A Report on

Multinational Cost of Capital &

Capital Structure on BAT and BEXIMCO

This report has been submitted as a partial requirement of International Financial

Management (FIN-546) course

To the course Instructor Prof. K.M. Zahidul Islam

Adjunct Professor, Department of Finance

School of Business & Entrepreneurship

Independent University, Bangladesh (IUB)

By
Tahera Jalil; ID- 1931009
Sk. Mahfuz Zaman; ID- 1922082
Md. Habibur Rahman; ID- 2021684
Nazmul Jannat Taqwa; ID- 0920597
Tuman Bin Jane Alam; ID-2022953

September 01, 2021

 Letter of Transmittal

September 01, 2021

Prof. K.M. Zahidul Islam

Adjunct Professor
School of Business & Entrepreneurship
Independent University, Bangladesh

Subject: Letter of Transmittal

Dear Sir,

We would like to inform you that, it is a great pleasure for us if you please accept our report on
Multinational Cost of Capital & Capital Structure on BAT and BEXIMCO, two well-
known multinational and domestic company in Bangladesh. While preparing this report, we try
to follow all your given guidelines especially on multi-national companies. Despite information
and time limitations, we have tried our best to address the major and in-depth issues in making
this report accurate and reliable. Hopefully, it will help us in our future career as well.

If you have any further enquiry, we are available and would be very delighted to clarify that. We
highly appreciate your comment or any kind of suggestion regarding this report.

Sincerely,
Tahera Jalil; ID- 1931009
Sk. Mahfuz Zaman; ID- 1922082
Md. Habibur Rahman; ID- 2021684
Nazmul Jannat Taqwa; ID- 0920597
Tuman Bin Jane Alam; ID-2022953

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 Acknowledgement

First of all, we would like to thank Almighty Allah to let us finish and submit our report. We

would like to express our gratitude to our course instructor Prof. K.M. Zahidul Islam for giving

us continuous suggestion, constructive supervision and all kinds of support for completing the

report on MNCs Cost of Capital & Capital Structure on BAT and BEXIMCO as a partial

fulfillment of our course International Financial Management [FIN-546]. We would also like to

thank him for assigning us such a topic that has helped us to enhance our knowledge in a truly

unique way.

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 Executive summary

The objective of this report is to get the brief idea about capital structure and cost of capital of

MNCs. This paper consists of the theoretical aspects and importance of cost of capital and capital

structure for multinational companies (MNCs). Also, it is shown all the equation of WACC and

CAPM of two leading companies- British American Tobacco Bangladesh LTD. (BAT) and

Bangladesh Export Import Company LTD. (BEXIMCO). We have collected all the required

historical data to analyze the return and risk by using CAPM and WACC formula. Moreover, we

have determined the financial health of these two companies with the help of Altman Z-score by

using 5 basic financial ratios. This analysis will help investors to take decision whether they

purchase or sell the shares of these two companies. The scope of this paper is limited, so the

detailed analysis of financing and investing decision has been excluded due to the lack of the

information. References are taken from Dhaka Stock Exchange (DSE) which are directly related

to issue of capital structure and cost of capital for these two companies. In short, this article is

made with primary data which can bear couple of issues regarding financial decision of these

two companies.

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 Table of Contents

TITLE PAGE NO.

