Capital Structure and Dividend Policy Analysis of FU-WANG Food Limited and Rangpur Dairy and Food Limited

A Case in the Food and Allied Sector of Bangladesh


Term Paper, 2018

65 Pages


Excerpt

Contents

1. Introduction:

2. Objectives of the Report:

3. Sources of Data:

4. Scope of the report

5 Limitations of the Report:

6. Industry Overview:
6.1.1: Status of Exports of Agro-Based Products
6.1.2 GDP Impact
6.1.3. Porter's Five factor Analysis of Food and Allied Sector:

7 Company Overview:
7.1. Overview of Rangpur Dairy& Food Products:
7.2. Corporate goal of Rangpur Dairy& Food Products:
7.3. Corporate Social Responsibility of Rangpur Dairy& Food Products:
7.4. Overview of FU-WANG FOOD Limited:
7.5. Corporate goal of FU-WANG FOOD Limited:
7.6. Corporate Social Responsibility of Rangpur Dairy& Food Products:

8. Analysis of Capital Structure:
8.1. Stock Concept:
8.1.1. Financial Debt Ratio:
8.1.2. Debt to Equity Ratio:
8.1.3. Financial Leverage:
8.2. Flow Concept:
8.2.1. Interest Coverage Ratio:
8.2.2. Debt Service Coverage Ratio:
8.2.3. Cash Flow Coverage Ratio:
8.3. Checklist:
8.3.1. Tangibility:
8.3.2. Uncertainty of Operating Income:
8.3.3. Profitability:
8.3.4. Sustainable Growth Rate:
8.3.5. Financial Slack:

9. DuPont Analysis:
9.1. Tax Burden:
9.2. Interest Burden:
9.3. EBIT or Operating Income Margin:
9.4. Asset Turnover Ratio:
9.5. Equity Multiplier:
9.6. DuPont Return on Equity:

10. Dividend Policy:
10.1. Types of dividends:
10.2. Types of Dividend Policy:
10.3. The stylized fact of dividend policy:
10.4. Analysis of Dividend Policy of FU-WANG food:
10.5. Analysis of Dividend Policy of Rangpur Dairy:
10.6. The stylized facts of Dividend policy of the selected firm:

11. Pecking Order Theory:
11.1. Pecking Order theory test for Rangpur Dairy:
11.2. Pecking Order theory test for FU-WANG Food:

12. Conclusion:

13. References

14. Appendix:

Executive Summary

This report is prepared with an intention to make capital structure and dividend policy analysis of the assigned two firms which are FU-WANG food limited and Rangpur dairy and food limited who are the participants of food and allied sectors. In an effort to performed capital structure and dividend policy analysis the paper first consider a general overview of the food and allied sector based on some information and analysing the Porter's five competitive factors model. After that this report demonstrates company overview for both the selected firm. The company overview generally contains some basic information of the selected firms and briefly discusses the corporate goals of the firms. Then the capital structure analysis has been conducted based on the stock variable, flow variable and flow concept. Summarizing the result is like that - Under stock concept FU-WANG food has higher financial debt, D/E and financial leverage than those of Rangpur dairy. It indicates FU-WANG food is carrying more debt in its capital than Rangpur dairy. Under flow concept Rangpur dairy has greater cash flow coverage and interest coverage ratio whereas debt service coverage ratio is higher for FI-WANG food. Based on the checklist it has been found that tangibility is higher for Rangpur dairy. But in case of rest of the factors which are profitability (measured in both return on asset and return on operating asset), growth rate, financial slack and uncertainty of operating income is higher for FU-WANG food. This report also performed five factors extended DuPont analysis that reveals FU-WANG food has substantial higher return on equity than that of Rangpur dairy. This result occurs mainly due to the higher interest burden and financial leverage of the firm. In the analysis of dividend policy this report also demonstrates the trends of the earnings per share, dividend pay-out for the last five years. It has revealed that both of the firm is following residual dividend policy. In this policy investment is the major priority. If any amount of residual cash is available to the firm after making investment then the firm will distribute cash dividend. Both of the firms are not paying any cash dividend during the last five years so that it can be understood that the firms have no residual amount of cash is available to them after making investment to distribute cash dividend. Therefore the firm is following residual dividend policy. The firms are retaining all of their earnings to recapitalize them so that it will be able to attain sustainable earnings. Only then both firms will distribute cash dividend. This report has also considered Pecking order theory in a very basic form and with limited knowledge regarding this matter where assumptions are made to some extent. Based on this basic analysis it is indicated that FU-WANG food has not followed pecking order they at all. In contrast, Rangpur dairy followed the pecking order theory for the first two years and after that it has also lost its consistency with pecking order theory.

