Analysis of Capital Structure of Target Company (UPGDCL) and

Peer Company (BARAKA Power) of Power Industry in Bangladesh

Submitted to

Prof. Dr. Mahmood Osman Imam

Professor
Department of Finance
University of Dhaka

Submitted by:

NAME ID
Md. Jafar Ikbal 42012

Evening MBA, Dhaka University

Course name: Corporate Finance
Submission Date: 16-12-2020

University of Dhaka
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Letter of Transmittal

Prof. Dr. Mahmood Osman Imam

Professor

Department of Finance

University of Dhaka

Subject: Submission of report on “Analysis of Capital Structure of Target Company

(UPGDCL) and Peer Company (BARAKA Power) of Power Industry in
Bangladesh”

Dear Sir,
We are pleased to present this report on “Analysis of Capital Structure of Target Company
(UPGDCL) and Peer Company (BARAKA Power) of Power Industry in Bangladesh” This is to
inform you that we have successfully completed our report.

Working on this report has been really interesting & informative experience for us. We learned many
unidentified facts which we believe will be supportive to our academic & professional career in the
future. While doing this report, we learned to integrate plenty of information into a concise volume.
We have enjoyed working on this report and we hope that our report will meet the level of your
expectations. We would try our best and shall be obliged to provide you with any clarification
regarding the report.

Sincerely,
On behalf of the group

Md. Jafar Ikbal

ID no – 42012
EMBA
Department of Finance
University of Dhaka

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Acknowledgement

Firstly, we would like to thank the Almighty Allah for giving us the strength, the patience, and the
knowledge to do this report on “Analysis of Capital Structure of Target Company (UPGDCL) and
Peer Company (BARAKA Power) of Power Industry in Bangladesh”. We would also like to take
this ultimate opportunity with pleasure to thank our course instructor, Prof. Dr. Mahmood Osman
Imam for giving us the opportunity to do the report on Corporate Finance. He has been very helpful
to us throughout the entire process and has always been there to help us heartily even through his
hard times. He helped us whenever we got stuck with our paper without even a slight bit of
hesitation. He proved himself to be a successful mentor all through his deeds and contributions for
our preparation.

Moreover, we would also like to thank the people who helped out in providing solution to every
problem through discussion, without any faulty. We really appreciate even the minor sacrifice they
made in doing that. Without their efforts, it would have been impossible for us to finish this report at
such convenience. We would also like to thank our friends and family members for showing us their
support and help us in every possible ways throughout the entire work process. With presence in
every aspect, completing this task seemed as festive and interesting as ever.

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 Table of Contents

Chapter Contents Page

1 Introduction: 5-6

2 Industry Analysis: 7-18

2.2.1 Industry Analysis Using Porter’s Five Factor’s Model.

2.2.2 Industry Analysis using SCP and HHI.
2.2.3 Company Profile.
3 Trend behavior analysis of target and peer company using stock 19-26
and flow concept :

3.1 Stock concept (Debt ratio, Debt Equity Ration, Financial

Leverage)
3.2 Company Analysis: Flow concept (Interest Coverage ratio,
Debt Service Coverage ratio, Cash flow coverage ratio)
3.3 Cost of capital calculation of Target and Peer Company.
4 Factors Affecting Capital structure: 27-36

4.1 Tangibility
4.2 Profitability
4.3 Assets Liquidity
4.4 Firms Growth
4.5 Financial Slack
4.6 Firms Size
4.7 Uncertainty of Operating Income.
4.8 Managerial Ownership
4.9 Family Ownership

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 Chapter- 1
Introduction

Introduction:

The capital structure is the particular combination of debt and equity used by a company
to finance its overall operations and growth. Debt comes in the form of bond issues or loans, while
equity may come in the form of common stock, preferred stock, or retained earnings. Short-term
debt is also considered to be part of the capital structure.

 Capital structure is how a company funds its overall operations and growth.
 Debt consists of borrowed money that is due back to the lender, commonly with interest
expense.
 Equity consists of ownership rights in the company, without the need to pay back any
investment.
 The Debt-to-Equity (D/E) ratio is useful in determining the riskiness of a company's
borrowing practices.

