INTERNATIONAL ISLAMIC UNIVERSITY, ISLAMABADFACULTY OF MANAGEMENT

ProjectMuslim commercial bank Ltd

CourseManagerial Finance

Submitted to:

Sir. Ch. Mazhar Hussain

Submitted by:

Asad Rehman Khan 3311/FMS/BBA/F11Haroon Islam 3334/FMS/BBA/F11Usman Ali Abid 3312/FMS/BBA/F11Muhammad Nauman 3333/FMS/BBA/F11

ACKNOWLEDGEMENT

I thank Almighty Allah who blessed us and made it possible for us to complete this report. I am also very grateful to our parents who supported us. I wish to express profound gratitude to my teacher Mr. “Chaudry Mazhar Hussain” for his guidance.

TABLE OF CONTENTS

CHAPTER I: INTRODUCTION 1.1 Objective 1.2 Purpose

1.3 Company profile CHAPTER 2 CAPITAL BUDGETING, CASH FLOWS ESTIMATION

2.1 Theoretical background 2.2 Initial investment

2.3 Operational cash flows 2.4 Terminal cash flows CHAPTER 3: CAPITAL BUDGETING TECHNIQUES

3.1 Payback period 3.2 NPV (Net present value)

3.3 IRR (Internal rate of return) CHAPTER 4: COST OF CAPITAL 4.1 Cost of preferred stock 4.2 Cost of common stock 4.3 Cost of common stock equity 4.4 WACC (Weighted average cost of capital

CHAPTER 5: CONCLUSION AND RECOMMENDATION

REFERENCES

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CHAPTER 1: INTRODUCTION

1.1Objective of the project We have been assigned the project regarding the key topics in financial management which includes key topics like capital budgeting, capital budgeting techniques, cost of capital. This project is very helpful for us to the application of these concepts in the practical field.

1.2 Purpose of the projectThe purpose of the project is to apply the concepts of the financial management on banking sector and to give Suggestions and Recommendations. 1.3Company profile

MCB Bank Limited, with more than 60 years of experience as one of the leading banks in Pakistan, was incorporated on July 9 in 1947. The bank has journeyed remarkable tenure of more than half a century of competitively edged and well positioned heights of success by deploying quality banking, heads on technological developments, professionally leading management and prudent and ethical work methodologies. MCB was nationalized along with other private banks in 1974 as part of Government of Pakistan's economic reform movement and was later privatized to Nish at Group lead consortium in 1991.

Since privatization, MCB's growth has been phenomenal. Today, MCB in one of the largest foreign banks in Sri Lanka, the first bank in Pakistan to launch Global Depository Receipts (GDR) in 2006, has strategic foreign partnership with Mabank of Malaysia which holds 20% shares in MCB through its wholly owned subsidiary

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Mayban International Trust (Labuan) Berhad since 2008, has international indirect regional presence in Dubai (UAE), Bahrain, Azerbaijan, Hong Kong and Sri Lanka and serving through a domestic network of over 1,150 branches and over 690 ATMs across Pakistan with a customer base of 4.96 million (apprx.)

MCB is reputed as one of the soundest financial institution and as one of the leading banks in Pakistan with a deposit base of PKR. 545 bln (apprx.) and total assets of PKR 766 bln (apprx.). The bank is versed as one of the oldest and most responsible banks in Pakistan and has played pivotal role in representing the country on global platforms while being one of the few institutions that are recognized and traded in the international market.

The bank has also been acknowledged though prestigious recognition and awards by Euro money, MMT, Asia Money, SAFA (SAARC), The Asset and The Asian Banker.

Vision Statement

Challenging and Changing the Way you Bank.

Mission Statement

MCB Bank’s team of committed professionals is dedicated to maintaining long term customer relationships through outstanding service and convenience.

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CHAPTER 2: CAPITAL BUDGETING,CASH FLOWS ESTIMATION

2.1 Theoretical background

Capital budgeting is the process of evaluating and selection of long term investments that are consistent with the firm goal of maximizing the owner’s wealth. Firms typically makes a verity of long term investments, but the most common for the manufacturing firm is in fixed assets, which include property(land), plant, and equipments. These assets often referred to as earning assets; generally provide the basis for the firm’s earning power and value.

