio |19.5 |16.8 |24.4 |37.7 |21.3 | |Market/Book Ratio |3.72 |3.06 |5.62 |8.37 |8.54 | Chapter 3 Enquiry into Stock Price Movement In this chapter we will consider only the stock price movement of the year 2005-2009. Daily stock price is affected due to various factors that can be a macroeconomic variable as well as company specific variable. But in this section we will consider only the corporate decision factors. Variables can be some the following ones: 1. Dividend declaration 2. AGM Share Price Movement for the year of 2009: Figure-17: Stock Price fluctuation of Aftab for the year 2009 Comment: We can see that the price of Aftab Auto rose continuously throughout the year till the middle of May. DSE inquiry tells us that there was no sensitive price information that was undisclosed for the price hike that we see. Then there were drop in the stock price but after that we can see a significant rise from around beginning of the September. We can only conclude that dividend declaration on 31st August may contribute to this price hike. Again after the AGM took place in 6th December, the stock price started to fall. But at the end of the year, the company experienced a slight increase in the share price. Calculation of Beta: Average Market return (RM) = 1.884658331 Covariance (Ri,RM) = 0.00543901 Variance = 0.01175511849 ÃŽ ²i = 0.462692922 Comment: Beta measures the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. As beta of Aftab Auto is less than 1 that is 0.463 which means that the security will be less volatile than the market. Dividend declaration & Stock Price Movement: We will now take a functional approach to the matter of dividend declaration for the year. We have taken the dividend declaration on 31/08/2009 an important factor which affected the stock price during that period. A regression analysis is done using dummy variable. The regression output summary follows: SUMMARY OUTPUT OF REGRESSION |R Square |0.549260989 | | | |Cost of Capital |15% | | | |Year |10 | | | |Investment | |1,500,000,000.00 | | |Quantity |200 | |200.00 | |Price |10,000,000.00 | |10,000,000.00 | |Revenue | | |2,000,000,000.00 | |VC |70% | |1,400,000,000.00 | |FC |3.50% | |70,000,000.00 | |Depreciation | | |150,000,000.00 | |EBIT | | |380,000,000.00 | |Tax |27.50% | |104,500,000.00 | |Net Income | | |275,500,000.00 | |Cash flow | | |425,500,000.00 | So, project NPV at 2010 is, NPV2010 = -1,500,000,000 + (425,500,000.00 X PVIFAn=10, i=15%) NPV2010 = -1,500,000,000 + 425,500,000.00 * 5.018768626 = 635,486,050.36 Taka So the NPV of the Project is 635,486,050.36 Taka which is positive. So the company may go for this project based on the assumptions we took to calculate the NPV. Sensitivity Analysis: Now we would like to test the sensitivity of NPV to various inputs of the project. Because we need to know what happens to NPV if some inputs change. This helps give us better understanding of the projects situation to sustain the NPV. |Particulars |Amount in Taka |Amount in Taka |Change | |Revenue |2,000,000,000.00 |1,600,000,000.00 |(0.20) | |VC |1,400,000,000.00 |1,120,000,000.00 |(0.20) | |FC |70,000,000.00 |70,000,000.00 |- | |Depreciation |150,000,000.00 |150,000,000.00 |- | |EBIT |380,000,000.00 |260,000,000.00 |(0.32) | |Tax |104,500,000.00 |71,500,000.00 |(0.32) | |Net Income |275,500,000.00 |188,500,000.00 |(0.32) | |Cash flow |425,500,000.00 |338,500,000.00 |(0.20) | |NPV |635,486,050.36 |198,853,179.90 |(0.69) | |Relative Change | | |3.44 | Here we see that, %∆in Revenue= -20% %∆in NPV = -69% And Relative Change = 3.44 So from the above analysis we can see that NPV is very sensitive to change in revenue. For 20% decrease of Revenue, NPV is decreased by 69%. Besides that, 1% change of revenue; NPV is changed for 3.44%. New Share Price with the project: New share price= (current capitalization + NPV