1.1 Target Company of the paper is United Power Generation and Distribution Company
Limited (UPGDCL) and Peer Company is Baraka Power Limited of Power Industry in
Bangladesh.

1.2 Objectives:
The main objective of the term paper is to analyze the different capital structural aspects of Power
sector of Bangladesh specially 2 selected companies of identical sector.
The specific objectives are as follows:
 To analyze the capital structure pattern of the aforesaid companies.
 To calculate the different ratios and its interpretation with arguments.
 Finding the factors influencing the Capital structure decision.

1.3 Methodology
Methodology is the way to come out with arguments systematically. This paper has been completed
by following systematic and sequential steps.

1.3.1Data Source:
This report is mostly based on annual report of the aforesaid companies and Dhaka Stock Exchange.
The data collection method was based on the secondary data, which were available on the web and
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also collected from DSEC library. My main source of secondary data was the DSEC (web& Library)
and company’s web.

1.3.2 Time Frame

To prepare the report I took the data set of previous 5 years data of my selected companies.

1.4 Scope of term paper: My main focus of this term paper is to arguments regarding capital
structure:

 Corporate goal
 Stock concept and Flow concept
 Time series analysis using Graph
 Relationship between Factors influence of capital structure decision and Debt ratio.

1.5 Limitation:
Financial analysis needs lots of time & due procedure. Due to time constraint and knowledge
constraint right procedure may be missing in some cases.

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 Chapter 2
Industry Analysis

Structural reforms in Bangladesh Power sector:

The electricity supply industry in South Asia started with the commissioning of the first power
station in the 1890s. The first effort to structure a legal framework for the industry came in 1910 with
the enactment of the Indian Electricity Act, 1910. In 1947, at the time of independence of India &
Pakistan, the installed generating capacity in the then East Pakistan was only 21 MW. In order to
formulate plans and improve power supply situation of the country, the Electricity Directorate was
established in 1948. Later, in 1959, “Water & Power Development Authority” (WAPDA) was
created considering the growing demand for electricity and its importance in agriculture & industry.
Later the “WAPDA” was divided into two parts namely “Bangladesh Power Development Board” &
“Bangladesh Water Development Board” by the Presidential Order 59 (PO-59) of 31st May 1972. As
a result, Bangladesh Power Development Board (BPDB) was entrusted with the responsibilities of
Operation, Maintenance, and Development of Generation, Transmission & Distribution facilities of
electricity throughout the country. By the ordinance (Ordinance No-LI of 1977), Rural Electrification
Board (REB) was established for the development of electricity in the rural areas for the effective
benefit of rural people on October, 1977. Today there are 80 numbers of operating rural electric
cooperatives called Palli Bidyuit Samity (PBS), which provide service to approximately 26.459
million new connections and construct more than 0.482 million kms of line. As part of the “Reforms-
Funding” linkage agreed between the development partners and the Government, the implementation