1.0 Introduction 1

1.1 Company Profile 2

2.0 Theoretical Aspects 4

2.1 Cost of Capital 4

2.2 Types of Cost of Capital 4

2.3 Cost of Equity Comparison Using the CAPM 5

2.4 Estimating an MNC’s Cost of Capital 6

2.5 Factors Affecting Cost of Capital 8

2.6 Cost Of Capital for MNCs Versus Domestic Firms 8

2.7 Country Differences in the Cost of Debt 9

3.0 Importance of Cost of Capital for MNCs and Capital Structure 10

4.0 Implication of Cost of Capital and Capital Structure 11

5.0 Capital Asset Pricing Model of BAT & BEXIMCO 12

6.0 Conclusion 17

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 1. Introduction

Every MNC needs capital to expand its operation in home country and also establish a foreign
subsidiary. Usually MNC operates its business by using equity and debt capital. To gather equity
capital MNC’s first priority is to offer domestic equity so that they can have the whole ownership
of the subsidiary. Secondly, MNC who has strong global presence can offer global equity by
selling their stocks in various countries, using each country’s local currency where they have
large subsidiaries that need financing and their stock market valuations are relatively high
compared to other countries. MNC can also offer private placement of equity where a limited
number of large investors are willing to invest for a long period of time. Other than equity
capital, when MNC wants to generate debt capital, they can offer domestic bond by the help of
investment bank with 10-20 years maturity period and has no obligations to hold till maturity
period. Like global equity, MNC can also offer global bond in multiple countries with reselling
option in secondary market where they have large subsidiaries which are in need of financing.
MNC can offer private placement of bonds which has some restrictions and which may reduce
the transaction cost because of a small number of large investors. Another source of debt is MNC
can take loans from financial institutions that has an adjustable interest rate. To generate equity
and debt capital for operation, MNC faces cost of capital. MNCs cost of debt is depends on its
interest rate along with credit risk premium. There is a positivity in debt financing, that it has tax
advantage. When it comes to equity, MNCs’ cost of equity is issuing new common stock and
selling them or firms cost of retain earning that reflects opportunity cost. It also contains risk
premium. Firms can measure its cost of capital by using weighted average cost of capital
formula. Also firm needs to use debt in certain amount where they don’t get bankrupt and can get
tax benefit. MNCs cost of capital can vary from domestic firms due to its larger size compared to
domestic corporate. It also has access to international capital market where they can obtain funds
in a lower cost. As MNCs have operations in different countries, it can diversify cash flow risk.
So the probability of bankruptcy is quite lower compared to domestic firms. There are few risks
that MNCs have no control over which is the exposure to exchange fluctuation risk that will
increase the probability of bankruptcy and the exposure to country risk that will cause MNC to
lose their subsidiary’s asses and bankruptcy.

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1.1 Company Profile

British American Tobacco Bangladesh

The presence of British American Tobacco in this part of the world can be traced back to 1910.
Beginning the journey as Imperial Tobacco 110 years ago, the Company set up its first sales
depot at Armanitola in Dhaka. After the partition of India in 1947, Pakistan Tobacco Company
was established. The first factory in Bangladesh (the then East Pakistan) was setup in 1949 at
Fauzdarhat in Chattogram and in 1965, the second factory of Pakistan Tobacco Company was set
up in Mohakhali, Dhaka. After Bangladesh’s independence, the Company became Bangladesh
Tobacco Company Limited; and in 1998, the Company changed its name and identity to British
American Tobacco Bangladesh (BAT Bangladesh) aligning the corporate identity with other
operating companies in the BAT Group.

BEXIMCO

Today the BEXIMCO Group ("BEXIMCO" or the "Group") is the largest private sector group in
Bangladesh. BEXIMCO was founded in the 1970's by two brothers – Ahmed Sohail Fasihur
Rahman and Salman Fazlur Rahman. Since the early days, the Group has evolved from being

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primarily a commodities trading company to a leading, diversified group with a presence in
industry sectors that account for nearly 75% of Bangladesh's GDP. BEXIMCO's corporate
mission is "Taking Bangladesh to the world".

As BEXIMCO has grown over the years, the flagship platform now has operations and
investments across a wide range of industries including textiles, pharmaceuticals, PPE, ceramics,
real estate development, construction, trading, marine food, information and communication
technologies, media, DTH, financial services, and energy. The Group sells its products and
services in the domestic Bangladesh market as well as international markets. BEXIMCO is the
largest employer in the private sector in Bangladesh and employs over 70,000 people worldwide.

The BEXIMCO name has now become one of the most recognizable brand names in
Bangladesh. It is synonymous with innovation, trust and quality. The Group consists of four
publicly traded and seventeen privately held companies. The publicly traded companies are
Bangladesh Export Import Company Limited, Beximco Pharmaceuticals Limited, Shinepukur
Ceramics Limited and Beximco Synthetics Limited. The total revenue of the group stands in
excess of 2 Billion US Dollars per year.