of the project) / shares outstanding = (market price per share on the last day of 2009 * shares outstanding +NPV) / shares outstanding = (2,048.75 * 2,319,570+ 635,486,050.36) / 2,319,570 = 2,322.72 Taka/ share Scenario Analysis For scenario analysis we took three cases 1. Pessimistic 2. Expected 3. Optimistic situation We will assume that only sales are taken for the scenario analysis. The whole income statement is vertical size statement. Then after calculating the NPV for three scenarios of sales we will find the share price. We took that in pessimistic scenario sales will drop by 20% and in optimistic scenario sales will increase by 20%. |Particulars |Pessimistic |Normal |Optimistic | |Quantity |160.00 |200.00 |240.00 | |Price |10,000,000.00 |10,000,000.00 |10,000,000.00 | |Revenue |1,600,000,000.00 |2,000,000,000.00 |2,400,000,000.00 | |VC |1,120,000,000.00 |1,400,000,000.00 |1,680,000,000.00 | |FC |70,000,000.00 |70,000,000.00 |70,000,000.00 | |Depreciation |150,000,000.00 |150,000,000.00 |150,000,000.00 | |EBIT |260,000,000.00 |380,000,000.00 |500,000,000.00 | |Tax |71,500,000.00 |104,500,000.00 |137,500,000.00 | |Net Income |188,500,000.00 |275,500,000.00 |362,500,000.00 | |Cash flow |338,500,000.00 |425,500,000.00 |512,500,000.00 | |NPV |198,853,179.90 |635,486,050.36 |1,072,118,920.83 | Now we can calculate the future stock price for these three scenarios using the new share price finding process shown earlier in this chapter. |Description |Pessimistic |Normal |Optimistic | |MKT Price |2,048.75 |2,048.75 |2,048.75 | |No. Of Share Outstanding |2,319,570.00 |2,319,570.00 |2,319,570.00 | |Current Capitalization (A) |4,752,219,037.50 |4,752,219,037.50 |4,752,219,037.50 | |NPV (B) |198,853,179.90 |635,486,050.36 |1,072,118,920.83 | |(A + B) |4,951,072,217.40 |5,387,705,087.86 |5,824,337,958.33 | |New Share Price With Project |2,134.48 |2,322.72 |2,510.96 | We can see that according to NPV the future market price of the company changes. Breakeven Quantity Based on NPV: |PVIFAn=10, i=15% |5.019 | |Initial Investment |1,500,000,000.000 | |EAC |298,878,093.768 | |Fixed Cost |70,000,000.000 | |VC |7,000,000.000 | |Price |10,000,000.000 | |Tax |0.275 | |1-Tc |0.725 | |Depreciation |150,000,000.000 | |After Tax Fixed Charge |308,378,093.768 | |After Tax Contribution |2,175,000.000 | |BEP Quantity |141.783 | |Particulars |Year (2011-2021) | |Investment |1,500,000,000.000 | |Quantity |141.78 | |Price |10,000,000.00 | |Revenue |1,417,830,316.17 | |VC |992,481,221.32 | |FC |70,000,000.00 | |Depreciation |150,000,000.00 | |EBIT |205,349,094.85 | |Tax |56,471,001.08 | |Net Income |148,878,093.77 | |Cash flow |298,878,093.77 | So, project NPV at 2010 is, NPV2010 = -1,500,000,000 +(298,878,093.77 X PVIFAn=10, i=15%) NPV = -1,500,000,000 + 298,878,093.77 * 5.018768626 = 0.00 Taka. Breakeven Price Based on NPV: |Particulars |Amount in Taka | |Revenue | 1,825,349,094.85 | | VC | 1,400,000,000.00 | | FC | 70,000,000.00 | | Depreciation | 150,000,000.00 | | EBIT | 205,349,094.85 | | Tax | 56,471,001.08 | | Net Income | 148,878,093.77 | | Cash flow | 298,878,093.77 | We know, Revenue = Price X Quantity Price = Revenue / Quantity Price = 1,825,349,094.85 / 200 Break-Even Price = 9,126,745.47 Chapter 5 Prospective Analysis With the different factors positively contribute to the growth of the stock price of Aftab Automobiles, we have analyzed the trend of different variables from the five year financial statement and detected the growth or reduction of every item. After that we have selected few components which show a growing trend and positively contribute to the growth of Stock Price. As we found that for Aftab Automobiles ltd, Market price movement is mostly similar with company’s financial performance as like sales growth & profit growth. |Growth Rates (%) |2009-2008 |2008-2007 |2007-2006 |2006-2005 |GEOMEAN | |Sales |14.74% |41.81% |-15.92% |8.95% |17.67% | |Net Profit/Loss |28.96% |88.45% |-35.28% |-2.36% |50.61% | |Operating Profit/Loss |69.27% |26.14% |47.34% |7.64% |28.45% | |EBIT |58.21% |81.95% |-29.43% |11.35% |37.83% | From the income statement we can concentrate on growth rates of sales revenue, operating profit, EBT and Net income. We are concentrating on average of last 4 years growth performance. From here we will use average sales growth of 17.67% for forecasting future market price. As growth rate of operating profit, EBT and Net income is close in figure, we are going to use average net income growth of 50.61% for forecast the market price trend. As the world economy is experiencing the recession and the impact of recession is also started affecting our economy, so it will be a highly optimistic choice if we expect that the company will grow at the rate of 17.67% or 50.61%. On the other hand, the other growth rates that have been calculated also give us the indication that we cannot consider them as company growth rate given GDP growth of Bangladesh is 5.5% and world economy is in recession. We can assume that average growth rate for forecasting the share price & value of the company. Growth Rate: Scenario -1 Assuming growth rate of 17.67% as average of last 4 years growth of Sales | |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |17.67% |17.67% |17.67% |17.67% |17.67% | |Sales |2,124,637,706 |2,500,061,189 |2,941,822,001 |3,461,641,948 |4,073,314,080 |4,793,068,678 | |Net Income |316,616,692 |372,562,861 |438,394,719 |515,859,066 |607,011,363 |714,270,271 | |Dividend |47,570,900 |55,976,678 |65,867,757 |77,506,590 |91,202,004 |107,317,398 | |Addition to Retain Earnings|269,045,792 |316,586,183 |372,526,962 |438,352,476 |515,809,359 |606,952,873 | |Total Asset |2,438,883,896 |2,869,834,680 |3,376,934,468 |3,973,638,789 |4,675,780,763 |5,501,991,224 | |Total Debt |1,533,364,403 |1,804,309,893 |2,123,131,451 |2,498,288,779 |2,939,736,406 |3,459,187,829 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |632,856,211 |1,005,383,174 |1,443,735,650 |1,959,545,009 |2,566,497,881 | |Total Financing |2,438,883,896 |3,026,415,569 |3,717,764,090 |4,531,27 3,893 |5,488,530,879 |6,614,935,175 | |Funds Needed |- |(156,580,889) |(340,829,621) |(557,635,104) |(812,750,116) |(1,112,943,951) | |Debt: Equity Ratio |1.69 |1.48 |1.33 |1.23 |1.15 |1.10 | |Sustainable Growth Rate |42.27% |34.96% |30.48% |27.49% |25.37% |23.81% | |EPS |136.50 |160.62 |189.00 |222.39 |261.69 |307.93 | |Price |2,048.75 |2,410.76 |2,836.75 |3,338.00 |3,927.82 |4,621.87 | Assuming 17.67% growth rate, it has been found that the company has excess fund, which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses. The projection says that assuming 17.67% growth rate, after 5 years in 2014 EPS of the company would be 307.93 as well as considering current P/E ratio as constant factor, in year 2014 share price would be Taka 4,621.87. Growth Rate: Scenario -2 Assuming growth rate of 50.61% as average of last 4 years growth of Net income | |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |50.61% |50.61% |50.61% |50.61% |50.61% | |Sales |2,124,637,706 |3,199,916,849 |4,819,394,766 |7,258,490,458 |10,932,012,478 |16,464,703,993 | |Net Income |316,616,692 |476,856,400 |718,193,424 |1,081,671,116 |1,629,104,867 |2,453,594,840 | |Dividend |47,570,900 |71,646,532 |107,906,843 |162,518,496 |244,769,106 |368,646,751 | |Addition to Retain Earnings |269,045,792 |405,209,867 |610,286,581 |919,152,620 |1,384,335,761 |2,084,948,089 | |Total Asset |2,438,883,896 |3,673,203,036 |5,532,211,092 |8,332,063,126 |12,548,920,274 |18,899,928,825 | |Total Debt |1,533,364,403 |2,309,400,127 |3,478,187,532 |5,238,498,242 |7,889,702,202 |11,882,680,486 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |721,479,895 |1,331,766,477 |2,250,919,096 |3,635,254,857 |5,720,202,947 | |Total Financing |2,438,883,896 |3,620,129,488 |5,399,203,473 |8,078,666,803 |12,114,206,524 |18,192,132,898 | |Funds Needed |- |53,073,548 |133,007,619 |253,396,323 |434,713,750 |707,795,927 | |Debt: Equity Ratio |1.69 |1.76 |1.81 |1.84 |1.87 |1.88 | |Sustainable Growth Rate |42.27% |44.75% |46.56% |47.85% |48.74% |49.35% | |Price |2,048.75 |3,085.62 |4,647.26 |6,999.23 |10,541.54 |15,876.62 | Assuming 50.61% growth rate, it has been found that the company required additional fund to run to sustain the business in this growth rate. The projection says that assuming 50.61% growth rate, after 5 years in 2014 EPS of the company would be 1057.78 as well as considering current P/E ratio as constant factor, in year 2014 share price would be Taka 15,876.62. Growth Rate: Scenario -3 Assuming growth rate of 42.27% as sustainable growth rate Sustainable Growth Rate = [pic] = [pic] = 42.27% | |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |42.27% |42.27% |42.27% |42.27% |42.27% | |Sales |2,124,637,706 |3,022,749,966 |4,300,506,074 |6,118,386,469 |8,704,708,779 |12,384,303,496 | |Net Income |316,616,692 |450,454,726 |640,867,854 |911,771,112 |1,297,188,735 |1,845,527,449 | |Dividend |47,570,900 |67,679,744 |96,288,861 |136,991,427 |194,899,502 |277,286,081 | |Addition to Retain Earnings |269,045,792 |382,774,982 |544,578,993 |774,779,685 |1,102,289,233 |1,568,241,368 | |Total Asset |2,438,883,896 |3,469,832,148 |4,936,575,765 |7,023,331,171 |9,992,185,492 |14,216,013,523 | |Total Debt |1,533,364,403 |2,181,537,673 |3,103,702,297 |4,415,678,018 |6,282,243,106 |8,937,829,769 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |699,045,010 |1,243,624,003 |2,018,403,688 |3,120,692,921 |4,688,934,289 | |Total Financing |2,438,883,896 |3,469,832,148 |4,936,575, 765 |7,023,331,171 |9,992,185,492 |14,216,013,523 | |Funds Needed |- |- |- |- |- |- | |Debt: Equity Ratio |1.69 |1.69 |1.69 |1.69 |1.69 |1.69 | |Sustainable Growth Rate |42.27% |42.27% |42.27% |42.27% |42.27% |42.27% | |EPS |136.50 |194.20 |276.29 |393.08 |559.24 |795.63 | |Price |2,048.75 |2,914.78 |4,146.90 |5,899.85 |8,393.79 |11,941.96 | Assuming 42.27% growth rate, it has been found that the company has no excess fund or no deficit. The projection says that assuming 42.27% growth rate, after 5 years in 2014 EPS of the company would be 795.63 as well as considering current P/E ratio as constant factor, in year 2013 share price would be Taka 11,941.96. Growth Rate: Scenario -4 Assuming growth rate of 5.5% as GDP growth rate | |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |5.50% |5.50% |5.50% |5.50% |5.50% | |Sales |2,124,637,706 |2,241,492,780 |2,364,774,883 |2,494,837,501 |2,632,053,564 |2,776,816,510 | |Net Income |316,616,692 |334,030,610 |352,402,294 |371,784,420 |392,232,563 |413,805,354 | |Dividend |47,570,900 |50,187,300 |52,947,601 |55,859,719 |58,932,004 |62,173,264 | |Addition to Retain |269,045,792 |283,843,311 |299,454,693 |315,924,701 |333,300,559 |351,632,090 | |Earnings | | | | | | | |Total Asset |2,438,883,896 |2,573,022,510 |2,714,538,748 |2,863,838,380 |3,021,349,490 |3,187,523,712 | |Total Debt |1,533,364,403 |1,617,699,445 |1,706,672,915 |1,800,539,925 |1,899,569,621 |2,004,045,950 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |600,113,339 |899,568,031 |1,215,492,732 |1,548,793,291 |1,900,425,381 | |Total Financing |2,438,883,896 |2,807,062,249 |3,195,490,411 |3,605,282,122 |4,037,612,377 |4,493,720,796 | |Funds Needed |- |(234,039,738) |(480,951,663) |(741,443,742) |(1,016,262,887) |(1,306,197,084) | |Debt: Equity Ratio |1.69 |1.36 |1.15 |1.00 |0.89 |0.80 | |Sustainable Growth Rate |42% |31% |25% |21% |18% |16% | |EPS |136.50 |144.01 |151.93 |160.28 |169.10 |178.40 | |Price |2,048.75 |2,161.43 |2,280.31 |2,405.73 |2,538.04 |2,677.63 | Assuming realistic one 5.5% growth rate, it has been found that the company has excess fund, which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses. The projection says that assuming 5.5% growth rate, after 5 years in 2014 EPS of the company would be 178.40 as well as considering current P/E ratio as constant factor, in year 2014 share price would be taka 2,677.63. Calculating Expected Return of Aftab Auto using CAPM: The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. 