2.2 Initial investment

(+)Installed Cost:

Cost of New ATM (2 pieces) 11,000,000

(+) Installation Cost 450,000 11,450,000

(-)After Tax Sale Proceed From Old Asset:

Sale proceed from old asset -

(-)Tax (35%) - -

(+) Net Working Capital

Initial Investment 11,450,000

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2.3 OPERATIONAL CASH FLOWS

Year Year Year Year Year Year1 2 3 4 5 6

Revenues 5,050,000 6,400,000

6,000,000

6,900000 7,100,000

-

(-)Expenses 20,000 18,000 12,000 11,000 10,000 -Earnings Before Depreciation and Tax

5,030,000 6,382,000

5,988,000

6,889,000 7,090,000

-

(-)Depreciation 2,500,000 4,000,000

2,300,000

1,600,000 1,500,000

520,000

Earnings before Tax 2,530,000 2,382,000

3,688,000

5,289,000 5,590,000

(520,000)

(-)Tax (35%) 885,500 1,043,700

1,290,800

1,851,150

1,956,500

182,000

Net Operating Profit After Tax

1,664,500 1,338,300

2,397,200

3,437,850 3,633,500

(338,000)

(+)Depreciation 2,500,000 4,000,000

2,300,000

1,600,000 1,500,000

520,000

OPERATING CASH FLOW 4,144,500 5,338,300

4,697,200

5,037,850 5,133,500

182,000

2.4 Terminal cash flows

After Tax Sale Proceed From Sale of New Assets (ATM)

Sale proceed from new assets (ATM) 3,800,000

-Tax 1,137,500 (W#1)2,662,500

-After Tax Sale Proceed From Old Assets (ATM)

Sale proceed from old assets (ATM) -

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-Tax - -

Change in net working capital 0

Terminal Cash Flow 2,662,500

(Working #1) Cost Price of new machine = 11,000,000

Accumulated Depreciation:

(20%+32%+19%+12%+12%) ×11,000,000 = 10,450,000

Book Value = Initial Purchase Price- Accumulated Depreciation

Book Value = 11,000,000 - 10,450,000

Book Value = 550,000

Recaptured Depreciation = Sale Price - Book Value

Recaptured Depreciation = 3,800,000 – 550,000

Recaptured Depreciation = 3,250,000

Tax = Recaptured Depreciation × 35%

Tax = 3,250,000× 35%

Tax = 1,137,500

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CHAPTER 3: CAPITAL BUDGETING TECHNIQUES

3.1 Payback period (PBP)

Pay back periods is commonly used to evaluate proposed investments. The payback period is the amount of time required for the firm to recover its initial investment in a project as calculated from the following formula in case of unequal installments in case of an annuity we simply divide the cash flow on the initial investment. So our selected project cash flows are unequal so we use the following formula to find the payback period of the project.

Formula Payback period of the project = a+ (b-c/d)Payback period of the project=2+ (6400000-6000000) =2.03 years

11450000

So the payback period of the project is 2.03 years is the in which the project return the initial investment to the company.

3.2 NPV (Net present value)

In net present value we less the initial investment from the present value of the

cash flows of the project. This technique is also called sophisticated technique.

Formula

Net present value (NPV) =PV cash flows- initial investment

9DISCOUNT FACTOR @ 11%

YEARS CASH INFLOWS PRESENT VALUE

1 5050000 4549550

2 6400000 5194384

3 6000000 4387148

4 6900000 4545243

5 7100000 4213504

Sum of present value of cash inflows =22889829

Now putting values into the formula

NPV= 22889829-11,450,000= 11439829

The NPV value of the project is positive so it represent that the return of the project is more than the cost of the capital.

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3.3 IRR (Internal rate of return)

DISCOUNT FACTOR @ 30%

YEARS CASH INFLOWS PRESENT VALUE

1 5050000 3884615

2 6400000 3786982

3 6000000 2730996

4 6900000 2415881

5 7100000 1912236

Sum of present value of cash inflows = 14730170

DISCOUNT FACTOR @ 35%

YEARS CASH INFLOWS PRESENT VALUE

1 5050000 3740741

2 6400000 3511659

3 6000000 2438655

4 6900000 2077371

5 7100000 1583395

Sum of present value of cash inflows = 13351821

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IRR =30%+[ (35%−30%) (14730710−11 ,450 ,000 )]

(14730710−13351821)

IRR = 30%+[ (5% ) (3280710 )]

(1378889)

IRR = 30%+ 16403551378889

IRR = 30%+ 1.21%

IRR = 31.21%

So we accept the project because the internal rate of return is greater than the opportunity cost or the cost of capital.