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of Part (C) of the Project has been linked to redefining the franchise area of DESA and handing over
of distribution networks outside Metropolitan Dhaka City to PBSs under REB, and formation of a
corporatized Dhaka Electric Supply company (DESCO) which will initially take over part of the
distribution network of DESA and ultimately take over all its assets. Under the reform program
Dhaka Electric Supply Authority (DESA) was created for the proper management & electrification
in Dhaka city and its adjoining areas in 1990. DESCO has started functioning from 1996 after taking
over part of the distribution network of DESA. DESA was reformed again as Dhaka Power
Distribution Company (DPDC) in July, 2008. Under the Companies Act 1994, Power Grid Company
(PGCB) was created in 1996 to look after the transmission system. The main operating function of
PGCB is wheeling of energy from BPDB power stations and Generation Companies to Distribution
entities utilizing transmission network. PGCB gets its energy wheeling charge from its clients
(distribution entities) at the rate fixed by Bangladesh Electricity Regulatory Commission (BERC).
Ashuganj Power Station has been converted into Ashuganj Power Station Company Ltd. (APSCL) in
1996, as a subsidiary company of BPDB. Northern Electricity Supply Company Ltd. (NESCO) was
created in 2016 to look after the distribution system of Rajshahi and Rangpur zone. NESCO is a
distribution subsidiary of BPDB. West Zone Power Distribution Company Ltd. (WZPDCL) was
created in 2002 to look after the distribution system of Barishal and Khulna Zone. WZPDCL is a
distribution subsidiary of BPDB. Electricity Generation Company of Bangladesh (EGCB) has been
formed as a Generation Company since 2004. EGCB has implemented 2x105 MW Peaking Power
Plant at Shiddirgonj, 412 MW CCPP at Haripur and 335 MW CCPP at Shiddirgonj. North West
Power Generation Company (NWPGCL) was created in 2008. NWPGCL has implemented 225 MW
Combined Cycle Power Plant at Sirajganj, 225 MW Combined cycle Power Plant at Khulna, 360
MW Combined cycle Power Plant at Bheramara, 225 MW Combined cycle Power Plant at Sirajganj
(2nd unit), 225 MW Combined cycle Power Plant at Sirajganj (3rd unit) and 105 MW power plant at
modhumoti, Bagerhat. As a part of the new reform initiative, BPDB is currently in the process of
identifying Strategic Business Unit (SBU) for its generation and distribution sectors. According to
the BPDB latest annual report, functional and financial performance of the SBUs will be operated
like components of a corporate body and will be evaluated separately under the legal frame work of
existing BPDB structure.

Consumer Segmentation & Drivers of Growing Electricity Demand:

Majority of the power consumption demand comes from domestic & industrial sector of the country.
RMG manufacturing, construction & infrastructure development, and pharmaceutical sector are key
growth drivers within the industrial sector. In FY2018-19, 53% of the country’s total power were
consumed by domestic sector while industrial sector consumed 30% of the total power demand.
Besides, commercial segment also consumed 12% of the total power consumption. In 2019-20, share
of domestic users might increase while that of industrial and commercial spaces may decline due to
COVID-19 pandemic outbreak and resultants general holidays for more than two months. Key
drivers of the power consumption growth are- steady population growth, urbanization, increasing
per-capital income and higher purchase power, change in the life-style of country people,
industrialization and increased digitalization. Bangladesh population has been growing by around
1.5% each year. According to “World Population Prospects (WPP) 2015”, population of Bangladesh

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will be 202 Million in 2050. Growing population imply an increasing demand for power
consumption and widening gap between supply and demand. Besides, demand for power is likely to
increase substantially in line with rapid urbanization. Meanwhile, access to electricity in the country
has seen steady improvement over the years as the country went through long period of economic
growth while favorable government policies to generate power in line with growing demand.

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2.1 Porter’s Five Forces model for Power Industry in Bangladesh:

Buyer Power (Very Low)

Based on the following parameters it can be said that Overall the buyer has weak power.

1. Low Switching Cost – switching cost for the buyers is low as of now but is supposed to
increase when new players come in the market as the product in not differentiable i.e.
electricity.
2. Buyer size – Very small.
3. Oligopoly Threat – Very Low.
4. Undifferentiated product – As the product i.e. electricity is undifferentiated product, so this
increases buyer power.
5. Tendency to switch – Buyers (Power Development Board) will switch to the supplier who is
efficient and cost effective.
6. Price sensitivity – Not much price sensitive
7. Buyer independence – Low as of now but if more suppliers come into picture as Govt. has
sought competition in this market, the buyer power will increase.
8. Product dispensability – Very Low.

Supplier Power (High)

Based on the following parameters it can be assessed that the supplier Power in High.

1. Supplier size – Very Large..

2. Oligopoly threat – Small number of suppliers enjoy monopoly, thereby contributing to the
supplier power.
3. Switching costs – Very high, as only large govt. companies are the suppliers.
4. Player independence – Low
5. Substitute inputs – As no substitute inputs, so the firms have no choice.
6. Player dispensability – High
7. Differentiated input- Inputs are same i.e. electricity in case of company buying electricity
from wholesale market and selling to the end-users, and coal or gas in case the company is in
power generation field.

