AQRON Private Limited

AQRON PRIVATE LIMITED Analysis of Key Financial Indicators

AGENDA

• Understand the basic frame work of financial analysis

• Discuss Aqron cash budget in detail

• Discuss Aqron cash budget with reinvestment

• External financing requirement ?

• Discuss optimal structure in detail

• Discuss First Chicago approach for Venture valuation

AGENDA (Contd)

• Calculate NPV for various initiatives

• Sensitivity analysis and interpretation

• Scenario Analysis and interpretation

• Discussion on Limitations

• Exercise Section ; IS , BS and ratios

FINANCIAL ANALYSIS

• Goal of financial analysis

• Forecast Decision (P)• Visibility Management (O)• Risk Diversification(L)• Prudence Profitability (C)

• Goal of a firm • Share Holders Wealth • Going Concern

AQRON PRIVATE LIMITEDProject Details

FINACIAL VISIBILITY

• Projected Cash Budget without reinvestment

• Projected Cash Budget with reinvestment

• Projected Financial Statements

• Cash Budgeting under three different scenarios

OPTIMAL CAPITAL STRUCTURE

• Calculation of unlevered Beta

• Inclusion of Leverage

• Optimal Debt to Equity Ratio (Weighted Average Approach)

• Valuation under Venture Capital (First Chicago Approach)

• Maximum Angel Investment

RISK ANALYSIS

• Sensitivity Analysis

• Scenario Analysis

FINANCIAL VISIBILITY

CASH BUDGETING

• Importance• Timing of Acquisitions • Quality of Acquisitions

• Sales Forecast• Demand forecast • Regression Techniques • Historical data • Intuitive Approach

CASH BUDGETING (contd)

• Determination of Cost • Inflation adjusted• Exchange rate adjusted• Demand forecast

• Unpredictability • Risk determination• SML approach to weigh decisions

CASH BUDGETING (contd)

• Decision Criterion• Payback period • Discounted payback period• Net Present Value of different alternatives • IRR and MIRR ?

• AQRON Cash Budget without reinvestment__

2009 2010 2011 2012 20130

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Profit Expense Revenue

AQRON Private Limited Cash Budget

CASH BUDGETING (contd)

• Reinvestment of Reserves • Can demand be created?• Assumption of a linear demand curve

__• Maximizing output from resources (Best practice)

• Revenue function = (Demand Curve) * Number of hours of solution• Profit function = Revenue function – Cost function • Maximize

» 1st order derivative» Maxima to the second order» Gives you quantity that maximizes each product and service

2009 2010 2011 2012 2013

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Profit RevenueCostSalary

AQRON Cash Budget with Reinvestment

EXPANSION SCENARIOS

• Advertisement • Training • Research and Development__

NPV Comparison0

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Advertisement R&DTraining

NPV Comparison of Three Expansion Scenarios

OPTIMAL CAPITAL STRUCTURE

OPTIMAL CAPITAL STRUCTURE

• Inclusion of Debt – Raises risk for the equity holder – Increases ROE for the stockholder – High risk Lower stock price – High ROR Higher stock price

• Optimal capital Structure – Maximizes Stock Price – Minimizes Weighted Average Cost of Capital (WACC)

OPTIMAL CAPITAL STRUCTURE (contd)

• Business Risk – ROIC (zero debt ) = ROE– Business risk (unlevered firm) = σ ROE– Dependent

• Financial Risk – Risk over and above business risk in a levered firm– Spreads out the probability distribution

OPTIMAL CAPITAL STRUCTURE (contd)

• Weighted Average Cost of Capital

WACC = Wd*Kd *(1-T) + Ws*Ks + Wp*KpWACC = D/A*Kd*(1-T) + E/A*Ks

• Cost of Debt Kd– KIBOR + Premium

• Cost of Equity Ks – CAPM: Ks = Rf + β (Rm- Rf)

OPTIMAL CAPITAL STRUCTURE (contd)

• Calculation of Market Risk Premium

– Geometric mean of KSE 100 Index from 2000-2009

• Hamada Equation for Beta calculation

– β = βu [1 + (1-T)(D/E)]– βu = β / [1+ (1 – T) (D/E)]

• Approach__

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KD

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t of C

apita

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00.05 0.1

0.15 0.20.25 0.3

0.35 0.40.45 0.5

0.55 0.6

0.650000000000001 0.70.75 0.8

0.85 0.90.95

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Equity CapitalDebt Total Capital

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ital

FIRST CHICAGO APPROACH

• Very optimistic• Optimistic • Conservative • Pessimistic

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MAXIMUM ANGEL INVESTMENT

• 49-51% Ownership right • Feasible amount calculation

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RISK ANALYSIS

SENSITIVITY ANALYSIS

“Change in NPV response to change in a variable all else constant”

• What If Questions against a base case – Selling Price – Growth Rate – Variable Cost – Fixed Cost – WACC

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Sales Price Growth Rate Variable Cost Fixed Cost WACC

Sensitivity Analysis Aqron Private Limited

Change

NPV

SCENARIO ANALYSIS

“Bad and good set of financial outcomes are compared with the most likely using probability distributions”

• Best case scenario• Base case scenario• Worse case scenario • Allows changes in more than one variable at a time

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Best CasePolynomial (Best Case)Linear (Best Case)Base CaseWorse Case

Distribution Mean 1556035

Probability Graph Aqron Private Limited

MONTE CARLO SIMULATION

1. Each variables is assigned a value 2. NPV is generated 3. The process is repeated 1000 times4. 1000 NPVs are generated 5. Mean of these 1000 values is the Expected profitability6. Std. Deviation is the risk

EXERCISE SESSION