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 or risk premium. 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). [pic] [pic] = 7.25% + 0.463 (1.88% – 7.25%) [pic] = 4.915% We have determined market return Rm for year 2009 taking the monthly change in DSE Index. The average market return in 2009 has been found to be 1.88% and beta for the company is 0.46. If we post all the values in the above equation (considering Rf=7.5) we get the expected return [pic] to be 4.915%. This is lower than the risk free rate. This is the outcome of low market return. As such the expected return derived from CAPM can not be used for stock valuation. Future Stock Price Valuation under Gordon Model : In this section we shall make a projection of market stock price of Aftab Auto. It has a security specific beta risk of 0.46 and the expected return for the company is 4.915%. But the expected return 4.915% is based on market return 1.88%. This phenomenon may be due to the fact that in 2009 due to the political situation & anti corruption activity of the government, a lot of money has been invested in DSE. As a result the price of stocks increased. It is vivid from the below graph. [pic]Figure-20: DSE General Index for the 2009 As the Expected Return derived from CAPM is too low (4.915%), we shall use another formula for expected rate of return. ks=(D1/P0)+g Growth rate, g=Retention Rate*ROE Retention Rate = 0.85g= (0.85*0.35) =29.71% ROE = 35% D1= D0 (1+g) =20.51*1.2975=26.50 ks = (26.61/ 2048.75)+0.2975 = 31.01% From this formula we get the Expected Return (ks) 31.01%. Using the above information we can forecast expected stock value for Aftab Auto using the Gordon Model (Dividend Valuation Model). We assume that dividends will grow at a constant rate, g, forever. Since future cash flows grow at a constant rate forever, the value of a constant growth stock is the present value of a growing perpetuity: [pic]Where, [pic] We assume g=29.71% & k=37.12%. From all the above information we can forecast the future stock price for 2009. So the stock price for 1st January, 2010 would be BDT 459.64 But the real average stock price for first three months in 2010 was BDT 298.43. The average stock price is 54% lower than our forecasted price. This indicates the price of Aftab share is undervalued in the market. The explanation for lower market price may be due to decreasing trend in the General Index in 2010. Fig-21: DSE General Index in 2010 |Year |Dividend |Projected Price of Stock(using Gordon Model) | |2009 (Actual) |Do |20.51 |2,048.75 | |2010 (projected) |D1 |26.60388 |2048.75 | |2011 (projected) |D2 |34.50836 |2657.469714 | |2012 (projected) |D3 |44.76141 |3447.050776 | |2013 (projected) |D4 |58.06081 |4471.230282 | |2014 (projected) |D5 |75.3117 |5799.711558 | |2015 (Projected) |D6 |97.68813 | | Future Market Price projection in different growth Rate: [pic] |Growth Rate |2006 |2007 | |Sales |2,124,637,706 |2,500,061,189 | |Cost |1,808,021,014 |2,127,498,327 | |Net Income |316,616,692 |372,562,861.48 | |Asset |2,438,883,896 |2,869,834,680.42 | |Debt |1,533,364,403 |1,804,309,893.01 | |Equity |905,519,493.00 |1,065,524,787.41 | |Total |2,438,883,896.00 |2,869,834,680.42 | |Debt : Equity Ratio |1.69 |1.69 | Here the plug variable is Dividend distribution of taka 212,557,567 and thus the Debt : Equity ratio becomes unchanged. Scenario 