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Threat of New Entrants (Low):

The Threat of new entrants is Low based on the following parameters.

1. Difficult to Entry- Difficult to acquire Electricity generating license from Power

Development board because of the regulation of Electricity generation and distribution and
the back forces from already enlisted suppliers.
2. Fixed costs – High fixed cost acts as a barrier to entry for new entrants.

Threat of Substitute products:

The Threat of substitute products is very Weak as per the following parameters.

1. Undifferentiated products – Electricity is an undifferentiated product and cannot live

mankind without it. There are few possibilities of differentiation like solar power but for
heavy initial cost makes it difficult to establish.

Rivalry among existing firms (Low):

The rivalry among existing firms is low as per the following parameters.

1. Competitor size – Very Few companies very large in size.

2. Number of players – Very few.
3. Hard to exit
4. Ease of expansion – Difficult because of lack of investment and resources.

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2.2 The Structure Conduct Performance Paradigm (SCP):

Structure of Power Industry:

Bangladesh Power Industry contains 05 nos. state owned organizations which maintain 49.77%
market share and others are Private companies with 50.33% market share.

Conduct and Performance:

The utility electricity sector in Bangladesh has one national grid with an installed capacity of 21,419
MW as of September 2019. The total installed capacity is 20,000 MW (combining
solar power). Bangladesh's energy sector is booming. An average of 77.9% of the population had
access to electricity in Bangladesh.

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Achievements of Power and Energy industry of Bangladesh:
(a) Almost 77.9% of Population getting electricity by using national grid.
(b) Its economic growth over 7%.
(c) Electricity coverage almost 95%.
(d) Installed capacity-20000MWatt.

HHI Index:

 The Herfindahl-Hirschman Index (HHI) is a common measure of market concentration and is

used to determine market competitiveness.
 A market with an HHI of less than 1,500 is considered to be a competitive marketplace, an
HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or
greater to be a highly concentrated marketplace.

The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of
the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O.
Hirschman, it is an economic concept widely applied in competition law, antitrust and also
technology management.

Company Name % Market share

United Power Generation & Distribution Company Ltd. 6.575
Baraka Power Company Limited 0.904
Electricity Generation Company Limited 4.785
North West Zone Power Distribution Company Ltd. 6.975
-- --
-- --
-- --
Ashugonj Power Station company 7.84

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Calculation of HHI index by considering Public and private sector of Power industry:

Particulars Installed Generation Capacity % of market share

BPDB 5613MW 28.68%

APSCL 1444MW 7.38%

EGCB 957MW 4.89%

NWPGCL 1395MW 7.19%

RPCL-BPDB JV 331MW 1.69

Sub Total of Public sector 9740 MW 49.77%

IPPs 6916MW 35.34%

SIPPs (BPDB) 99MW 0.51%

SIPPs (REB) 251MW 1.28%

15yr Rental 169MW 0.86%

3/5 yr Rental 1235MW 6.31%

Power Import 1160MW 5.93%

Sub Total Private sector 9830MW 50.23%

HHI Index of Power Industry in Bangladesh:

HHI=(28.68)2+(7.38)2+(4.89)2+(7.13)2+(1.69)2+(35.34)2+(0.51)2+(1.28)2+(0.86)2+(6.31)2+(5.93)2
=2281.147

2281.147 is greater than 1500 that means Power Industry is a Non competitive market.

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2.3 Company Profile:

Target Company: United Power Generation and Distribution Company Limited

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PEER Company: BARAKA Power Limited

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 Chapter-3
(Trend Behavior of stock and Flow concept of Target and Peer Company)

3.1 Stock Concept:

3.1.1 Debt Ratio=(Interest bearing financing/Total Asset): The debt ratio is a financial ratio that
measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to
total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a
company’s assets that are financed by debt. (All data will be found in Excel Sheet).

