FIN440.

Submitted To:

Shegofta Shabnom,

Lecturer of Department of Finance,

North South University.

Submitted By:

Iftekar Hasan Sajib ID: 1411365030

Shaimul Haque ID: 1330336030

Maksuda Akter Bonna ID: 1311265030

Israt Jahan Nipa ID: 1230988030

Sumaiya Masud ID: 1311076630

Date of Submission: 18th March, 2017

1
Latter of Transmittals
05.04.2016

Shegofta Shabnom

Lecturer

School of Business & Economics

North South University.

Dear Sir,

With due respect, we beg and state that we would like to present our report on the analysis on two
manufacturing organizations registered in DSE (Heidelberg &Confidence) using several ratios to
examine their financial condition. We have also gone to some local stores to collect information
about how they manage their cash, inventory account receivables, EFN and WACC etc. We all
tried our best to collect all updated information and create a perfect business analysis.

Therefore, we shall be available to answer any question and clarification.

Sincerely yours,

Iftekar Hasan sajib

ID: 1411365030

Section: 08, Course: Fin 440

On behalf of my group mates

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Table of Contents
Introduction .................................................................................................. 4

Company Background ................................................................................ 5-6

Part:1 Ratio Analysis ............................................................................... 6-20

Part:2 Cash Flow .................................................................................. 20-22
Part:3 Free Cash flow from Pro-Forma Statements ............................... 23-24
Part:4 Weighted Average Cost of Capital (WACC) .................................24-26
Part:5 Firms Valuation .......................................................................... 26-27

Introduction
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Financial statement analysis (or financial analysis) is the process of studying and analyzing a
company's financial statements to make better economic decisions. Here, we have analyzed the
financial statement of Heidelberg Cement Bangladesh LTD and Confidence cement LTD, and
tried to make a comparison between these two companies in order to decide which one is in better
position i.e. has greater value. Heidelberg Cement Bangladesh LTD and Confidence cement LTD,
both are very renowned companies in cement industry of Bangladesh, and sell their product with
strong brand image and market reputation at a premium price across all regions and segments.
However, in order to analyze the financial position of these two companies, we have calculated
different types of ratio, Weighted Average Cost of Capital and Free cash flow of the future. Our
main aim is to value the two firms’ financial models to find their value and decide which one is a
better option to invent in.

4
Company background

Heidelberg Cement Bangladesh LTD: Heidelberg Cement Bangladesh Limited is one of

the largest manufacturers of top-quality cement in Bangladesh, and represents two reputed brands:
Ruby Cement and Scan Cement.

In 1998, Heidelberg Cement Group established its presence in Bangladesh by setting up a floating
terminal with onboard packing facilities in the port of Chittagong. In 1999, the Group further
strengthened its position in Bangladesh and built a greenfield plant in Kanchpur, near Dhaka, under
the name Scan Cement International Limited. In 2000, Heidelberg Cement bought a minority
position in Chittagong Cement Clinker Grinding Co. Limited (CCCGCL), followed soon
thereafter by acquisition of a controlling stake. In 2003, the two companies were merged and the
name changed to Heidelberg Cement Bangladesh Limited. Since 2004, the company has
diversified its product range by introducing Portland Composite Cement (PCC) into the market.
The company also produces Ordinary Portland Cement (OPC).

Heidelberg Cement further increased the capacity of its Kanchpur plant by setting up another
grinding unit able to process 0.45 million tons per year, which was commissioned in 2008. The
company also increased the capacity of its Chittagong plant by installing another cement mill of
0.75 million tons per year, which has been in operation since the end of 2011. The total production
capacity now stands at 2.4 million tons per year. Both plants are certified according to the globally
applicable ISO 14001 environmental management system standards. In 2013, Heidelberg Cement
installed another cement silo with a capacity of 8,000 tons at its Kanchpur plant as part of its silo
project, which will help to increase the productivity.

Our brands Scan Cement and Ruby Cement are both Portland Composite Cement (PCC), using
top-quality clinker and other cementitious materials blended to create the best characteristics for
the customer. The strong brand image and market reputation of both brands allow Heidelberg
Cement Bangladesh to sell Scan Cement and Ruby Cement at a premium price across all regions
and segments.