BEXIMCO encompasses one of South Asia's largest vertically integrated textile and garment
companies. The Textile division is a fully integrated manufacturer of cotton and polyester
blended garments for men, women and children, both for domestic and export markets.
BEXIMCO is also the largest exporter of pharmaceuticals in Bangladesh with presence in 55
countries. The Pharmaceuticals division manufactures and sells generic pharmaceutical
formulation products, active pharmaceutical ingredients (API) and intravenous (IV) fluids. The
Group is also the largest ceramics exporter in Bangladesh.

BEXIMCO is well positioned to capitalize on strong growth across industries in both the
domestic and global markets. Each Group company is managed by an independent, professional
team with significant depth of experience. Management teams have established a clear strategic
plan that will further strengthen the overall platform. BEXIMCO intends to leverage its market
position and global scale, further diversify operations into highly profitable sectors, capitalize on
the domestic growth opportunity and selectively pursue international opportunities going
forward.

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 2. Theoretical Aspects
2.1 Cost of Capital

Cost of capital refers to the amount of return a company should have on a specific investment
after cost of capital is accounted for. The cost of capital typically determines the rate of return
required to persuade investors to finance a capital budgeting project. Cost of capital is judged
internally by companies to determine if the resource expenditure is worth pursuing a capital
project. Investors judge cost of capital to determine the risk associated with investing money into
a capital project.

The cost of capital is heavily dependent on the type of financing used in the business. A business
can be financed through debt or strictly through equity. However, most companies employ a
mixture of equity and debt to finance their businesses.

Therefore, the cost of capital comes from the weighted average cost of all capital sources or the
weighted average cost of capital. Companies should only invest in projects that supply an excess
of returns that are greater than the cost of their capital. It provides a benchmark, which is
required to be met by the end of a project.

2.2 Types of Cost of Capital

The term cost of capital is vague in general. It does not clarify which capital we are talking
about. It could be equity or debt or any other source of capital. We can classify cost of capital
into following broad classifications.

Cost of Equity Capital:

Cost of equity capital is the cost of using the capital of equity shareholders in the operations.
This cost is paid in the form of dividends and capital appreciation (increase in stock price). Most
commonly, the cost of equity is calculated using following formula:

Cost of Equity Capital = Risk-Free Rate + Beta * (Market Risk Premium – Risk-Free Rate)

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Cost of Debt Capital:

Cost of debt capital is the cost of using bank’s or financial institution’s money in the business.
The banks are compensated in the form of interest on their capital. The cost of debt capital is
calculated using following formula.

Cost of Debt Capital = Interest Rate * (1 – Tax Rate)

Cost of Capital or Weighted Average Cost of Capital (WACC):

Weighted average cost of capital, as the term itself suggests, is the weighted average of all types
of capital present in the capital structure of a company. Most of the times, WACC is referred as a
cost of capital because of its frequent and vast utilization especially when evaluating existing or
new projects. Assuming these two types of capital in the capital structure i.e., equity and debt,
the WACC can be calculated by following formula:

WACC = Weight of Equity * Cost of Equity + Weight of Debt * Cost of Debt.

2.3 Cost of Equity Comparison Using the CAPM

A firm’s cost of equity represents the compensation that the market demands in exchange for
owning the asset and bearing the risk of ownership. The traditional formula for the cost of equity
is the dividend capitalization model and the capital asset pricing model (CAPM).

The capital asset pricing model, however, can be used on any stock, even if the company does
not pay dividends. That said, the theory behind CAPM is more complicated. The theory suggests
that the cost of equity is based on the stock’s volatility and level of risk compared to the general
market.

The CAPM Formula is:

Cost of Equity = Risk-Free Rate of Return + Beta × (Market Rate of Return - Risk-Free Rate of
Return)

In this equation, the risk-free rate is the rate of return paid on risk-free investments such as
Treasuries. Beta is a measure of risk calculated as a regression on the company’s stock price. The

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market rate of return is the average market rate. In general, a company with a high beta—that is,
a company with a high degree of risk—will have a higher cost of equity.