Target Company: United Peer Company: Baraka Power Power Industry

Power Generation & Company Limited.
Distribution Company
Limited
2013 0.258 2013 0.121 2013 0.18
2014 0.166 2014 0.155 2014 0.16
2015 0.083 2015 0.131 2015 0.20
2016 0.035 2016 0.088 2016 0.19
2017 0.000 2017 0.173 2017 0.19
2018 0.000 2018 0.133 2018 0.21
2019 0.001 2019 0.375 2019 0.24

From the above graph we can see that our target company UPGDCL maintained a highly decrease of
debt from the period of 2016 to till date on the other hand peer company BARAKA maintain
sometimes slight and sometimes almost double up debt increasing.

If we compare our target company UPGDCL with Power Industry, we can see that UPGDCL has
maintained a lesser portion of debt in its capital structure, than that of the whole industry.

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3.1.2 Debt equity ratio: The debt-to-equity (D/E) ratio is calculated by dividing a company’s total
liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s
financial statements.

Debt to Equity Ratio=(Total Liabilities/Total Equity)

Target Company: United Peer Company: Baraka Power Industry

Power Generation & Power Company Limited.
Distribution Company
Limited
2013 0.587 2013 0.198 2013 0.32
2014 0.450 2014 0.240 2014 0.32
2015 0.178 2015 0.211 2015 0.65
2016 0.046 2016 0.179 2016 0.62
2017 0.009 2017 0.276 2017 0.53
2018 0.008 2018 0.233 2018 0.52
2019 0.011 2019 0.731 2019 0.53

The debt-to-equity ratio tells a company the amount of risk associated with the way its capital
structure is set up and run. The ratio highlights the amount of debt a company is using to run their
business and the financial leverage that is available to a company. Debt consists of the liabilities and
obligations that are held by the organization, with the intent to pay them off over time. These include
short-term debt, which is due within a year, and long-term debt with a maturity of more than one
year (such as loans or mortgages). Company owners want to know if their debt is rising, decreasing,
or staying steady. The answer indicates whether or not their company is being overwhelmed by
financial obligations or has room to grow.

From the above graph we can see that target company UPGDCL maintained a highly decrease of
debt equity ratio from the period of 2013 to till date on the other hand peer company BARAKA
maintains unstable debt equity ratio.

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If we compare our target company UPGDCL with Power Industry, we can see that UPGDCL has
maintained a lesser portion of debt in its capital structure, than that of the whole industry.

3.1.3 Financial Leverage: Leverage is an investment strategy of using borrowed money specifically,
the use of various financial instruments or borrowed capital to increase the potential return of an
investment. Leverage can also refer to the amount of debt a firm uses to finance assets.

Financial Leverage= (Net Financial Obligation/Shareholders equity)

Target Company: United Peer Company: Baraka Power Industry

Power Generation & Power Company Limited.
Distribution Company
Limited
2013 0.409 2013 0.145 2013 0.17
2014 0.240 2014 0.192 2014 0.10
2015 0.097 2015 0.159 2015 0.03
2016 0.037 2016 0.104 2016 0.26
2017 0.000 2017 0.221 2017 0.33
2018 0.000 2018 0.164 2018 0.27
2019 0.001 2019 0.648 2019 0.28

A company needs financial capital to operate its business. For most companies, financial capital is
raised by issuing debt securities and by selling common stock. The amount of debt and equity that
makes up a company’s capital structure has many risk and return implications. Therefore, corporate
management must use a thorough and prudent process for establishing a company’s target capital
structure. The capital structure is how a firm finances its operations and growth by using different
sources of funds.

From the graph it is shown that UPGDCL decrease its financial obligations thoroughly than that of
BARAKA and also compared to power industry. There is a lot of change of capital structure
occurred by BARAKA.

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3.2 Flow concept:

3.2.1 Interest Coverage Ratio: The interest coverage ratio is a debt ratio and profitability ratio used
to determine how easily a company can pay interest on its outstanding debt. The interest coverage
ratio may be calculated by dividing a company's earnings before interest and taxes (EBIT) by its
interest expense during a given period by the company's interest payments due within the same
period.