Confidence Cement LTD: Confidence Cement Limited (CCL) is the first private sector
cement manufacturing company in Bangladesh established in 1994 with having 4,80,000 M/T

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annual production capacity at Chittagong. Confidence Cement Ltd. Is the first ISO-9002 certified
Cement Manufacturer in Bangladesh. It has a unique management system in Quality Assurance,
Marketing, Sales and Procurements. It Manufactures Portland Cement and Portland Composite
Cement. CCL aims to be the number one cement manufacturing company in Bangladesh, through
continuous development and by producing high and consistent quality Cement to meet all
customer’s requirement at all time.

Part: 1, Ratio Analysis

Liquidity ratios:
Short-term Solvency Ratios attempt to measure the ability of a firm to meet its short-term financial
obligations. In other words, these ratios seek to determine the ability of a firm to avoid financial
distress in the short-run. The two most important Short-term Solvency Ratios are the Current Ratio
and the Quick Ratio.

Current Ratio

The Current Ratio is calculated by dividing Current Assets by Current Liabilities. Current Assets
are the assets that the firm expects to convert into cash in the coming year and Current Liabilities
represent the liabilities which have to be paid in cash in the coming year. The appropriate value
for this ratio depends on the characteristics of the firm's industry and the composition of its Current
Assets. However, at a minimum, the Current Ratio should be greater than one.

2013 2014 2015

Heidelberg 2.91 2.33 1.96
Confidence 1.41 1.39 1.01

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 3
2.5
2
1.5
1
0.5
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: In 2013, they had more CA than 2015. For this reason, Heidelberg had less
ability to pay in cash in 2105 than 2013 to their short term creditors.

Confidence: From 2103 to 2015 they had operating their current ratio as level year to year.
Because in 2015 their CR is 1.01 that is means, they did not reserve extra CA for their short-term
creditors.

Cross-sectional:
Form this ratios analysis, Heidelberg had more CR than Confidence, Heidelberg reserve
more current assent for their creators. On the other hand, confidence did not want to reserve CA
for their short term creditors.

Quick Ratio
The Quick Ratio recognizes that, for many firms, Inventories can be rather illiquid. If these
Inventories had to be sold off in a hurry to meet an obligation the firm might have difficulty in
finding a buyer and the inventory items would likely have to be sold at a substantial discount from
their fair market value.

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 2013 2014 2015
Heidelberg 2.46 1.96 1.65
Confidence 1.22 1.16 .87

2.5

2
1.5
1
0.5
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: Actually, Heidelberg operate more cash balance for year 2013 than 2015.

Confidence: In 2015, their QR is too low, because there was more inventory in 2015.

Cross-sectional:
According to QR, we can see, Heidelberg operates more liquid balance than confidence.

Cash Ratio
The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm's ability to pay off its
current liabilities with only cash and cash equivalents. The cash ratio is much more restrictive than
the current ratio or quick ratio because no other current assets can be used to pay off current debt--only
cash.

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 2013 2014 2015
Heidelberg 2.08 1.57 1.28
Confidence .09 .04 .05

2.5

2
1.5
1
0.5
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: In 2013 Heidelberg had 5013593 cash balance, but in 2015 cash balance was
4050381. That’s mean cash balance reduced over the three years.

Confidence: They are operating lower cash balance for their creditors according to their
liquidity.

Cross-sectional:
Though confidence operating higher balance than Heidelberg, but they are performing less
according to cash ratio.

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Financial Leverage Ratio:
Total Debt ratio

Debt ratio is a solvency ratio that measures a firm's total liabilities as a percentage of its total assets. In
a sense, the debt ratio shows a company's ability to pay off its liabilities with its assets. In other words,
this shows how many assets the company must sell in order to pay off all of its liabilities.

Company name 2013 2014 2015

Heidelberg 30.13% 35.87% 40.86%
Confidence 36.14% 42.74% 46.87%

50.00%

40.00%
30.00%
20.00%
10.00%
Confidence
0.00%
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: In 2013, Heidelberg performed well than 2015. Because, in 2015 their
liabilities were increased.

Confidence: From this ratio, we can see, Confidence literally increased their liabilities.

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Cross-sectional:
According to debt ratio, confidence is performing less than the Heidelberg. Because they
have more assets. On the other, Heidelberg operating less total asset than confidence.

Debt-Equity Ratio
The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt to total
equity. The debt to equity ratio shows the percentage of company financing that comes from
creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank
loans) is used than investor financing (shareholders).

2013 2014 2015

Heidelberg 0.43 .56 .69
Confidence .57 .75 .88

0.8
0.6
0.4
0.2
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: In 2015, Heidelberg operating more credit financing than 2013.