For a well-diversified firm with cash flows generated by several projects, each project contains
two types of risk: (1) systematic risk, which is the risk of a project that is attributed to general
market conditions, and (2) unsystematic risk, which is the risk that is unique to the specific
project.

2.4 Estimating an MNC’s Cost of Capital

The weighted average cost of capital (WACC) is a financial ratio that calculates a company’s cost of
financing and acquiring assets by comparing the debt and equity structure of the business. In other words,
it measures the weight of debt and the true cost of borrowing money or raising funds through equity to
finance new capital purchases and expansions based on the company’s current level of debt and equity
structure. Management typically uses this ratio to decide whether the company should use debt or equity
to finance new purchase.

The WACC formula is calculated by dividing the market value of the firm’s equity by the total market
value of the company’s equity and debt multiplied by the cost of equity multiplied by the market value of
the company’s debt by the total market value of the company’s equity and debt multiplied by the cost of
debt times 1 minus the corporate income tax rate.

Here’s a list of the elements in the weighted average formula and what each mean.

Re = total cost of equity

Rd = total cost of debt

E = market value total equity

D = market value of total debt

T = income tax rate

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Cost of Equity

The cost of equity, represented by Re in the equation, is hard to measure precisely because issuing stock
is free to company. A company doesn’t pay interest on outstanding shares. In addition, each share of
stock doesn’t have a specified value or price. It simply issues them to investors for whatever investors are
willing to pay for them at any given time. When the market it high, stock prices are high. When the
market is low, stock prices are low. There’s no real stable number to use. So we need to look at how
investors buy stocks. The cost of equity is the amount of money a company must spend to meet investors’
required rate of return and keep the stock price steady.

Cost of Debt

Compared with the cost of equity, the cost of debt, represented by Rd in the equation, is fairly simple to
calculate. We simply use the market interest rate or the actual interest rate that the company is currently
paying on its obligations. Keep in mind, that interest expenses have additional tax implications. Interest is
typically deductible, so we also take into account the amount of tax savings the company will be able to
take advantage of by making its interest payments, represented in our equation Rd*(1 – T).

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If the business is at point A on the curve, issuing debt would bring down its WACC. If the business is at
point B on the curve, issuing equity would bring down its WACC. However, after point C, the ratio of
debt to total capital is high enough to potential bankruptcy. At such a higher level of debt, the firm would
incur a higher cost of debt to reflect the higher level of credit risk. In addition, investors might require a
higher cost of equity to invest in the firm because of the higher risk of bankruptcy. Consequently, when
the ratio of debt to total capital is beyond point C on the horizontal axis, the cost of capital rises as the
ratio of debt to total capital increases. The firm’s cost of capital is minimized at point C, where it benefits
from the tax advantage of debt, but does not use such an excessive level of debt that would cause the tax
advantage of debt to be overwhelmed by concerns about the firm’s bankruptcy.

2.5 Factors Affecting Cost of Capital

There are various factors that can affect the cost of capital. Some fundamental factors are as follows:

Primarily, the market opportunity available to entrepreneurs is the most contributing factor. If there are no
new profitable businesses available in the market, a businessman would not need money and therefore the
demand for money fall resulting in fall in the cost of capital as well.

Preferences of capital providers in terms of consumption or savings are other important factors which
vary from person to person and country to country. If the capital providers are bent towards consumption,
the supply of capital would reduce and thereby increase in cost.

Risk plays a key role in case of determining the cost of the capital. Higher the risk, higher would be the
required rate of return and vice versa.

In economics, it is said that inflation plays an important role in deciding the cost of capital. Higher the
inflation, higher would be expectations of the capital providers else they may opt to consume or invest
somewhere else.

2.6 Cost Of Capital for MNCs Versus Domestic Firms

The five factors that distinguish the cost of capital for an MNC and the cost for a domestic firm in a
particular industry are stated below:

a. Company Size: An MNC that often borrows substantial amounts may receive
preferential treatment from creditors. However, that these advantages are due to the
MNC’s size and not to its internationalized business.