The Interest coverage ratio is also called “times interest earned.” Lenders, investors, and creditors
often use this formula to determine a company's riskiness relative to its current debt or for future
borrowing.

Interest Coverage Ratio= EBIT/Financial Expenses (Interest Expense)

Target Company: United Peer Company: Baraka Power Industry

Power Generation & Power Company Limited.
Distribution Company
Limited
2013 6.494 2013 4.322 2013 0.41
2014 6.357 2014 5.199 2014 0.35
2015 12.264 2015 8.175 2015 0.64
2016 34.563 2016 12.603 2016 0.59
2017 21.038 2017 13.351 2017 3.02
2018 9.469 2018 7.134 2018 2.50
2019 7.547 2019 5.456 2019 1.68

The interest coverage ratio at one point in time can help tell analysis a bit about the company’s
ability to service its debt, but analyzing the interest coverage ratio over time will provide a clearer
picture of whether or not their debt is becoming a burden on the company’s financial position. A
declining interest coverage ratio is something for investors to be wary of, as it indicates that a
company may be unable to pay its debts in the future.

From the graph we can see that the interest coverage ratio of UPGDCL is higher than BARAKA and
also higher than power industry.

3.2.2 Debt Service Coverage Ratio: The debt-service coverage ratio applies to corporate,
government, and personal finance. In the context of corporate finance, the debt-service coverage
ratio (DSCR) is a measurement of a firm's available cash flow to pay current debt obligations.
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Debt Service Coverage Ratio= {EBIT/FE (Interest)+Principal Installment}

Target Company: United Peer Company: Baraka Power Industry

Power Generation & Power Company Limited.
Distribution Company
Limited
2013 8.718 2013 1.710 2013 0.47
2014 4.525 2014 5.093 2014 1.50
2015 2.586 2015 2.838 2015 1.60
2016 3.6 2016 2.624 2016 6.07
2017 2.869 2017 1.407 2017 0.04
2018 9.497 2018 2.355 2018 2.22
2019 7.543 2019 0.376 2019 1.57

A debt service coverage ratio of 1 or above indicates that a company is generating sufficient
operating income to cover its annual debt and interest payments. As a general rule of thumb, an
ideal ratio is 2 or higher. A ratio that high suggests that the company is capable of taking on
more debt.

From the above graph it is shown that the debt service coverage ratio of UPGDCL is lower than 1 till
2017, after the year UPGDCL has crossed the border line from negative to positive DSCR. On the
other hand BARAKA has performed a fluctuated DSCR from 2013 to till date.

3.2.3 Cash Flow Coverage ratio: The cash flow coverage ratio is an indicator of the ability of a
company to pay interest and principal amounts when they become due. This ratio tells the number of
times the financial obligations of a company are covered by its earnings.

Cash Flow Coverage ratio= Net Cash flow from operating activities/Borrowings

Target Company: United Peer Company: Baraka Power Industry

Power Generation & Power Company Limited.
Distribution Company
Limited
2013 0.862 2013 0.361 2013 1.12
2014 1.491 2014 0.009 2014 1.59
2015 7.484 2015 1.327 2015 4.33
2016 34.983 2016 0.892 2016 1.47

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 2017 23.348 2017 0.215 2017 4.08
2018 9.826 2018 0.397 2018 2.53
2019 8.308 2019 0.130 2019 1.55

The cash flow coverage ratio is an indicator of the ability of a company to pay interest and principal
amounts when they become due. This ratio tells the number of times the financial obligations of a
company are covered by its earnings. A ratio equal to one or more than one means that the company
is in good financial health and it can meet its financial obligations through the cash generated by
operating activities. A ratio of less than one is an indicator of bankruptcy of the company within two
years if it fails to improve its financial position.
It is an important indicator of the liquidity position of a company. This ratio is often used by the
banks to decide whether to make or refinance any loan.

We can see that the performance to pay interest and principal amounts of UPGDCL and BARAKA
are in good condition. The average cash flow coverage ratio of UPGDCL is higher than BARAKA
and than that of Industry.