Confidence: over the three years, confidence reducing their investor financing
(shareholders) and increasing their creditor financing (bank loans).

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Cross-sectional:
According to debt- equity, ratio confidence is operating higher rate that indicates more
creditor financing is used than investor financing than Heidelberg.

Equity Multiplier
The equity multiplier is a financial leverage ratio that measures the amount of a firm's assets that are
financed by its shareholders by comparing total assets with total shareholder's equity. In other words,
the equity multiplier shows the percentage of assets that are financed or owed by the shareholders.
Conversely, this ratio also shows the level of debt financing is used to acquire assets and maintain
operations.

2013 2014 2015

Heidelberg 1.43 1.56 1.69
Confidence .43 .25 .12

1.5

0.5
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: over the three years, the company increasing their shareholder’s equity by
raising assets.

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 Confidence: The Company also reducing their shareholder’s equity by decreasing assets.

Cross-sectional:
According to this ratio, Heidelberg increasing their shareholder’s equity on the hand
confidence decreasing their shareholder’s equity.

Inventory Turnover
The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed
by comparing cost of goods sold with average inventory for a period. This measures how many
times average inventory is "turned" or sold during a period. In other words, it measures how many
times a company sold its total average inventory dollar amount during the year.

2013 2014 2015

Heidelberg 6.98 8.28 8.08
Confidence 11.85 7.64 12.14

14
12
10
8
6
4
2 Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: In 2013, their turnover was 6.98, which is lower than 2014 and 2015. Because
after 13 they increasing their COGS.

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 Confidence: In 2014, the ratio was too low 7.64, because their COGS decreased.

Cross-sectional:
According to the inventory ratio, Heidelberg is operating well over the three years. But
confidence can’t be operating economically. Because in 2015, their inventory turnover was go
down.

Receivables Turnover
Accounts receivable turnover is an efficiency ratio or activity ratio that measures how many times a
business can turn its accounts receivable into cash during a period. In other words, the accounts
receivable turnover ratio measures how many times a business can collect its average accounts
receivable during the year.

2013 2014 2015

Heidelberg 11.51 10.57 10.23
Confidence 5.97 4.92 7.25

12
10
8
6
4
2
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: During 2013, Heidelberg turned its accounting receivable into cash 11.51
times which is more than 2014 and 2015. Because, they are trying to reduce credit sell year by
year.

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 Confidence: In 2014 there was less receivable turnover, because, they did not sell in that
year. But 2015, there was highest RT over the three years.

Cross-sectional:
According to Receivable turnover, Heidelberg can collect its average accounts receivable
during the three years. However, Confidence can collect its ACR sometimes.

Total Asset Turnover

The asset turnover ratio is an efficiency ratio that measures a company's ability to generate sales from
its assets by comparing net sales with average total assets. In other words, this ratio shows how
efficiently a company can use its assets to generate sales.

2013 2014 2015

Heidelberg .93 1.03 1.07
Confidence .76 .72 .89

1.2
1
0.8
0.6
0.4
0.2
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: The company is more efficient in 2015 than 2013, because the company use
$1.07 assets to generate $1 Sales. whereas it uses .93 for 2013.

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 Confidence: In 2015, Confidence have more ability to generate sales from its assets by
comparing net sales with average total assets.

Cross-sectional:
According to Total Asset Turnover ratio, Heidelberg is more efficient than Confidence.

Profit Margin
The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a profitability
ratio that measures the amount of net income earned with each dollar of sales generated by
comparing the net income and net sales of a company.

2013 2014 2015

Heidelberg 14.80% 11.23% 13.37%
Confidence 10.46% 6.58% 12.04%

15.00%

10.00%

5.00%

Confidence
0.00%
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: In 2013, Heidelberg operated 14.80% profit during the year which is highest
value over the three years.

Confidence: In 2013 & 2015 the profit margin was literally well but in 2014 their PM was
less, because there was extra fair loss during the year.

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Cross-sectional:
According to Profit Margin ratio, Heidelberg is performing gradually well over the three
years, but confidence could not do it for 2014 more expenses and loses.

Return on Asset /ROA

The return on assets ratio, often called the return on total assets, is a profitability ratio that measures
the net income produced by total assets during a period by comparing net income to the average total
assets.

