Capital expenditure

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Capital Expenditure - A consumer company's case study

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Capital expenditure

  1. 1. Capital Expenditure A consumer company’s Case Study
  2. 2. Introduction to Case 1. Bank Manager 2. Looking for New Business Opportunities 3. New Office – Human and Intellectual Capital 4. Successfully set a Meeting with MD of HICL
  3. 3. 5. Six years Old Business, going through rapid expansion, with 95 employees, Growth Meeting Outcomes 4. Needs Medium Term Financing of 1.2 Million 6. From 3 different location to the new One
  4. 4. Ratio Analysis HUMAN & INTELLECTUAL CAPITAL LIMITED Ratios and Other Information As at May 31 Year 20X1 Year 20X2 Year 20X2 (4 months to 30th Sep) 20X3 (12 months to 30 May) Forecast Actual Forecast Liquidity Current ratio 0.83:1 0.84:1 Acid (Quick) test ratio 0.81:1 0.83:1 0.51:1 0.44:1 Efficiency Credit given (days) 89 81 52 38 Credit taken (days) 83 90 70 69 Profitability Gross profit margin (%) 28 32.9 35.7 34.3 36 Net profit margin (%) 1.3 3.8 9.7 5.6 6.3 Financial Structure Gearing (%) (To compute the ratio) 11.8 2.0 Interest/finance charges cover (times) 4.4 4 7.3 3.6 5.2 Net working assets to sales (%) 3.2 6.1 Retained profit to sales (%) 1.1 2.1
  5. 5. Balance Sheet’s Analysis Trend Analysis Total Liabilities & SHE Shareholders' funds Distributable reserves Total Longterm Liabilities Long term financing Total Currrent Liabilities Current Tax LT Debt current portion Bank overdraft Total Assets Total Fixed Assets Total Current Assets Stock Debtors Cash Trend Analysis Revaluation Reserve 523,369 in Shareholder Fund COMMON SIZE ANALYSIS 20X2 Shareholders' Distributable reserves Long term financing Term liabilities Hire Purchase over 12 months 0.00% 200.00% 400.00% 600.00% 800.00%1000.00% Creditors Hire Purchase Bank overdraft LT Debt current portion Hire Purchase over 12 months Term liabilities Current Tax Long term financing Revaluation reserve funds Creditors Shareholders' Bank overdraft Hire Purchase Current Tax LT Debt current portion Distributable reserves funds 20X1
  6. 6. Balance Sheet’s Analysis TOTAL ASSETS – COMMON SIZE Cash Debtors Machinery & Vehicles Freehold land & buildings Plan, Stock ANALYSIS Cash Debtors Stock Freehold land & buildings Plan, Machinery & Vehicles 20X2 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Total Assets – Comparative Cash Debtors Stock Freehold land & buildings Plan, Machinery & Vehicles Common Size Analysis Vertical Analysis 20x1 Vertical Analysis 20x2 20X1
  7. 7. Balance Sheet’s Analysis Common size Analysis - Total Liabilities Comparative Shareholders' funds Distributable reserves Revaluation reserve Long term financing Hire Purchase over 12 months Term liabilities Current Tax LT Debt current portion Bank overdraft Hire Purchase Creditors 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Common size Analysis 20x2 Common size Analysis 20x1
  8. 8. Income Statement HUMAN & INTELLECTUAL CAPITAL LTD Profit & Loss Account Summary 12 months to May 31 Year 20X1 Year 20X2 4 months to 30th Sep Year 20X2 4 months to 30th Sep 20X2 20X3 (12 months to 30 May) Adjusted Calculation Forecast Actual Forecast Sales 2,685,374 5,234,983 2,433,000 2,111,842 7,398,000 Profit after tax 34,549 198,829 235,000 119,136 466,000 236,244 Interest (Finance charge) 10,097 65,193 37,266 45,304 111,700 135,795 Depreciation 38,429 45,267 16,800 16,800 54,000 Directors' remuneration 47,298 63,663 20,000 20,000 85,000 Tax @ 30% Assume 14,784 98,932 EBITDA 97,859 408,221 289,066 181,240 631,700 EBIT 59,430 362,954 272,266 164,440 577,700 Expected Interest 260,795 Interest Coverage with EBIT 1.3917 Int Cov with EBITDA 1.5653
  9. 9. Ratio Analysis 0.8420x2 Return on Equity Current Ratio 0.8320x1 Less than 1 FINANCING OF CURRENT LIABILITIES Short term Assets 7.82%20x2 3.12%20x1 Less than 10% assumed profit rate Long Term Assets Debt to Equity 11.820x1 Due Revaluation of Building that is still 2.020x2 unrealised
  10. 10. Agreement in Principles Proposed Loan Calculations 1. $1.25 Million Loan Principle 2. At 10% Profit Margin, Total Payable in 5 years $ 1.875 Million 3. First Year debt repayment $ 115,871 Interest $ 318,706 Installment 4. Adjusted Expected Interest payment for 20x3 $ 260,795 Adjusted Exp + New Facility
  11. 11. Agreement in Principles Interest Coverage Ratio for 20X3 with New Loan Interest 1. 362,954 EBIT 20X3 & 408,221 EBITD 20X3 2. 362,954/260,795 IC 3. IC = 1.39 or 1.56 i.e < 2
  12. 12. Agreement in Principles “YES”, subject to certain conditions Past 3 Years Audited Accounts 5 year Projected Mgmt Accounts 130% Collateral/Charge
  13. 13. Other Facilities Bai Inah Cash Line (OD) Financing - i Customer applies financing from the bank 1. Bank sells their asset at a selling price (financing amount plus profit margin) on deferred term. Customer (1st contract) Bank (2nd contract) Asset (owned by the Bank) 2. When ownership of the asset transferred to customer ,simultaneously the asset is sold back to the Bank at a price equivalent to financing amount and the Bank pays on cash basis to customer as principal limit of Cash Line, made available in customer’s Wadiah Current Account Customer pays profit for utilized amount on monthly basis. Profit on unutilized portion is rebated
  14. 14. Other Facilities Bai Al Dayn Working Capital Financing i (BWCF) Customer Seller/ Supplier Bank 1. Sells on credit term Buyer 2. Presents the debt (invoices) and bank purchases the debt arising from the sale transaction and pays the Bank on maturity 3. Settles the purchase price on or before maturity date

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