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 b. Increased Access To Global Markets Provides More Flexibility: The MNC’s access
to the international capital markets may allow it to obtain funds at a lower cost than that
paid by domestic firms.
c. International Diversification: If a firm’s cash inflows come from sources all over the
world, those cash inflows may be more stable because the firm’s total sales will not be
highly influenced by a single economy which facilitates a company as follows;

i. Lower probability of bankruptcy

ii. Lower cash flow variability

iii. Lower exposure to business cycles

iv. Lower financing costs

v. Increased debt capacity before reaching optimal capital structure

d. Foreign Exchange Risk: An MNC’s cash flows could be more volatile than those of a domestic
firm. In addition, an MNC that is more exposed to exchange rate fluctuations will usually have a
wider (more dispersed) distribution of possible cash flows in future periods.

e. Country Risk: The higher the percentage of an MNC’s assets invested in foreign countries and
the higher the overall country risk of operating in these countries, the higher will be the MNC’s
probability of bankruptcy (and therefore its cost of capital), other things being equal.

2.7 Country Differences in the Cost of Debt

The cost of debt for firms is higher in some countries than in others because the corresponding risk free
rate is higher at a specific point in time or because the credit risk premium is higher.

1. Differences in the Risk-Free Rate: The risk-free rate is the interest rate charged on
loans to a country’s government that is perceived to have no risk of defaulting on the
loans. Any factors that influence the supply and/or demand for loanable funds within a
country will affect the risk-free rate.
2. Differences in the Credit Risk Premium: The credit risk premium on an MNC’s loans
can be highly influenced by a country’s characteristics, such as the country’s economic

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 conditions, the relationship between its creditors and borrowers, and its government’s
willingness to rescue troubled companies.

3. Importance of Cost of Capital for MNCs and Capital Structure

Cost of capital is the amount of return an investment could have garnered if that investment was
executed. It involves debt, equity or any source of capital.

Cost of capital is a useful finance and accounting tool to assess big projects and investments with
the intent to limit costs. It calculates investment opportunity cost and maximizes potential
investment in the process by turning future cash flows into present value by keeping it
discounted. It will help the company such as British American Tobacco (BAT) and BEXIMCO
to calculate their investment cost and will proceed for maximization of profit by turning the cash
flow into present value with discount rate.

It also helps in making company budget decision which will reflect in financial source as capital.
It can calculate the progress of ongoing project and matching with those investment against the
cost of capital. This will help the company of BAT and BEXIMCO to monitor their progress and
improve any section if required for the betterment of the company. In this way, the companies
will be able to track their work and compare with each other. This will motivate them to work
harder for the company and be greater than the competitors. They will be able to track their
employees work and reward them according to their performance.

It will be useful for companies also who wants to expand their operation and funds their business
while keeping debts as low as possible to satisfy shareholders. It also reduces the probability of
bankruptcy. The companies such as BAT and BEXIMCO would like to expand their operation so
that they can start earning from different areas by opening branches of offices in different areas.
This will give them a huge amount of profit earning and does not have to be dependable on few
areas only. This will create huge amount of job opportunities for the people which will reduce
unemployment and better standard of living for the employees. Many people will get to know
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about the company and its success since it will gain a lot of fame and respect which will continue
with employees working for the company.

The Multinational company might have competitive advantages in some countries over few
terms and conditions such as lowest cost of resources. They might be able to adjust their
international operation and sources of funds to capitalize on the differences and the multinational
companies might have more debt-intensive capital structure. For companies which are mainly
operated in Bangladesh, will be easier for them to enter in the market abroad. This is because
they will be providing the products at a very reasonable rate which will satisfy the customers
abroad. Many people might have heard about the company like BAT and BEXIMCO and its
positive views among the people which will persuade them to buy any product or services from
these multinational companies. The prices might be quite lower than their competitors to survive
in the foreign market and they will get attention and noticed by people since they are working for
the company and will spread positive opinion about the company.

Capital structure is important because it maximizes the market value of the company, and the
ownership interest of the shareholders also increases. It minimizes the company’s cost of capital
by determining the proper fund sources so that the company can keep the overall cost of capital
at lowest. It also maximizes the company’s market price of share by increasing earnings per
share of the shareholders which also increases the dividend receipt of the shareholders.

