AQRON PRIVATE LIMITED<br />Analysis of Key Financial Indicators<br />
AGENDA<br />Understand  the basic frame work of financial analysis<br />Discuss Aqron cash budget in detail<br />Discuss A...
AGENDA (Contd)<br />Calculate NPV for various initiatives <br />Sensitivity analysis and interpretation<br />Scenario Anal...
FINANCIAL ANALYSIS<br />Goal of financial analysis<br />Forecast 	 Decision		(P)<br />Visibility	 Management	(O)<br />Ri...
AQRON PRIVATE LIMITEDProject Details  <br />
FINACIAL VISIBILITY<br />Projected Cash Budget without reinvestment <br />Projected Cash Budget with reinvestment <br />Pr...
OPTIMAL CAPITAL STRUCTURE<br />Calculation of unlevered Beta <br />Inclusion of Leverage <br />Optimal Debt to Equity Rati...
RISK ANALYSIS<br />Sensitivity Analysis<br />Scenario Analysis <br />
FINANCIAL VISIBILITY <br />
CASH BUDGETING <br />Importance<br />Timing of Acquisitions <br />Quality of Acquisitions<br />Sales Forecast<br />Demand ...
CASH BUDGETING (contd)<br />Determination of Cost<br />Inflation adjusted<br />Exchange rate adjusted<br />Demand forecast...
CASH BUDGETING (contd)<br />Decision Criterion<br />Payback period <br />Discounted payback period<br />Net Present Value ...
CASH BUDGETING (contd)<br />Reinvestment of Reserves <br />Can demand be created?<br />Assumption of a linear demand curve...
EXPANSION  SCENARIOS<br />Advertisement <br />Training <br />Research and Development<br />__<br />
NPV Comparison of Three Expansion Scenarios <br />
OPTIMAL CAPITAL STRUCTURE <br />
OPTIMAL CAPITAL STRUCTURE <br />Inclusion of Debt <br />Raises risk for the equity holder <br />Increases ROE for the stoc...
OPTIMAL CAPITAL STRUCTURE (contd)<br />Business Risk <br />ROIC (zero debt ) = ROE<br />Business risk (unlevered firm) =  ...
OPTIMAL CAPITAL STRUCTURE (contd)<br />Weighted Average Cost of Capital<br />WACC = Wd*Kd *(1-T) +  Ws*Ks + Wp*Kp<br />		W...
OPTIMAL CAPITAL STRUCTURE (contd)<br />Calculation of Market Risk Premium<br />Geometric mean of KSE 100 Index from 2000-2...
Capital<br />
FIRST CHICAGO APPROACH<br />Very optimistic<br />Optimistic <br />Conservative <br />Pessimistic <br />__<br />
MAXIMUM ANGEL INVESTMENT<br />49-51% Ownership right <br />Feasible amount calculation <br />__<br />
RISK ANALYSIS  <br />
SENSITIVITY ANALYSIS <br />“Change in NPV response to change in a variable all else constant”<br />What If Questions again...
SCENARIO ANALYSIS <br />“Bad and good set of financial outcomes are compared with the most likely using probability distri...
MONTE CARLO SIMULATION<br />Each variables is assigned a value <br />NPV is generated  <br />The process is repeated 1000 ...
EXERCISE SESSION <br />
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AQRON Private Limited

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Analysis of key financial indicators.
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AQRON Private Limited

  1. 1. AQRON PRIVATE LIMITED<br />Analysis of Key Financial Indicators<br />
  2. 2. AGENDA<br />Understand the basic frame work of financial analysis<br />Discuss Aqron cash budget in detail<br />Discuss Aqron cash budget with reinvestment<br />External financing requirement ?<br />Discuss optimal structure in detail <br />Discuss First Chicago approach for Venture valuation<br />
  3. 3. AGENDA (Contd)<br />Calculate NPV for various initiatives <br />Sensitivity analysis and interpretation<br />Scenario Analysis and interpretation <br />Discussion on Limitations <br />Exercise Section ; IS , BS and ratios <br />
  4. 4. FINANCIAL ANALYSIS<br />Goal of financial analysis<br />Forecast  Decision (P)<br />Visibility  Management (O)<br />Risk  Diversification (L)<br />Prudence  Profitability (C)<br />Goal of a firm <br />Share Holders Wealth <br />Going Concern <br />
  5. 5. AQRON PRIVATE LIMITEDProject Details <br />
  6. 6. FINACIAL VISIBILITY<br />Projected Cash Budget without reinvestment <br />Projected Cash Budget with reinvestment <br />Projected Financial Statements<br />Cash Budgeting under three different scenarios <br />
  7. 7. OPTIMAL CAPITAL STRUCTURE<br />Calculation of unlevered Beta <br />Inclusion of Leverage <br />Optimal Debt to Equity Ratio (Weighted Average Approach)<br />Valuation under Venture Capital (First Chicago Approach)<br />Maximum Angel Investment <br />
  8. 8. RISK ANALYSIS<br />Sensitivity Analysis<br />Scenario Analysis <br />
  9. 9. FINANCIAL VISIBILITY <br />
  10. 10. CASH BUDGETING <br />Importance<br />Timing of Acquisitions <br />Quality of Acquisitions<br />Sales Forecast<br />Demand forecast <br />Regression Techniques <br />Historical data <br />Intuitive Approach <br />
  11. 11. CASH BUDGETING (contd)<br />Determination of Cost<br />Inflation adjusted<br />Exchange rate adjusted<br />Demand forecast <br />Unpredictability<br />Risk determination<br />SML approach to weigh decisions <br />
  12. 12. CASH BUDGETING (contd)<br />Decision Criterion<br />Payback period <br />Discounted payback period<br />Net Present Value of different alternatives <br />IRR and MIRR ? <br />AQRON Cash Budget without reinvestment<br />__<br />
  13. 13.