1. Introduction:

Corporate finance is defined as the area of finance which is dealing with the sources of fund and the capital structure of firms and the actions that managers take to maximize the value of the firm to the shareholders including the tools and analysis which are used to allocate financial resources. The main objective of corporate finance is to maximize or increase shareholder value. Corporate finance governs 3 principles which are investment principle, financing principle and dividend principle. The investment principles specifies that firms invest only in projects that yield a return that exceeds the hurdle rate or required rate of return (project with positive net present value). The financing principle suggests that accurate mix of debt and equity in the capital structure that will maximize the value of the firm. Maximizing the value of the firm is ensured by making optimal mix of debt and equity which will minimize the cost of capital. Thereby, value can be created and added to the firm.

To analyze different aspects of corporate finance of the selected firms, first industry analysis is performed. I have been assigned 02 (two) stock-listed companies from the Food and Allied Sector named FU-WANG Food Limited and Rangpur Dairy and Food Limited. There after all possible aspects of corporate finance of aforesaid companies are analyzed and evaluated to employ the bookish knowledge in practical arena.

2. Objectives of the Report:

The overall objective of this term paper is to analyze the Capital Structure & Dividend Policy Analysis of FU-WANG food limited and Rangpur dairy and food products limited.

The specific objectives are as follows:

- Analyzing the financial statements of the selected companies
- Analyzing the capital structure pattern of the aforesaid companies.
- Evaluating the divided policy and dividend pattern of the companies.

3. Sources of Data:

This report is primarily based on secondary data which were available on the websites. The main source of secondary data was the Annual Reports of the companies for the period 2014 to 2018, DSE website, lankabangla.com, stockbangladesh.com investing.com and respective firm’s websites.

4. Scope of the report

The main focus of this report is to analyze the assigned and above mentioned companies with respect to:

- Financial Statement and Performance Analysis
- Cost of Capital and Capital Structure
- Dividend Policy

5. Limitations of the Report:

Financial analysis needs lots of time & due procedure. Due to time and lack of knowledge in the field of finance, right procedures may be missing in some cases.

6. Industry Overview:

Bangladesh has a rapidly growing consumer market and due to a large population base, the demand for food products is always on the rise. The market and the product range have evolved significantly over the last decade and many companies have entered the food business which was otherwise not into this level of diversification in the past. The food processing industry in Bangladesh represents one of the major potential sectors within the industrial segments in terms of contribution to value addition and employment. The sector accounts for over 22% of all manufacturing production and employs about 20% of labor forces. All food processing enterprises account for 2% of the national GDP. The food processing sector includes processing of cereals, pulses & oilseeds, bakery and confectionary, fruits and vegetables, dairy, carbonated beverages and non-carbonated fruit juices, drinks, other beverage and various other food items.

6.1.1: Status of Exports of Agro-Based Products

Bangladesh Agro-processors Association (BAPA) has now 370 members who are engaged in manufacturing, processing and exporting the products of this emerging sector. Now about 90 items of agro-processed products are being exported to 70 countries throughout the world. Major export markets of agro-processed products are Asia, Middle East and Africa. Major exported items are pickle, drinks, juice, spices, rice, tea, party snacks (chanachur), nuts, mustard oil, chips, biscuits etc.

6.1.2 GDP Impact

There is a huge opportunity to expand our national GDP through export diversification of different agro-processed products like Export maize/corn to Egypt and Nigeria as the soil of our country is suitable for large number of quality and tasty maize production Export of fresh horticultural food stuff in Iran, Indonesia, and Turkey. The food processing sub-sectors such as vacuum fried fruit chips, potato chips, spices powder, bakery products, soft drink bottling, confectionary manufacture, frozen vegetables, processed fish, grain products, meat, poultry and milk processing, tomato paste, canned jackfruit and pineapple, fast food, ready to eat breakfast cereals, food additives, flavors etc. have huge potential in the domestic and export markets.