It also creates an investment opportunity for the company to invest in another type of businesses.
This will create motivation of the suppliers and increase the confidence in them. Moreover, this
will increase the growth of the country which will be used for development of the society.

4. Implication of Cost of Capital and Capital Structure

As we all know that Cost of capital can be a useful corporate financial tool to assess foreign big
projects and investments, with the intent to limit costs. As per theory that Cost of capital is an
important economic and accounting tool that calculates investment opportunity costs and
maximizes potential investments within the method for the MNC firm.

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In the common approach is that to use the prevailing WACC as a discount rate to calculate a
project NPV. Ideally, we all know that sort of a project discount rate that reflects project business
risk and project finance moreover as. Additionally, to this company WACC will reflect the
MNC's business risk and also the company's financial structure. For a remote firm NPV helps to
Incorporates continuance of money, Simple because of determine if a firm delivers value,
Considers a MNC's cost of capital and firm for inherent uncertainty of projections by most
heavily discounting far-future estimates. A positive NPV could also be a decent NPV. A project
with a positive NPV should be pursued, while a project with a negative NPV mustn't.

However, it is known that a "good" NPV is just just about nearly as good because the inputs into
the NPV equation.

Year BAT Beximco   Difference in CF

0 -10000 -10000   0
1 6500 3500   -3000
2 3000 3500   500
3 3000 3500   500
4 1000 3500   2500
         
  Rate of Return 0.12    
    BAT Beximco  
  NPV $966.01 $630.72  
  PI 1.096601 1.063072  
  IRR 18% 15%  

NPV Profile
5000
4000 Discount Rate
3000 NPVx
2000 NPVb
Axis Title
1000
0
-1000 1 4 7 10 13 16 19
-2000

5. Capital Asset Pricing Model of BAT & BEXIMCO Company

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In our report we have selected two listed company from the Dhaka Stock Exchange. Those are:

1. British American Tobacco Bangladesh Ltd.(BAT)

2. Bangladesh Export Import Company Limited (BEXIMCO)

We are also using DSEX Index as our market index because DSEX is include of 285 companies which
represents 93 percent of total market capitalization of DSE.

Capital Asset Pricing Model (CAPM): The Capital Asset Pricing Model (CAPM) is a model
that describes the relationship between the expected return and risk of investing in a security. It
shows that the expected return on a security is equal to the risk-free return plus a risk premium,
which is based on the beta of that security. Below is an illustration of the CAPM concept.
[ CITATION Inv \l 1033 ]

Formula

The formula that we have used to calculate Capital Asset Pricing Model (CAPM) is

CAPM = R f + β ( Rm−R f )

R f = Risk Free Rate

β = Beta

Rm = Market Return

For our calculation, we have used the Risk-Free Rate of 8.20%. Because on 01/01/2020 the 364
days Treasury bill rang of yield was 7.94% - 8.20%. 7.25-8.50

To calculate the Beta of the stocks we have also uses a formula which is

Covariance( R i , Rm )
Beta =
Variance ¿ ¿

Data Analysis

We have collected one month of historical data in 2020 of these stocks and use those data to
apply Capital Asset Pricing Model (CAPM).

To find the return of each of the stocks, we have subtracted ending price to beginning price then
divided by beginning price. We have also calculated the market return of the DSEX Index.

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 Return

Date DSEX BAT BEXIMCO

1/1/2020 0% 1% 1%
1/2/2020 0% 0% 7%
1/5/2020 -1% 1% -3%
1/6/2020 -2% -1% -3%
1/7/2020 -1% -1% -2%
1/8/2020 -1% -2% -1%
1/9/2020 -1% -3% 1%
1/12/2020 0% 1% -1%
1/13/2020 -2% -3% -3%
1/14/2020 -2% -3% -3%
1/15/2020 1% 1% 1%
1/16/2020 2% 2% 1%
1/19/2020 6% 7% 8%
1/20/2020 1% 0% 2%
1/21/2020 -1% 0% -2%
1/22/2020 1% 2% 1%
1/23/2020 2% 4% 3%
1/26/2020 0% 4% -1%
1/27/2020 -1% 3% -3%
1/28/2020 0% 2% 0%
1/29/2020 -1% -4% -3%
1/30/2020 0% -1% 1%

After calculating the return, we find the Variance and Covariance of the stocks.