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CHAPTER 4: COST OF CAPITAL

4.1 Cost of preferred stock

The ratio of the preferred stock dividend to the firm’s net proceeds from the sale of preferred stock; calculated by dividing the annual dividend Dp , by the net proceeds from the sale of the preferred stock Np.

Formula

Kp = Dp/Np

Np = S.P – F.C

Dp= 10 Np=86

Now Kp = 10/86

Kp = 11.6%

4.2 Cost of common stock

The rate at which investors discount the expected dividends of the firm to determine its share value.

Formula

As Ks = Kv

Ks = D1/P +g

Now cost of common stock

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Kn = D1/Nn + g

Nn = S.P – (F.C + under pricing)

4.3 Cost of common stock equity

KS = D1PO

+g

i. Growth rate ( g):In the following table Annual Dividends paid by MCB is given:

YEARS 1 2 3 4 5

Annual dividend(per share in

rupees)3.00 3.00 2.0 2.5 4.00

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.50

0.51

1.52

2.53

3.54

4.5

Annual Dividend

Annual dividend (PER SHARE)

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Here we have available data 5 years; through this data we can calculate (g):

DIVIDENT 5=DIVIDENT 1(1+g)n−1

From using the above written formula we calculate growth (g):

We take future value = 4, dividend paid by FFC in year 2010,We take present value = 3, dividend paid by FFC in 2006,Here we have n = 5,

Putting these values in the equation:

D5 = D1(1+g)n−1

4 = 3(1+g)5−1

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=(1+g)4

1.333333 = (1+g)4

¿

1.0745699 = 1+ g

g =1.0745699- 1

g = 0.0745699

or

g = 7.45%

So we take MCB growth rate g = 7.45%16

ii. D1 :

D1=D0(1+g)D1=4(1+0.745699)D1=4 (1.745699 )D1=4.298279

iii. P0 :

Now for getting value ofP0, we have following data:

1. D0 =4.002. g = 7.45699%3. RRR or K e=11.002204%

P0 = D0(1+g)K e−g

Now putting value in the above formula,

P0 = 4 (1+0.745699)0.11002204−0.0745699

P0 = 4.2982790.03545214

P0 = 121.24

Now calculatingKS:

KS = D1PO

+g

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Putting values in the equation

KS = 4.298279121.24

+0.0745699

KS = 0.0354526+0.0745699KS = 0.11002254 or Ks = 11.0%

Cost of retained earning

The same as the cost of an equivalent fully subscribed issue of additional

common stock, which is equal to the cost of common stock equity Kr.

Kr = Ks

Kr = D1PO

+g

Current market price per share

Dividend growth rate

Projected dividend per share

Under pricing per share

Flotation cost per share

60 7.45 % 3 2 2

Kr = 3/56 + 7. 45%Kr = 0.0535 + 0.0745 Kr= 12.8 %4.4 WACC (Weighted average cost of capital

The weighted average cost of capital associated with its next dollar of total new financing.

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Source of capital Weight Cost Weighted costDebt .60 6 % 3.6 %Common .40 13 % 5.2 %

Weighted average cost of capital = 8.8 %

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CHAPTER 5: CONCLUSION AND REFERENCES

In chapter 2 we find the initial investment of our new project of ATM with zero net working capital and tax. Then we find the operational cash flows for 6 years and its operational cash flow is good then previous years.

In chapter 3 payback period of the project is 2.03 years in which the project return the initial investment to the company. And the NPV value of the project is positive so it represent that the return of the project is more than the cost of the capital. And IRR is 31.21% So we accept the project because the internal rate of return is greater than the opportunity cost or the cost of capital.

In chapter 4 we find out that MCB is gradually growing and growth rate g is 7.45% it represents that MCB is improving its services. And its cost of preferred stock and common stocks is improving. And it also gives considerable dividend to its share holders. And weight average cost of capital is 8.8% this is good for MCB etc.

Finally we find out about the MCB bank that its quality of services and its working is improving according to new requirements in banking sector.

REFERENCES.www.mcb.com.www.google.com.Mcb bank manager.Principles of managerial finance.