3.3 Cost of Capital:

UPGDCL

Here,
Risk free rate (Rf) =5.5%
Market return (Rm) =3.26%
Beta co-efficient (B) =0.118

According to CAPM model:

Cost of Equity (Re)=Rf+(Rm-Rf)B

= 5.5+(3.26-5.5)0.118=5.24%

Cost of Debt (Rd)=14.6%

Cost of Capital =Cost of Debt+Cost of Equity=14.6+5.24=19.84%

WACC Calculation:

Weight of Debt (D/V)=Total debt/(Total debt+Total equity)

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 = 0.087

Weight of Equity (E/V)=Total Equity/(Total debt+Total equity)

= 0.92

WACC= {(E/V)*Re+(D/V)*Rd(1-Tc)}
Here
E=Market value of the firm’s equity
D= Market value of debt
V=Market value of the firm
Re= Cost of Equity
Rd= Cost of Debt
Tc=Corporate tax rate

WACC= {(0.92*0.0524)+(0.087*0.146)(1-0.25)}*100=5.77%

BARAKA:

Here,
Risk free rate (Rf) =5.5%
Market return (Rm) =1.41%
Beta co-efficient (B) =0.17

According to CAPM model:

Cost of Equity (Re)=Rf+(Rm-Rf)B

= 5.5+(1.41-5.5) 0.17=4.80%

Cost of Debt (Rd)=11.1%

Cost of Capital=Cost of Debt+Cost of Equity=11.1+4.80=15.9%

WACC Calculation:

Weight of Debt (D/V)=Total debt/(Total debt+Total equity)

= 0.176

Weight of Equity (E/V)=Total Equity/(Total debt+Total equity)

= 0.824

WACC= (E/V)*Re+(D/V)*Rd(1-Tc)
Here
E=Market value of the firm’s equity
D= Market value of debt
V=Market value of the firm
Re= Cost of Equity
Rd= Cost of Debt
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Tc=Corporate tax rate

WACC= {(0.824*0.048)+(0.176*0.111)(1-0.25)}*100=5.42%

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 Chapter-4
Factors affecting Capital structure

4.1 Tangibility: The tangibility measures the amount of tangible asset relative to total asset.
The higher ratio indicates that company has more ability to pay off financial obligation which
financed by debt. Also indicates that company can fulfill its fund requirement by issuing debt
financing.
Tangibility= (Property, Plant and Equipments/Total Asset)

UPGDCL BARAKA INDUSTRY

Year Tangibility Debt ratio Tangibility Debt Tangibility Debt ratio
ratio
2013 0.667 0.258 0.607 0.121 0.45 0.18
2014 0.783 0.166 0.543 0.155 0.45 0.16
2015 0.727 0.083 0.496 0.131 0.33 0.20
2016 0.687 0.035 0.559 0.088 0.40 0.19
2017 0.573 0.000 0.485 0.173 0.41 0.19
2018 0.521 0.000 0.448 0.133 0.39 0.21
2019 0.467 0.001 0.275 0.375 0.34 0.24

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They found that the firms' debt ratio is negatively related to asset structure. They concluded
that firms that generate relatively high internal funds tend to avoid debt financing. Thus, firms that
rely more on tangible assets tend to use less debt than firms with relatively fewer tangible assets.

It is shown that the target company UPGDCL’s maintain a less debt ratio compare to its tangibility
and debt ratio almost gone nil from 2017 to till date that means UPGDCL doesn’t carry any debt that
time, on the other hand Peer Company BARAKA continuously maintain a large number of debt. At
2019 BARAKA draws a large amount of debt from the market that’s why the tangibility gone down
than debt ratio.

The relationship between tangibility and debt ratio is negatively proportional which is related from
the empirical literature of Peeking order theory that says the firms with more fixed assets are
supposed to issue less debt since internal capital is preferred. What is more, firms holding
more tangible assets will be less prone to asymmetric information problems thus are less
likely to have debts.