2: |Particulars |2,009.00 |17.67% Growth Rate | |Sales |2,124,637,706 |2,500,061,189 | |Cost |1,808,021,014 |2,127,498,327 | |Net Income |316,616,692 |372,562,861.48 | |Asset |2,438,883,896 |2,869,834,680.42 | |Debt |1,533,364,403 |1,591,752,325.95 | |Equity |905,519,493.00 |1,278,082,354.48 | |Total |2,438,883,896.00 |2,869,834,680.42 | |Debt:Equity Ratio |1.69 |1.25 | In this case, no Dividend is paid. So Equity increases for the Net income and thus Debt goes down. So in this case, plug variable is the Debt: Equity ratio. Scenario Analysis: In this case study, the growth rate of 5.5% has been selected as the constant growth rate and the pro forma statement has been generated based on this growth rate. For scenario analysis, both optimistic and pessimistic scenarios are being considered. | |Current |Scenario Analysis of 2009 Pro-forma | |Year |2009 |Pessimistic |Normal |Optimistic | |Growth Rate | |2.50% |5.50% |8.50% | |Sales |2,124,637,706 |2,177,753,649 |2,241,492,780 |2,305,231,911 | |Net Income |316,616,692 |324,532,109 |334,030,610 |343,529,111 | |Dividend |47,570,900 |48,760,173 |50,187,300 |51,614,427 | |Addition to Retain Earnings |269,045,792 |275,771,937 |283,843,311 |291,914,684 | |Total Asset |2,438,883,896 |2,499,855,993 |2,573,022,510 |2,646,189,027 | |Total Debt |1,533,364,403 |1,571,698,513 |1,617,699,445 |1,663,700,377 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |592,041,965 |600,113,339 |608,184,712 | |Total Financing |2,438,883,896 |2,752,989,943 |2,807,062,249 |2,861,134,555 | |Funds Needed |- |(253,133,949) |(234,039,738) |(214,945,527) | |Debt: Equity Ratio |1.69 |1.33 |1.36 |1.39 | |Sustainable Growth Rate |42.27% |30.45% |31.35% |32.24% | |EPS |136.50 |139.91 |144.01 |148.10 | |Price |2,048.75 |2,099.97 |2,161.43 |2,222.89 | In the above scenario analysis, we have taken the 5.5% growth rate in normal situation. If we want to be optimistic enough to predict that the economy will have a high growth and the company will also able to grow at 8.50%. On the other hand, the situation can also be worse enough to have a growth lower than the normal and the company may face a growth of 2.50%. After analyzing the scenario of different situation we can say that the projected growth rate is appropriate for the company which will help the company to operate in the market even if the situation is worse. It gives a positive indication towards the company and increases the shareholders confidence to invest in the company’s share. Chapter 6 Findings & Conclusion: At the end we can say that, in year 2009, we see that the Market price is much higher then the Book Value of each share. Investors are willing to pay more than the book value of each share. The major reasons of the higher market value are the underestimation of the assets, as the assets are calculated based on the purchase price; not on the basis of the market price. Besides that investment to the other shares are also calculated on the purchase price. But the market price is also higher. Moreover, Aftab Automobiles ltd enjoys a better reputation on the market. So the Intangible assets like, Patent, Trade mark should be considered. So we can say that the company’s financial position is good. Based on market price if we re-construct the balance sheet, we have to introduce ‘Goodwill’ as intangible asset for Aftab Auto. This goodwill basically shows the confidence of the shareholders & investors on Aftab Auto backed by some positive news. Overall we see that the Sales of the company are increasing which is a good sign. Besides that the company is investing heavily on the fixed assets,  which may used to generate more revenue for the company. They are also offering cash dividend each year and also the company paid its short term load and also taking short term loans, which indicates that the company is