1. INTERNAL CASH FLOW & INVESTMENT DECISIONS (Final Year Project I) P RESENTER : S HAIKH F AIZAN A HMED R EG #: BB-1-05-2820 S UPERVISOR : S IR M IRZA I MTIAZ A SKARI D ATED : 23 July, 2008

2. EQUITY DEBT INTERNAL FINANCING SOURCES OF FINANCING

3. TWO TYPES OF THEORIES Pecking Order Theory Trade Off Theory Internal Financing DEBT EQUITY DEBT EQUITY Financing Hierarchy

4. OBJECTIVE “ What factors a manager takes into consideration while taking investment decisions with respect to retained earnings and not making lenders their first preference for funds inflows”

8. DESCRIPTIVE STATISTICS FOR THE DATA SET Year 2004: 4.84259 2.0523213 6.668273347 2.582300011 2.6063 12.42 0.36 35 MkBkF 0.6193 -0.366208 0.028044581 0.167465162 0.0792 0.405 -0.35 35 CF/K 10.4547 1.1353591 140.7463824 11.86365805 0.4672 50.57 -33.6 35 Debt Ratio 0.83973 0.6813003 5277.51 72.65 30.049 248.7 -111 35 Sales Growth 16.4453 2.6769755 213932.3422 462.5282069 0.3365 22.65 -12.1 35 NIM 26.8418 4.9117271 0.330155662 0.574591735 0.3641 3.518 0.016 35 Slack/K 15.8594 3.7869418 2.62852905 1.621273897 117.85 894.7 10.7 35 CR 0.59112 0.1968459 2.136430639 1.461653392 0.983 4.337 -2.35 35 I/K 5.09904 2.0730393 352496.0792 593.7138024 695.07 2903.1 40.2 35 K Kurtosis Skewness Variance Std Dev. Mean Max Min N Variable

9. Year 2005: Continued…. 16.0329 3.5536624 23.48481763 4.846113663 3.7677 10.39 0.3 35 MkBkF 0.95042 0.8363342 0.065206768 0.25535616 0.1776 0.838 -0.3 35 CF/K 13.9288 -3.629886 361.3036543 19.00798922 -3.558 11.984 -91.5 35 Debt Ratio 0.99549 0.6728867 9236.726498 96.10788988 68.249 354.2 -139 35 Sales Growth 3.40343 1.2379853 12561.40984 112.0776955 0.6069 3.81 -2.13 35 NI% 22.0112 4.417042 0.57120235 0.7557793 0.4262 4.389 0.035 35 Slack/K 21.9566 4.47569 5.138595261 2.266846987 131.09 1315 13.9 35 CR 1.07106 0.9374962 3.481936984 1.865994905 1.352 6.057 -2.04 35 I/K 6.99801 2.4751056 866519.0063 930.8700265 918.89 4626.2 36.3 35 K Kurtosis Skewness Variance Std Dev. Mean Max Min N Variable

10. Year 2006: Continued…. 14.4544 3.2884518 15.83171478 3.978908742 3.4237 22.5 0.285 35 MkBkF 2.23814 1.0720679 0.029938769 0.173028232 0.1245 0.684 -0.25 35 CF/K 5.38183 2.099136 28.35590853 5.325026623 2.8492 22.31 -5.72 35 Debt Ratio 1.08714 0.6029799 24165.22976 155.4516959 24.72 507.9 -221 35 Sales Growth 34.6566 5.8733064 1170142.402 1081.731206 1.9544 64.88 -2.1 35 NI% 23.3501 4.5802629 0.620915649 0.78798201 0.4241 4.61 0.028 35 Slack/K 14.7781 3.5637709 2.11954849 1.45586692 113.31 806 4.8 35 CR 1.77816 1.2610414 1.191180852 1.09141232 1.138 4.681 -0.31 35 I/K 4.746 2.1936619 1275619.2 1129.433132 1078.1 5079.9 32.4 35 K Kurtosis Skewness Variance Std Dev. Mean Max Min N Variable

12. Continued…. Year 2005 1.000 0.687 0.921 0.924 -0.157 0.418 0.480 -0.131 0.101 0.446 Z Score 0.687 1.000 0.691 0.744 -0.054 0.134 0.446 -0.029 0.098 0.158 M/B 0.921 0.691 1.000 0.997 -0.188 0.544 0.532 -0.150 0.081 0.550 CF/K 0.924 0.744 0.997 1.000 -0.180 0.517 0.538 -0.142 0.085 0.525 I/K -0.157 -0.054 -0.188 -0.180 1.000 -0.236 0.184 -0.170 0.108 -0.172 K 0.418 0.134 0.544 0.517 -0.236 1.000 -0.029 0.029 -0.048 0.954 Slack/K 0.480 0.446 0.532 0.538 0.184 -0.029 1.000 -0.082 -0.113 0.002 Sales Growth -0.131 -0.029 -0.150 -0.142 -0.170 0.029 -0.082 1.000 0.297 0.049 NIM 0.101 0.098 0.081 0.085 0.108 -0.048 -0.113 0.297 1.000 0.058 Debt Ratio 0.446 0.158 0.550 0.525 -0.172 0.954 0.002 0.049 0.058 1.000 CR Z Score M/B CF/K I/K K Slack/K Sales Growth NIM Debt Ratio CR

