Analysis Of Change In Equity Mlcf

Hamdard Institute of Management Sciences City Campus, Karachi.

Financial Management Term Assignment

Analysis of Statement of Change in Shareholders Equity Maple Leaf Cement Factory for the year ended 30th June’2006

Submitted to: Dr. Ayub Mehar Submitted by: Syed Asad Mehmood (MEN-2200475) Submission Date: 28.04.2007

Analysis of Statement of Change in Owner’s Equity Maple Leaf Cement Factory for the year ended 30th June’2005 1.

MLCF’s Statement of Change in Owners Equity for the year 2004 and for the year 2005 is tabulated below:

Issued, Subscribed & Paid up Capital Reserves Reserve for Issue of Bonus Share Un-appropriated Profit

2005 (Amount in ‘000) 3,248,84 4

2004 (Amount in ‘000)

Change (Increase) (Amount in ‘000)

1,804,913

1,443,931

2,704,922

1,560,423

1,144,499

270,737

-

270,737

56,393

332,208

(275,815)

6,280,896

3,697,544

2,583,352

2.

Firms equity enhanced by Rs: 2,583 Million in the year ended 30th June’2005, the sources of that change are: Sources of Increase Notes

Amount in '000

Amount in '000

Paid-up Capital Ordinary Share Issue

2.1

Preference Share Issue

2.2

902,457

Premium on Ordinary Share Issue

2.1

721,966

Less: Write-off Expenses Incurred on issue

2.3

(27,499)

541,474 694,467

Retained Earning Add: Profit for the year 2005

2.4

727,450

Less: Dividend for the year 2004

2.5

(270,737)

Less: Dividend on Preference Share for the year 2005

2.6

(11,759)

444,954

Total

2,583,352

Investments in equity instruments of associates where the Company does not have significant influence, effective from the current year, are being stated as per the accounting policy described in note 4.10. Till 30 June, 2005, these investments were stated at cost less impairment loss, if any. The change in accounting policy has been effected for better presentation and has been accounted for retrospectively by restating the comparative information in accordance with the recommended treatment specified in the revised IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). Had there been no change in the accounting policy, the carrying value of investments as at 30 June, 2005 and 30 June, 2006 would have been lower by Rs. 9.566 million and Rs. 12.395 million respectively with corresponding effects on fair value reserve on measurement of available-for-sale investments. The effect of change in accounting policy has been reflected in the statement of changes in equity. The change in accounting policy has not resulted in any change in the profit for the current year. In the interim financial statements of the Company for the current year, investments in SGIC were stated at the Company's share of the underlying net assets of SGIC using the equity method. The management, as at 30 June, 2006, has carried-out an appraisal and concluded that holding of 6.71% equity of SGIC and the Company's representation on the board of directors of SGIC through a non-executive director have not resulted in creation of a significant influence over the operations of SGIC; further, the Company does not have the power to participate in the financial and operating policy decisions of SGIC. Accordingly, these investments have been classified as available-for-sale as at 30 June, 2006.

3.

2.1

The Company, during the financial year 2004-05, offered to the existing shareholder of the company 90,245,662 ordinary share of Rs: 10/= each issued at Rs: 18 per share i.e. inclusive of premium of Rs: 8 per share. These right shares have been offered in the ratio of 50 ordinary shares for every 100 ordinary share registered in the name of the shareholders as on 03.12.04.

2.2

The Company, during the financial year 2004-05, offered to the existing shareholder of the company 54,147,398 preference share - Series “A” of Rs: 10/= each at par value This preference shares right issue has been made in the ratio of 30 preference shares (non-voting) for every 100 ordinary shares held by the company’s shareholders on 15.12.04.

2.3

Write-off of expenses incurred during the year on issue of ordinary and preference shares.

2.4

Profit after tax (PAT) for the year ended 30th June’2005 transferred to Owner equity statement.

2.5 2.6

Proposed and reserved for issue of bonus share @ 10%. Dividend on preference shares for the year ended 30th June’2005.

Firms equity enhanced by Rs: 2,583 Million in the year ended 30th June’2005, due to following major reasons: Notes

Non-Current Assets Current Assets Current Liabilities Add: Working Capital Less: Non-Current Liabilities

3.1 3.2 3.3 3.4

2005 (Amount in ‘000) 8,479,348

2004 (Amount in ‘000) 5,588,342

Change (Amount in ‘000) 2,891,006

1,940,059 (1,595,499) 344,560 (2,201,629) 6,966,839

1,499,266 (1,188,435) 310,831 (2,543,012) 3,666,992

33,729 (341,383) 2,583,352

Following the detail analysis of each major reason: Notes Non-Current Assets Fixed Assets Capital Working In Process

3.1.1 3.1.2

2005 5,099,297 3,342,032

2004 5,356,082 206,600

Change (256,785) 3,135,432

Stores & Spares held for CAPEX Deferred Taxation Long Term Loans to Employees Long Term Deposits & Prepayments

-

21,053 5,824 6,142 8,474,348

10,237 6,349 4,074 5,588,342

21,053 (10,237) (525) 2,068 2,891,006

Current Assets Stores, Spares & Loose Tools Stock in Trade Trade Debts Loan, Advances, Deposits, Prepayments & Rec. Cash & Banks