2013 2014 2015

Heidelberg 13.75% 11.60% 14.35%
Confidence 7.94% 4.73% 10.66%

15.00%

10.00%

5.00%

Confidence
0.00%
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: Heidelberg is more profitable in 2015 than 2013 and 2014. Because of
increasing in sales and assets.

Confidence: In 2015, Confidence produced 10.66% net income by total assets, which was
the highest value over the 3 years.

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Cross-sectional:
According to ROA ratio, 1st two years Confidence ROA was low, but in 2015 both are
operating above 10%.

Return on Equity /ROE

The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate
profits from its shareholder’s investments in the company. In other words, the return on equity ratio
shows how much profit each dollar of common stockholders' equity generates.

2013 2014 2015

Heidelberg 19.68% 18.08% 24.26%
Confidence 12.43% 8.26% 20.07%

25.00%

20.00%
15.00%
10.00%
5.00%
Confidence
0.00%
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: In 2015 Heidelberg increased their net income, for this reason the operate
highest return on equity during the years.

Confidence: 1st two years there was lower ROE, but in 2015 ROE highly increased because
of higher net income.

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Cross-sectional:
According to ROE ratio, Confidence had performed gradually bad comparing with
Heidelberg. Because Heidelberg have higher ROE.

Earnings Per Share

Earnings per share, also called net income per share, is a market prospect ratio that measures the
amount of net income earned per share of stock outstanding

2013 2014 2015

Heidelberg 26.09 20.88 24.81
Confidence 8.09 5.32 14.80

30
25
20
15
10
5
Confidence
0
2013 Heidelberg
2014
2015

Heidelberg Confidence

Time Series:
Heidelberg: Heidelberg operated per share earnings above $20 for the three years. But in
2013 was the highest per share earnings. Because of highest comprehensive income.

Confidence: In 2015, there was highest earning per share which was $14.80. Because there
was highest net during the year 2015.

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Cross-sectional:
According to Earning per share ratio, Heidelberg is the best and profitable company
between them, because Heidelberg perform well for his shareholder.

Part:2, Cash Flow

a. Pro-forma Statements

A pro forma financial statement is one based on certain assumptions and projections.

For example, a corporation might want to see the effects of three different financing options.
Therefore, it prepares projected balance sheets, income statements, and statements of cash
flows. These projected financial statements are referred to as pro forma financial statements.
Pro forma is a Latin term, literally means “for the sake of form” or “as a matter of form.” In
the world of investing, pro forma refers to a method by which financial results are calculated.
This method of calculation places emphasis on present or projected figures.
Financial statements that utilize the pro forma method of calculation are often designed to draw
focus to specific figures when an earnings announcement is issued by a company and made
available to the public, particularly potential investors. These pro forma statements may also
be designed to indicate a change proposed by a company, such as an acquisition or a merger.
Investors should be aware a company’s pro forma financial statements may hold figures or
calculations that are not in compliance with generally accepted accounting principles (GAAP).
In some instances, pro forma figures are vastly different than those generated with GAAP.
Pro-forma statements help general managers in overall planning (employment and inventory
levels, for example) and problem solving. As forecasts are developed, a manager can analyze
the results to identify potential trouble spots and plan accordingly. Finding problems and
trying out solutions on paper, months in advance, is much preferred to learning about the
problem first hand in real time. Similarly, by “seeing” into the future with pro-forma
statements, a manager can anticipate opportunities and prepare to exploit them long before the
window of opportunity begins to close. In addition to being a planning tool, pro-forma

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 statements, in tandem with actual results, can be used to evaluate performance and make
midstream corrections. Variance analysis, a comparison of the plan with actual performance,
helps a manager analyze firm performance during the budget period, gauge strengths and
weaknesses, and make interim adjustments to the plan.
Firstly, to calculate pro-forma statement we have to calculate the sustainable growth rate. At
first we calculate the plowback ratio (b) and return on equity (ROE) and then multiply both of
them (ROE*b) and divided by 1-ROE*b. Then we get the sustainable growth rate.
Now to prepare pro-forma income statement we take the sales, COGS, Operating & other
expense and taxable income of 2014 and multiply those with the sustainable growth rate from
that we prepared the pro-forma balance sheet of 2015. By following this method, we prepared
the next two years’ pro-forma income statement i.e. 2016 and 2017 respectively. We did not
change the interest expense which remained same all the years because we believed that it
would not be affected by the sustainable growth rate. Taxes were on EBIT. As EBIT changed
taxes & Net Income were changed accordingly as well.
To prepare the pro-forma balance sheet of 2016 we took the entire current assets amount from
the balance sheet of 2015 and then multiply with the sustainable growth rate then we got the
current assets figure of pro-forma balance sheet of 2016. Now in long term asset section we
did not take any account into consideration because both the company was producing below
100% capacity assuming that 100% production capacity is not possible to attain considering
restraints in the external environment. So we think the long term assets are not going to increase
if sales increases. So those items remained constant.
Now in the liabilities section we only took interest bearing debt on account which believed
would change if sales increases, considering the fact to meet current demands short term
liabilities would be needed to finance them. We believe the rest of the items remaining same
because we think they are not related to sales directly. Finally, in owner’s equity only retained
earnings will be changed. But from the company policy we could not find any information that
out of net income which proportion they gave out as dividend and which proportion they
retained.