Variance
DSEX BAT BEXIMCO
0.000268273 0.000697601 0.000831886
Covariance
  BAT BEXIMCO
DSEX 0.000340892 0.000366639

With the covariance and the variance of the stocks and the market index, we have calculated
Beta of each of the stocks.

BETA - β

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 BAT BEXIMCO
1.27 1.37

After calculating the Beta for each of the stocks, we have calculated the CAPM.

CAPM
BAT BEXIMCO
-2.56% -3.38%

Decision

The CAPM provides the information about the return that should be given by each of stocks.

If the actual return is lower than the CAPM of the stocks, this means that the stock is overvalued.
And if the actual return is higher than the CAPM of the stocks, this means that the stock is
undervalued. Investors prefer to buy the stock which is undervalued and sell the stock which is
overvalued.

Overvalued/
Stock Actual Return CAPM
Undervalued Decision
BAT -1.08% -2.56% Undervalued  Buy
BEXIMCO 0.72% -3.38% Undervalued  Buy

Altman Z-Score

The Altman Z-Score is a formula of 5 basic financial ratios to help determine the financial health
of a company. It is a probabilistic model to screen for bankruptcy risk of a company.

Formula

The original formula was created for publicly traded manufacturing companies.

Z-Score = 1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1.0(E)

Where:

 A = Working Capital (Current Assets – Current Liabilities) / Total Assets (Measures

liquidity of firm)

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  B= Retained Earnings / Total Assets (measures accumulated profits compared to assets)
 C= Earnings Before Interest & Taxes (EBIT) / Total Assets (measures how much profit
the firm’s assets are producing)
 D= Market Value of Equity (Mkt. Cap. + Preferred Stock) / Total Liabilities (compares
the company’s value versus its liabilities)
 E= Sales / Total Assets (efficiency ratio – measures how much the company’s assets are
producing in sales).

Z-Score Results:

 Z-Score of < 1.81 represents a company in distress.

 Z-Score between 1.81 and 2.99 represents the “caution” zone.
 Z-Score of over 3.0 represents a company with a safe balance sheet. [ CITATION CFI \l
1033 ]

Company Altman's Z-score

BAT 6.67
BEXIMCO 1.5

Investors can use Altman Z-scores to determine whether they should buy or sell a stock if they're
concerned about the company's underlying financial strength. Here, BAT Altman Z-scores is
6.67 so it does not have headed for bankruptcy. On the other hand, BEXIMCO Altman Z-scores
is 1.5 so it has headed for bankruptcy. Investor will invest or purchase share from BAT because
its Altman Z-scores is over 3 on the other hand investors will not invest or purchase share from
BEXIMCO because its Altman Z-scores is below 1.81.

6. Conclusion

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In conclusion we can say that, MNC can reduce its cost of capital in many ways. By measuring
cost of equity with the help of CAPM formula, firms can get the idea if its stock functioning
positively or not. This formula helps business to reduce the unsystematic risk which is unique for
every company. It also describes the relationship between the expected return and risk of
investing in a security. Company also conduct Altman’s Z score formula by using 5 financial
ratio to analyze if the company has good financial strength or is leading towards bankruptcy.
After taking two leading company (BAT and BEXIMCO) as an example we can say that both of
these companies can be pursued because their NPV shows the positive result. If one of them
shows the negative result then its project shouldn’t be continued or company need to make
necessary steps to fix its incorporate continuance of money. In case of investors who are
interested to by stock from these two companies, they can get the idea of company’s recent
position by calculating CAPM. As a result, they can take wise decision whether to buy new
shares or sell their existing share. We have shown some calculation of CAPM and can see that,
both of the BAT and BEXIMCOs stock is undervalued, this is a positive sign for those investors
who has enough capital and are willing to buy some share from these two companies. Also, we
conduct Altman’s Z score formula to find company’s underlying financial strength, in this case
we can see that BEXIMCO is heading to bankruptcy and BAT is in a safe position. So, investor
can take wise decision to which company they can invest and get good return.

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