-

1,100,967 183,217 92,597 193,476 369,802 1,940,059

941,544 100,145 87,104 147,202 223,271 1,499,266

159,423 83,072 5,493 46,274 146,531 440,793

Current Libilities Current Portion of Redemable Capital Current Portion of Long Term Loans Short Term Finances Trade & Other Payables Accrued Profit and Interest/Marup Taxation Dividends

3.3.1 -

Working Capital Non-Current Libilities Redeemable Capital Long Term Loans Deferred Liability for Vacation Benefits Deferred Taxation Long Term Deposits

83,300 434,030 589,843 432,048 38,646 4,005 13,627 1,595,499 344,560

83,300 434,030 274,611 307,511 23,154 65,829 1,188,435 310,831

315,232 124,537 15,492 (61,824) 13,627 407,064 33,729

3.4.1 -

41,650 2,157,706 8,513 328,571 6,572 2,543,012

124,950 2,061,737 7,760 7,182 2,201,629

(83,300) 95,969 753 328,571 (610) 341,383

3.1.1

The Company, during the year has added Fixed Assets and charged depreciation as per following statement: FA Addition at Cost as on 31.12.05 Rs: (-) FA Disposal at Cost as on 31.12.05 Rs:

84,371,000 (7,250,000)

3.1.2

Rs: 77,121,000 (-) Depreciation for the year Rs: (341,094,000) (+) On Disposals Rs: 7,188,000 Rs: (256,785,000) ============= Work on the expansion project comprising of a new production line of 6,700 tons per day clinker capacity based on most modern dry process technology has started this year. That’s the major reason of change in equity. Part of project finance was arranged through increased capital by issue of Right share of Rs: 18/= Ordinary (Including Rs: 8/= Premium) and preference shares (Nonvoting) both have been subscribed and paid in full.

3.3.1

The Increase in Short Term Loans is comparatively much lesser, and seems to be the regular, it shows that, the company is not utilizing short-term credit lines to finance expansion project. The company utilizing short-term finance facilities for opening letters of credit/guarantee aggregate etc.

3.4.1

The Increase in Long Term Loans is comparatively much lesser, and seems to be the regular; it shows that, the company is still not utilizing long-term credit lines to finance its major expansion project. Although, Company have used the 530 Million Long Term Loan facility to fund the conversion of one of the existing wet process line for grey cement to 500 tones per day dry process line of white cement. The company has the intentions to utilize following long term credit facilities in order to fund major expansion project. o Agreement for financing of Rs: 4,800 Million has already been signed with NBL led consortium. o US$14.5 Million from Islamic Corporation for the development of Private Sector, Jeddah KSA. o Rs: 1,000 Million from ABL led consortium. Company has the intentions to finance major expansion project through following sources. Increase in Capital Long Term Loan NBP Long Term Loan ICD Long Term Loan ABL Source Not Define Yet Total Project Cost

Rs: Rs: Rs: Rs: Rs: Rs:

2,138 Million 4,800 Million 870 Million 1,000 Million 1,417 Million 10,225 Million

It is apparently clear the remaining amount i.e. Rs: 1,417 Million will also be financed through Long Term Credit facilities.

4.

The Impact Following the summarized comparison company accounts for Actual 2 years (2004 and 2005) and if company exercised to option of using long-term credit facility ineasted of increase in capital in the year 2005.

Non-Current Assets Investment Current Assets Current Liabilities Working Capital Employed Capital Long Term Debt Share Holders Equity Represented by Share Capital Reserve & Un-app. Profit

Debit to Equity Ratio Current Ratio Breakup Value per share of Rs: 10 each

A2004 5,562,682 25,660 5,588,342 1,499,266 (1,188,435 ) 310,831 5,899,173 (2,201,629 ) 3,697,544

A2005 8,462,382 16,966 8,479,348 1,940,059

*F2005 8,462,382 16,966 8,479,348 1,940,059

(1,595,499) 344,560 8,823,908

(1,595,499) 344,560 8,823,908

(2,543,012) 6,280,896

(4,398,914) 4,424,994

1,804,913 1,892,631 3,697,544

3,248,844 3,032,052 6,280,896

1,804,913 2,620,081 4,424,994

37:63 1.26 20.49

29:71 1.22 19.33

50:50 1.22 24.52

It is seems clear from above statement that due the decision of injecting more capital into the company, company’s Debit to Equity Ratio has been improved from 37:63 to 29:71, but on the other side share’s breakup value is decreased from Rs: 20.49 to Rs: 19.33.

If the company’s management had exercised the option of funding through by utilizing long-term debt ineasted of capital injection, because it is usually easier to acquire assets through debt than acquire them through equity. If they use that option company’s Debit to Equity Ratio will become equal i.e. 50:50, although it will increased the share’s breakup value i.e. Rs: 24.52, but it will not be considered the healthy sign for the company, A high debt ratio (or, conversely, a low equity ratio) means that existing creditors have supplied a large portion of the company’s assets, and that there is relatively little stockholder’s equity to help absorb the risk. Therefore, it is clearly suggesting that management has exercised the best available option.