b. EFN (External Fund Needed)

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 Identifying the funds which must be raised in order to support the forecasted sales level is one
of the key outputs of the forecasting process. This amount is known as the External Financing
Needed (EFN) or Additional Funds Needed (AFN).
Now we shall develop approaches which allow the EFN to be identified quickly through the
use of an equation.

Where,
 S0 = Current Sales,
 S1 = Forecasted Sales = S0(1 + g),
 g = the forecasted growth rate is Sales,
 A*0 = Assets (at time 0) which vary directly with Sales,
 L*0 = Liabilities (at time 0) which vary directly with Sales,
 PM = Profit Margin = (Net Income)/(Sales), and
 b = Retention Ratio = (Addition to Retained Earnings)/ (Net Income)

We shall also use this approach to evaluate the case when the firm has excess capacity in its
fixed assets.
EFN is very important and we calculated EFN by deducting current year’s total liability and
owner’s equity from current year’s total asset. Now if the firm can increase sales and assets at
its sustainable growth rate per year without selling any additional equity and without changing
its debt ratio or payout ratio then the firm’s debt to equity ratio will be constant.
We believe that the excess funds needed should be fulfilled by debt i.e. taking long term loan
because in perspective to our countries conditions interest rate of long term corporate loan
financing is less and flexible than short term corporate loan financing.

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Part 03, Free Cash flow from Pro-Forma Statements

The Cash Flow from Assets measures the cash flows generated by the firm's assets. It is also known
as the Cash Flow of the Firm. These cash flows will be further categorized as Operating Cash
Flow, Capital Spending, and Additions to Net Working Capital.

1st Step: Calculating OCF: Operating Cash Flow measures the cash flows generated by the firm's
main operations, i.e. a firm’s ability to sell its products for more than its cost of production.
Operating Cash Flow can be determined as follows:

Operating Cash Flow = EBIT + Depreciation - Taxes

The calculation begins with EBIT (Earnings before Interest and Taxes) because Interest Expense
is not a cash flow that operations are dependent upon. Interest Expense reflects how the firm
chooses to finance its assets, not its ability to operate them successfully. Depreciation Expense
(from the Income Statement) is added back because it is a non-cash expense which was subtracted
out in the determination of EBIT. Finally, the taxes which the firm actually paid in cash during the
period are subtracted.

2nd Step: Calculating Net Capital Spending: Capital Spending reflects the firm's net investment
in fixed assets during the period. It can be calculated as follows:

Net Capital Spending = Ending Net Fixed Assets - Beginning Net Fixed Assets + Depreciation

In this calculation, Depreciation Expense (from the Income Statement) must be added back
because the balance for Ending Net Fixed Assets on the Balance Sheet is reduced by the
Depreciation Expense which had incurred during the period.

3rd Step: Calculating change in Net working Capital: Additions to Net Working Capital
measure the firm's investment in Net Working Capital during the period. Net Working Capital
(NWC) is defined as Current Assets minus Current Liabilities.

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Additions to NWC = Ending NWC - Beginning NWC.

Once the above items have been determined, the Cash Flow from the Firm's Assets can be
calculated as follows:

Cash Flow from Assets = Operating Cash Flow - Capital Spending - Additions to NWC

A healthy firm would be expected to generate positive cash flow. However, if the firm is young
and/or is investing heavily to promote growth, then a negative cash flow from the firm's assets is
possible and worthy to be considerable in investing.

If CFFA of any firm is positive, then it means that the company is doing good business and it is
maximizing its shareholder’s wealth just like Confidence & Heidelberg cement industry. In our
case Confidence CFFA is larger in amount than that of Heidelberg. So we can say, both the
companies are doing well financially in terms of assets but Confidence is doing better than
Heidelberg.