6.1.3. Porter's Five factor Analysis of Food and Allied Sector:

1. Threat of Substitutes: The threat of substitute is high in the food and allied sector in Bangladesh. If the price of the products gets high then, customers may switch to another available substitute.
2. Threat of New Entrants: The threat of new entrants is relatively because to enter into the food and allied sector firms will be required to obtain license form proper public authority. Therefore threat of new entrants is low.
3. Bargaining Power of Consumers: Since most of the firm in this sectors are corporation so that they have given a fixed price at which consumer will purchase the products. Moreover, there is no threat of backward integration indicating that bargaining power of consumer is low.
4. Bargaining Power of Suppliers: Firms in this sector obtain their most raw materials from peasant of the village. Though they also use various chemical but those are purchased at a fixed term. There is almost no threat of forward integration. Therefore bargaining power of suppliers is low.
5. Rivalry among Existing Firms: Most of the firms are selling their products at a fixed price. There are plenty of consumers for their products. Therefore the firms do not need to cut price to obtain more customers. But if one firm increase price others may have to maintain the same price indicates that rivalry among existing firm is medium.

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7. Company Overview:

7.1. Overview of Rangpur Dairy& Food Products:

Rangpur Dairy & Food Products Limited was incorporated in Bangladesh on March 06, 2004 as a Private Limited Company under The Companies Act 1994. The company is converted to Public Limited Company from Private Limited Company as at June 24, 2010 and issue of share through IPO as on date 13 th October 2011.

The firm has authorized capital of taka 1,000 million, paid up capital of taka 688.71 million. Face value per share is 10 taka and total number of share outstanding is 68871264. The firm is conducting its business in the food and allied sector in Bangladesh.

7.2. Corporate goal of Rangpur Dairy& Food Products:

The corporate goal of the firm is to be the market leader in the food and allied sector by providing high quality dairy products to the market in order to achieve customer satisfaction with improved quality and nutrition standards. The firm is also committed to attain relationship farming to enhance prosperity and empowerment of Bangladesh farming community to receive fresh and healthy raw material for their product which will ensure the highest and non-negotiable standard of their products. Therefore the primary goal of the firm is to provide quality products to meets customer needs. This will increase the revenue and thus maximize the shareholder wealth. This strategic thinking will make sure the sustainable growth in the long run and create value for the shareholder.

7.3. Corporate Social Responsibility of Rangpur Dairy& Food Products:

The annual reports that are made available for the public contains no information regarding the firm's CSR activity .Therefore, specific details regarding CSR of the company could not be obtained.

7.4. Overview of FU-WANG FOOD Limited:

FU-WANG food incorporates in 17th February 1997 as a private limited company. The company is converted to Public Limited Company from Private Limited Company in July 2000 by getting listed in both DSE and CSE.

The firm's authorized capital is taka 1500 million and authorized capital of taka 1108.39 million. The face value of the share is taka 10 and the number of share outstanding is 110,839,285

7.5. Corporate goal of FU-WANG FOOD Limited:

The company has made investments most generously for the procurement of modern manufacturing plant. They also invest substantially to maintain relationship with the farmers community and the supplier community to receive high quality raw material to produce their products. The firm also made investment in market analysis to determine the change in the taste of customers’ needs so that they can meet the customer demands by better tailoring their products. Therefore, it can be said that their primary goal is to satisfy their customers’ needs through quality products. This will increase revenues for the company and eventually the net profit will be maximized. Thus the firm will be able to maximize the shareholders wealth. The operational, tactical and long term strategic thinning and initiations also imply sustainable growth in the long term and creating as well as adding value to their customers.

7.6. Corporate Social Responsibility of Rangpur Dairy& Food Products:

Based on the information the firm has not made any substantial corporate social activity to mention.

8. Analysis of Capital Structure:

The strength of a company's balance sheet can be evaluated by four broad categories of investment-quality measurements: working capital adequacy; asset performance; and capital structure. A company's capitalization (not to be confused with market capitalization) describes the composition of a company's permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a company's capital structure is an indication of financial fitness.

8.1. Stock Concept:

8.1.1. Financial Debt Ratio:

Financial Debt ratio provides the information regarding the financial debt of a firm. It measures against 1 taka of equity how much financial debt a firm has. Basically, the higher the financial debt ratio, the higher the degree of financial debt and the higher the risk associated with the firm and vice versa.

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From the graph, it is observed that the financial debt ratio of FU-WANG food is higher than Rangpur Dairy in every year during the last five years. It suggests FU-Wang is carrying more interest bearing debt than Rangpur Dairy. Therefore, based on financial debt ratio, it can be said that FU-WANG food is in relatively more risky position than Rangpur dairy.