  14. 14. CASH BUDGETING (contd)<br />Reinvestment of Reserves <br />Can demand be created?<br />Assumption of a linear demand curve <br />__<br /> Maximizing output from resources (Best practice)<br />Revenue function = (Demand Curve) * Number of hours of solution<br />Profit function = Revenue function – Cost function <br />Maximize<br />1st order derivative<br />Maxima to the second order<br />Gives you quantity that maximizes each product and service <br />
  15. 15.
  16. 16. EXPANSION SCENARIOS<br />Advertisement <br />Training <br />Research and Development<br />__<br />
  17. 17. NPV Comparison of Three Expansion Scenarios <br />
  18. 18. OPTIMAL CAPITAL STRUCTURE <br />
  19. 19. OPTIMAL CAPITAL STRUCTURE <br />Inclusion of Debt <br />Raises risk for the equity holder <br />Increases ROE for the stockholder <br />High risk Lower stock price <br />High ROR Higher stock price <br />Optimal capital Structure <br />Maximizes Stock Price <br />Minimizes Weighted Average Cost of Capital (WACC)<br />
  20. 20. OPTIMAL CAPITAL STRUCTURE (contd)<br />Business Risk <br />ROIC (zero debt ) = ROE<br />Business risk (unlevered firm) = σ ROE<br />Dependent <br />Financial Risk <br />Risk over and above business risk in a levered firm<br />Spreads out the probability distribution <br />
  21. 21.
  22. 22.
  23. 23. OPTIMAL CAPITAL STRUCTURE (contd)<br />Weighted Average Cost of Capital<br />WACC = Wd*Kd *(1-T) + Ws*Ks + Wp*Kp<br /> WACC = D/A*Kd*(1-T) + E/A*Ks<br />Cost of Debt Kd<br />KIBOR + Premium <br />Cost of Equity Ks <br /> CAPM: Ks = Rf + β (Rm- Rf)<br />
  24. 24. OPTIMAL CAPITAL STRUCTURE (contd)<br />Calculation of Market Risk Premium<br />Geometric mean of KSE 100 Index from 2000-2009<br />Hamada Equation for Beta calculation <br />β = βu [1 + (1-T)(D/E)]<br />βu = β / [1+ (1 – T) (D/E)]<br />Approach<br />__<br />
  25. 25. Capital<br />
  26. 26. FIRST CHICAGO APPROACH<br />Very optimistic<br />Optimistic <br />Conservative <br />Pessimistic <br />__<br />
  27. 27. MAXIMUM ANGEL INVESTMENT<br />49-51% Ownership right <br />Feasible amount calculation <br />__<br />
  28. 28. RISK ANALYSIS <br />
  29. 29. SENSITIVITY ANALYSIS <br />“Change in NPV response to change in a variable all else constant”<br />What If Questions against a base case <br />Selling Price <br />Growth Rate <br />Variable Cost <br />Fixed Cost <br />WACC<br />__<br />
  30. 30.
  31. 31. SCENARIO ANALYSIS <br />“Bad and good set of financial outcomes are compared with the most likely using probability distributions”<br />Best case scenario<br />Base case scenario<br />Worse case scenario <br />Allows changes in more than one variable at a time <br />__<br />
  32. 32.
  33. 33. MONTE CARLO SIMULATION<br />Each variables is assigned a value <br />NPV is generated <br />The process is repeated 1000 times<br />1000 NPVs are generated <br />Mean of these 1000 values is the Expected profitability<br />Std. Deviation is the risk <br />
  34. 34. EXERCISE SESSION <br />
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