Part:4, Weighted Average Cost of Capital (WACC)

a. Cost of Equity using CAPM

To calculate WACC, firstly we need to calculate the cost of equity. To find the cost of equity
first we were looking for the Risk free rate which is basically same for both companies. Then
we calculated for the Beta for both Confidence & Heidelberg. We calculated the beta by finding
the slope of the return of the respective companies and the market returns. After finding the
market return we found all the values & easily calculated cost of equity for both Confidence
& Heidelberg.

b. Cost of Debt
To find the cost of debt we have found that Bangladesh has no active bond market. Therefore,
instead of considering the bond market’s value we considered the long term loan’s interest rate

24
 as required rate of return for debt. To find the value, we have come to know from reliable
sources and have gotten information that the long term corporate interest rate can be maximum
6.2% in latest years. So we have used 6.2% as required rate of return of debt.

c. Calculation of WACC
To calculate WACC, we calculated the weight of equity for both companies & by deducting
the rate from 100% we found the weight of debt. Then we multiplied the weight of equity with
the required rate of return of equity & weight of debt with the after tax required rate of return
of debt. Then we added these two values to calculate WACC.

We have found that the WACC value of these two companies is pretty close to each other with
a difference of about 2%. For Confidence Cement the value is 8% & for Heidelberg the value
is 6%.

d. Assumptions
The weighted average cost of capital (WACC) is the cost of capital a company expects to pay
to all its stakeholders including equity and debt-holders. First we calculate the marginal cost
of capital for each source of capital such as equity and debt, and then take the weighted average
of these costs.
While calculating the WACC is a straight-forward calculation and even getting the values of
equity and debt is easy, but there are some practical problems in calculating the cost of equity
and cost of debt. Thus many a times we assume things without strong reference data’s, let us
see some of the assumptions.
As we used CAPM method for calculating the cost of equity was based on historical data and
we presumed that the future return would be same as the historical trend.
To calculate the cost of debt we used the risk free rate and added a risk premium to it but the
problem is that for calculating the risk free rate we can only compare them to government
bonds having the same duration as the duration if the debt but for anything in between or longer
we assume the rate. Not considering higher risk premium as the debt increases as longer the
debt to mature the higher the risk premium.

25
 We assumed any new project included by these firms in the current fiscal year had the same
capital structure. For example, if the company had a capital structure of 70:30 debts to equity
ratio then the new projects would also be the same.
We also assumed there were no changes in risk for the inclusion of new projects or expanding
the current business.

Part:5, Firms Valuation

a. Value of the company using variable growth formula.

For computing the value of the company, at first we are discounted back five (2016,
2017,2018,2019,2020) years Free cash flow or cash flow from asset separately through the
WACC and with the formula of Present value=future value/ (1+WACC) ^t, t= number of year
which is the power of (1+WACC), for both the company at 2015. Then we are calculating the
growth rate of from 2020 data, and we assume from 2021 to infinity the growth rate is constant.
And we calculate 2019 cash flow through CF20=CF19 (1+g). After that we used constant
growth formula which is CF20/(RS-g), RS=WACC, for discounting back the 2020 cash flow
to 2016 and then we are discounting back this cash flow with the WACC and previously used
PV=FV/(1+WACC) ^t formula to compute at 2015 as present value. We are calculating our
growth rate through the sustainable growth formula=ROE*b/ (1-ROE*b).

VALUE of the firms

Company Value in taka, Tk.
Confidence 4,537,820,547.41

Heidelberg 7,544,923.18

26
 Company valuation is a process and a set of procedures used to estimate the economic value
of an owner’s interest in a business. Valuation is used by financial market participants to
determine the price they are willing to pay or receive to affect a sale of a business. Since,
Confidence’s value is much higher than Heidelberg so it’s right decision to buy Confidence’s
shares than Heidelberg.

b. Comparison on whether undervalued or overvalued.

Current Price Estimated Price

Confidence 228.11 100.88

Heidelberg 53.6 134.29

The current share price of both companies is lower than the estimated price. Heidelberg are selling
at a discount. Therefore, share price for the company are undervalued. On the other hand,
confidence share price is overvalued.
However, we would like to suggest investing in Confidence is though more profitable and also is
a safe and wise decision since the financial condition of Confidence is in very good position from
all perspective.

27