Case Study Question

Azra Khan recently graduated with a BS in Accounting and Finance and just been hired as a special assistant to Nouman Khan who is the director of finance and a major shareholder of Grand Electric Group Ltd. It is mere coincidence that Nouman Khan happens to be her paternal uncle and the companys chairman, Kamal Khan is her father. Grand Electric Group Ltd. (GEL) is one of the countrys better-established companies in the field of electrical goods. It has an interesting history. It was started by Jamal Khan, the father of the current chairman, some 35 years ago as a small wholesale concern that was distributing electrical equipments for household use like irons, vacuum cleaners, food mixers, etc. he did well in his business and soon set up a private limited company to start assembling household electrical equipment. Later he acquired another company that was manufacturing electric cables in a factory in Hattar Industrial Estatae. A few years later, they ventured into manufacture of electric lighting items, table and floor lamps and other similar fixtures. The original company that was dealing in wholesale business was also converted in a private limited company but it moved on to deal in larger items like generators, transmitters, etc. some eight years ago, Kamal Khan took over as a chairman of the group and restructured the whole business. He formed a public limited company, to be called Grand Electric Ltd. (GEL), liquidate all other businesses and brought their assets under the new company. Later the GEL was listed on Pakistan Stock Exchange. The Khan family still holds over 60 percent of the companys outstanding shares, the rest are held by the public at large.

The company has four principal divisions:

1. Home Appliances

2. Cable Division

3. Lighting Division

4. Distribution Division

GELs financial position over the last two years is attached:

Notes:

i. Current portion of long-term debt is included in Ltd.

ii. The company has two long term loans. The first loan of Rs. 50m is due for the retirement at the end of 2013. It carries an interest rate of 12% and also incurs incidental costs (e.g. trustees fees, registrar fee, etc.) of 0.50% per annum. The second loan of Rs 100m carries a floating rate of 2% above 6 months KIBOR. The average KIBOR for 2011 and 2012 were 9.1% and 9.4% respectively. This loan will mature in 2020 and attracts no changes other than interest. Both loans require bullet repayment of principal at the end of the loan tenure.

iii. Effective corporation tax rate for the company is 35% Required: As a first exercise, Azra was asked by Nouman Khan to study the information mentioned above with particular objective: To assess its present Weighted Average Cost of Capital (WACC). Show the working of Azra.

Required: As a first exercise, Azra was asked by Nouman Khan to study the information mentioned above with particular objective: To assess its present Weighted Average Cost of Capital (WACC). Show the working of Azra.

SUMMARIZED BALANCE SHEET OF GRAND ELECTRIC LIMITED All figures in thousands of rupees 2011 2012 Cash 21,840 24,450 Trade receivables 214,550 221,630 Inventories 211,410 225,820 Total current assets 447,800 471,900 Fixed assets, net of depreciation 388,400 416,300 Total assets 836,200 888,200 Bank overdraft 6,210 8,110 Trade payables 257,640 288,200 Accrued taxes 6,450 7,190 Total current liabilities 270,300 303,500 Long term debt 150,000 150,000 11% preferred share capital 100,000 100,000 Ordinary share capital (Rs. 10 per share) 200,000 200,000 Retained Earnings 115,900 134,700 Total Long term Debt and Equity 565,900 584,700 Total Equities and Liabilities 836,200 888,200 Market value of Oridinary shares: Rs Per share 21.80 22.50 Earnings per share: Rs 3.00 3.15 Dividend per share: Rs 1.50 1.50 SUMMARIZED BALANCE SHEET OF GRAND ELECTRIC LIMITED All figures in thousands of rupees 2011 2012 Cash 21,840 24,450 Trade receivables 214,550 221,630 Inventories 211,410 225,820 Total current assets 447,800 471,900 Fixed assets, net of depreciation 388,400 416,300 Total assets 836,200 888,200 Bank overdraft 6,210 8,110 Trade payables 257,640 288,200 Accrued taxes 6,450 7,190 Total current liabilities 270,300 303,500 Long term debt 150,000 150,000 11% preferred share capital 100,000 100,000 Ordinary share capital (Rs. 10 per share) 200,000 200,000 Retained Earnings 115,900 134,700 Total Long term Debt and Equity 565,900 584,700 Total Equities and Liabilities 836,200 888,200 Market value of Oridinary shares: Rs Per share 21.80 22.50 Earnings per share: Rs 3.00 3.15 Dividend per share: Rs 1.50 1.50