enjoying a favorable environment in terms of the short term credit situation. So, we can conclude that the Aftab Automobiles Ltd is financially sound based on the Cash Flow analysis. Profit margin, operating profit, EPS, market-book value of the Aftab is increasing which indicates that the company is becoming more efficient in terms of its operations and also gaining investors confidence. So we can say that after experiencing some downfall Aftab Auto is now experiencing efficiency in its performance and also investors’ confidence. From the cash flow statement we can see that, in 2006, 2007 & 2009 the free cash flow figures are negative. This might happen because of high investment in inventory and R&D departments, means the company used more cash than they had sourced of. . Also the cash flows to Investors were sufficient for the company over the years. The company had sufficient fund to pay out dividends and that would eventually maximize the value of the firm. Fixed investments were consistent and consumed huge cash over the years. Using dummy variable to find effects of Dividend declaration was a success in 2009. We have seen that dividend declaration had a significant effect on the share price of Aftab Auto in the year 2009. Price fluctuated after the dividend was declared. Price increased significantly after the dividend was declared. Using dummy variable to find effects of AGM on Stock Price was a success in 2009. We have seen that AGM declaration also had a significant effect on the share price of Aftab Auto in the year 2009. Price fluctuated after the AGM took place. Price fell enormously after the AGM. We assumed a hypothetical situation of capital investment for Aftab Auto. The project turned out to have a positive NPV of 635,486,050.36 Taka. So it’s a project that adds value to the company. Incorporating the value of the project in the share price result is a share price of 2322.72 taka. This is higher than the market price of 2048.75 taka in the last trading day of 2009. This shows that the project adds value to the wealth of the shareholders. From the sensitivity analysis, we can see that NPV is very sensitive to change in revenue. For 20% decrease of Revenue, NPV is decreased by 69%. Besides that, 1% change of revenue; NPV is changed for 3.44%. The scenario analysis shows that under pessimistic scenario of sales variable NPV becomes 198,853,179.90 taka and the future share price becomes 2134.48 taka. And optimistic scenario of sales variable results in a NPV of 1,072,118,920.83 taka and future price of share becomes 2510.96 taka. This shows how changes in sales in different situation can affect the project, its NPV and the future market price per share. But in this case it is satisfactory that sales change doesn’t affect the share price of the company to a great extent. This can mean that the company has a diversified way to do their business that a single project is not that much strong to affect the company’s price per share. Break-Even Quantity for the new investment is 142 units if the selling price is 10,000,000 per unit. On the other hand, Break-Even Price is 9,126,745.47 if the selling quantity is 200 units. In projecting future market price, assuming realistic one 5.5% growth rate, it has been found that the company has excess fund, which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses. The projection says that assuming 5.5% growth rate, after 5 years in 2014 EPS of the company would be 144.01 as well as considering current P/E ratio as constant factor, in year 2013 share price would be 2,677.63 Initially we assumed many growth variables, but considering current world wide economic condition, Bangladesh GDP growth rate of 5.5% as an assumption would be most appropriate, as due to recession period it would be very optimistic to assume higher growth rate