8.1.2. Debt to Equity Ratio:

Debt to Equity ratio measures against 1 taka of equity how much debt the firm is carrying.

Generally, the higher amount of debt, the higher debt to equity ratio the higher and therefore the degree of risk.

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From the above figure, it is observed that the Debt to Equity ratio of FU-EANG Food is higher than Rangpur Dairy in every year during the last five years. It indicates the FU-WANG food is carrying more debt against per taka of its equity than Rangpur Dairy. Therefore, based on debt to equity ratio, it can be said that FU-Wang food is carrying more debt in its capital than Rangpur Dairy, making FU-WANG food riskier firm.

8.1.3. Financial Leverage:

Financial leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet its financial obligations. The leverage ratio is important given that companies rely on a mixture of equity and debt to finance their operations and knowing the amount of debt held by a company is useful in evaluating whether it can pay its debts off as they come due.

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Based on the above graph, it is observed that FU-WANG food has higher financial leverage ratio compared to Rangpur Dairy in every year during the last five years. FU-WANG food’s financial leverage ratio has been increased in the steady progression manner. In contrast, Rangpur Dairy has very low financial leverage ratio during the first two years in the third years it has been increased dramatically and then in the four and fifth year it increased steadily. The main reason behind this abnormal increase is that a substantial increase in the financial obligation whereas the financial asset was increased in a steady manner compared previous years resulting unusual high financial leverage ratio in the third year of Rangpur Dairy firm.

8.2. Flow Concept:

8.2.1. Interest Coverage Ratio:

The interest coverage ratio measures how much earnings before interest and tax is available to the firm compared to pay of each taka of interest of the firm. Higher ratio indicates firm's higher capability to repay its interest out of its earnings before interest and tax. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) during a given period by the company's interest payments due within the same period.

The method for calculating interest coverage ratio may be represented by:

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From the graph it has been detected that without the first years FU-Wang food has higher interest coverage ratio than Rangpur Dairy. For FU-Wang food, in the interest coverage ratio has started to decrease from 2016 since its earnings before interest and taxes decreased on that year. But in 2018 the decreased interest coverage ratio occurs because the firm has more interest though EBIT increased. In case of Rangpur Dairy, in the first year it has very low amount of interest results higher interest coverage ratio. In the year of 2015 earnings before interest and taxes decreased whereas interest increased resulting substantial decline in interest coverage ratio. In 2018 both 2015 earnings before interest and taxes interest has been decreased but earnings before interest and taxes has been decreased in a higher rate therefore results low the interest coverage ratio for Rangpur Dairy firm.

8.2.2. Debt Service Coverage Ratio:

The debt service coverage ratio measures earnings before interest and tax and depreciation and amortization (EBITDA) available for debt servicing to interest, principal payments. It is a popular benchmark which is used in the measurement of an entity's (person or corporation) ability to produce enough EBITDA to cover its debt payments. The higher debt service coverage ratio, the easier it is to obtain a loan and vice-versa. With higher debt service coverage ratio the firm has more ability to repay its debt than those of with lower debt service coverage ratio.

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Excerpt out of 65 pages

Details

Title
Capital Structure and Dividend Policy Analysis of FU-WANG Food Limited and Rangpur Dairy and Food Limited
Subtitle
A Case in the Food and Allied Sector of Bangladesh
Course
Corporate Finance
Author
Year
2018
Pages
65
Catalog Number
V950923
ISBN (eBook)
9783346295910
ISBN (Book)
9783346295927
Language
English
Tags
Industry Overview, Analysis of Capital Structure, Analysis of Stock Concept, Debt to Equity Ratio, Financial Debt Ratio, Financial Leverage, Flow Concept Analysis, Interest Coverage Ratio Analysis, Debt Service Coverage Ratio Analysis, Cash Flow Coverage Ratio, Tangibility Analysis, Uncertainty of Operating Income Analysis, Profitability Analysis, Sustainable Growth Rate Analysis, Financial Slack Analysis, DuPont Analysis, Dividend Policy Analysis, Pecking Order Analysis
Quote paper
Sajjad Hossine Sharif (Author), 2018, Capital Structure and Dividend Policy Analysis of FU-WANG Food Limited and Rangpur Dairy and Food Limited, Munich, GRIN Verlag, https://www.grin.com/document/950923

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