Project: IBS (Image Builders)

Presented by: Shahid Abbas

Presented to: Sir Ahmed Nauman Anees

Introduction:
IBS is engaged in the design and development of graphics software applications, utilities and other products for the creation and presentation of graphics information. IBS held a small but impressive client list, which comprises of market leaders from a number of industries. Traditionally IBS developed business graphics, software products and components for high tech companies. Over past few years, IBS had turned its focus to the home and educational graphic markets. With the emergence of multimedia technology and CD-Rom, companies with large volumes of content looked for ways to enter home and educational computer market. Companies such as Disney, Nike and other turned to IBS for design concept and development of CD-Rom products. As hardware technology flourished, sales projections for the top 100 software companies were estimated at more than $13.3 billion. Market analysis estimated more than 10 million CD-Rom drives would be sold to the home computer market by the end of 2011. One of the biggest strength of IBS was that its employees were extremely loyal and comfortable in their present working environment. IBS differentiated itself from its competitors in three ways: IBS promoted itself as being the Nordstrom of the software development. IBS offered one-stop shopping software development solution. IBS unique characteristic was its size. At 65 people, IBS was more than twice as large the next biggest developing company and more than six time as large as the industry norm.
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IBS had two main sources of revenues: Capital= 80% Debt= 20% For financing of business manager of IBS contributed $4800 each in 1997 and $480 each in 1990. In 1987, Preferred Shares and friends and family contributed over $237,000 share capital to IBS.

Problems:
Company has to cope-up with following main problems: How company should be valued (valuation of the company)? How to finance the expected growth of business? How should be the Preferred Shareholders be compensated?

Assumptions
Capital Expenditure remains same From 2009 to 2010 at $ 480,000 Tax will be 37.6% No change in working capital for year 2008 and for 2009 and 2010 $200,000 change each year. Cost of debt (Kd) before tax is 10% and will increase 0.2% with very 5% increase in debt. For finding unlevered beta we take average of other companies beta which is 1.43 and we assume this as unlevered beta of the company. Value of the company is calculated on optimal capital structure.

Solutions:
1. Valuation of the company: Years EBIT Tax @ 37.6% EBIT (1-Tax) Depreciation Capital Expenditure Change in Working Capital total PV @ 17% 2008 1485526 558558 926968 11605 480000 2009 2542256 955888 1586368 74544 480000 200000 980912 716570 2010 2909840 1094100 1815740 78148 480000 200000 1213888 758680

458573 391943

Therefore, Value of company is $ 2616911

Recommendations:
After analyzing the case scenario of IBS, we recommend that company should take following steps to overcome the problems: Companys operating expenses are increasing from year 2008 to 2010, due to which EBIT is showing fluctuating trends. So company

should reduce its operating expenses in order to increase its EBIT and ultimately NI. Company should do some extra efforts in order to increase its revenues in order to increase its NI because expanses are increasing with more proportion as compared to revenues. Companys unlevered Beta is 1.43, which is better than some other companies. Still there is a need for the company to reduce it, in order to make it more attractive for the investors and the creditors. Keeping in view the optimal capital structure, company should finance the business 20% through Debt and remaining 80% with Equity. By maintaining this ratio, companys WACC would be less and stock price would be higher which a key factor is in order to maintain business attractive. Companys capital expenditure remained same. It means company is not engaging its funds in capital or fixed asset, which is good sign because normally it is suggested not to engage enough funds in fixed assets. In order to compensate Preferred Shareholders, company should increase its NI. When NI is increased, Dividend Payout Ratio also increase which is good for shareholders. Working Capital requirements for the company remains the same from year 2009-2010, which is again good for the company, as fluctuation in WC requirement effects the value of the firm.

Conclusion:
This case is related to a company named as IBS, which is engaged in the design and development of graphic software. In the beginning, IBS was a successful company then for past few years; IBS decided to expand its operations and turned its target market to home and educational graphics market. IBS did many ventures, out of which some were

successful and some failed. After analyzing the whole case, we conclude that: Companys operating expenses are increasing more than its revenues. That is why, it Net Income is decreasing. Companys Cost of Capital is 8.207%, which is less than it Rate of Return that is 10%. So it is good for the company. Companys Optimal Capital Structure is 20% Debt and 80% Equity, which is more dependent on equity as compared to debt. It sends positive signals to market, showing company has a potential of paying back its debts. If it takes more debt. Working Capital Requirements and Capital Expenditures are same over the period 2009- 2010, which is in favor of the company.