13. Continued…. Year 2006 1.000 0.343 0.589 0.676 -0.207 0.350 0.048 -0.033 -0.090 0.461 Z Score 0.343 1.000 0.018 0.507 -0.084 0.247 -0.126 0.072 -0.269 0.270 M/B 0.589 0.018 1.000 0.871 -0.200 -0.160 0.288 -0.167 -0.074 -0.058 CF/K 0.676 0.507 0.871 1.000 -0.213 -0.016 0.187 -0.108 -0.196 0.082 I/K -0.207 -0.084 -0.200 -0.213 1.000 -0.217 0.165 -0.026 0.130 -0.171 K 0.350 0.247 -0.160 -0.016 -0.217 1.000 -0.174 -0.041 -0.120 0.952 Slack/K 0.048 -0.126 0.288 0.187 0.165 -0.174 1.000 -0.248 0.054 -0.188 Sales Growth -0.033 0.072 -0.167 -0.108 -0.026 -0.041 -0.248 1.000 -0.054 -0.070 NIM -0.090 -0.269 -0.074 -0.196 0.130 -0.120 0.054 -0.054 1.000 -0.158 Debt Ratio 0.461 0.270 -0.058 0.082 -0.171 0.952 -0.188 -0.070 -0.158 1.000 CR Z Score M/B CF/K I/K K Slack/K Sales Growth NIM Debt Ratio CR

14. Data sets were then sorted by the three-year average Z values of each firm. The top one third of the companies are categorized as not financially constrained (NFC), the next one third as partially financially constrained (PFC), and the last one third as financially constrained (FC). Continued…. Year 2004 12 11 11 35 N 0.482502533 0.532792365 0.281092675 1.296387574 Z Score 0.891714286 1.107428571 0.607142857 2.606285714 M/B 0.01972889 0.039135932 0.020365575 0.079230397 CF/K 0.28509331 0.455711586 0.24226702 0.983071917 I/K 243.5542857 217.2057143 234.3114286 695.0714286 K 0.178375139 0.100035848 0.08573524 0.364146227 Slack/K 6.311428571 13.5 10.23714286 30.04857143 Sales Growth -4.813922934 -22.67424439 63.19911358 35.71094626 NIM 1.571805918 -0.139668068 -0.964900538 0.467237312 Debt Ratio 0.598428571 0.358628571 0.221457143 1.178514286 CR NFC GROUP PFC GROUP FC GROUP ALL VARIABLE

15. Continued…. Year 2005 12 11 11 35 N 0.66852912 0.248191734 0.609916872 1.526637725 Z Score 1.952571429 1.193571429 0.621571429 3.767714286 M/B 0.086064919 0.036092143 0.055489907 0.177646969 CF/K 0.660586379 0.269001145 0.423252434 1.352839959 I/K 340.38 260.4314286 260.7885714 861.6 K 0.249512847 0.093137267 0.083551278 0.426201391 Slack/K 29.88285714 12.71428571 25.65142857 68.24857143 Sales Growth 20.35797427 11.65255734 28.67458171 60.68511333 NIM 0.598941059 -3.251950725 -0.904636643 -3.557646309 Debt Ratio 0.73536 0.217314286 0.358085714 1.31076 CR NFC GROUP PFC GROUP FC GROUP ALL VARIABLE

16. Continued…. Year 2006 12 11 11 35 N 0.620745291 0.568847889 0.291012255 1.480605436 Z Score 1.602571429 1.233 0.588142857 3.423714286 M/B 0.036825302 0.057559964 0.030151051 0.124536318 CF/K 0.416105292 0.479109304 0.243192938 1.138407534 I/K 373.8028571 316.0857143 330.9228571 1020.811429 K 0.240320681 0.102183844 0.081547484 0.424052009 Slack/K -0.302857143 11.24571429 13.72 24.66285714 Sales Growth -2.372652646 187.5684467 10.41480296 195.610597 NIM 0.400128218 1.468911765 0.980183493 2.849223476 Debt Ratio 0.5656 0.351971429 0.212714286 1.130285714 CR NFC GROUP PFC GROUP FC GROUP ALL VARIABLE

18. Continued…. Year 2005 Year 2006 12 1.952571429 0.086065 NFC 11 1.193571429 0.05549 FC 35 3.767714286 0.177647 Total Sample No. of Observations M/B CF/K Group 12 1.602571429 0.036825 NFC 11 0.588142857 0.030151 FC 35 3.423714286 0.124536 Total Sample No. of Observations M/B CF/K Group