4.2 Profitability: Profitability is ability of a company to use its resources to generate revenues
in excess of its expenses. In other words, this is a company’s capability of generating profits
from its operations.

Profitability is one of four building blocks for analyzing financial statements and company
performance as a whole. The other three are efficiency, solvency, and market prospects.
Investors, creditors, and managers use these key concepts to analyze how well a company is
doing and the future potential it could have if operations were managed properly.

Profitability = Net Profit Margin/Return on Equity

NPM=(Revenue-COGS-E-I-T)/Revenue

ROE= Net Profit/SEavg (Share Holders equity avg.)

UPGDCL BARAKA INDUSTRY

Year Profitability Debt Profitability Debt Profitability Debt
ratio ratio ratio
2013 2.157 0.258 5.556 0.121 1.97 0.18
2014 2.180 0.166 5.325 0.155 1.91 0.16
2015 1.764 0.083 5.366 0.131 1.81 0.20
2016 2.206 0.035 5.478 0.088 1.94 0.19
2017 2.713 0.000 6.269 0.173 2.27 0.19
2018 2.750 0.000 7.694 0.133 2.64 0.21

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 2019 1.352 0.001 2.257 0.375 0.94 0.24

Above comparison shows that the relationship between profitability and debt ratio shows sometimes
positive and sometimes shows negative relationship both target and peer company and also industry.
This supports both trade off and peeking order theory.

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4.3 Asset Liquidity: An asset's liquidity is a function of how easily it can be converted into
cash. In corporate finance, liquid assets are those that can be used to pay off debts in a hurry.
The most common examples of liquid assets are cash – on-hand or deposited in a bank – and
marketable securities such as stocks and bonds.

Asset Liquidity = Current Asset/Current Liability

UPGDCL BARAKA INDUSTRY

Year Asset Debt Asset Debt Asset Debt
Liquid ratio Liquid ratio Liquid ratio
2013 2.627 0.258 2.643 0.121 1.87 0.18
2014 1.286 0.166 3.903 0.155 2.03 0.16
2015 2.108 0.083 2.834 0.131 1.45 0.20
2016 7.079 0.035 3.235 0.088 2.35 0.19
2017 48.994 0.000 2.137 0.173 10.35 0.19
2018 58.897 0.000 2.356 0.133 10.83 0.21
2019 47.506 0.001 1.918 0.375 9.10 0.24

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The firms with more current assets are expected to have more internal capital that can be used. As
the prediction of pecking order theory (POT), the firms with a high level of liquidity are supposed to
borrow less due to the preference of internal capital. Therefore, it is expected to have a negative
relationship between liquidity and leverage ratio. This theory supports the target company UPGDCL
shows that from 2015 to 2019 the debt ratio increased from 0.083 to 0 and Assets liquidity increased
from 2.108 to 47.506.

The peer Company and industry shows both peeking order and trade of theory with its positive and
negative relationship between Assets liquidity and debt ratio.

4.4 Firms Growth: Firms growth is calculated by the product of Return on Equity of the firm and
Retention ratio of the firm.

Firms Growth=ROE x RR

UPGDCL BARAKA INDUSTRY

Year Firms Debt Firms Debt Firms Debt
Growth ratio Growth ratio Growth ratio
2014 0.178 0.166 0.076 0.121 0.19 0.16
2015 0.238 0.083 0.023 0.155 0.18 0.20
2016 0.083 0.035 -0.074 0.131 0.11 0.19
2017 0.093 0.000 -0.102 0.088 0.03 0.19
2018 0.067 0.000 0.177 0.173 0.09 0.21
2019 0.054 0.001 0.132 0.133 0.16 0.24

According to POT, The firms with greater growth opportunity are supposed to have higher
requirements of funds, thus, it can be expected to borrow more.

According to trade off theory, is predicted that growth opportunity should have a negative
relationship.

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From the above table it is shown that the firms growth of target company, peer company and overall
industry maintains both negative and positive relationship between growth and debt or financial
leverage.

4.5 Financial Slack: Financial Asset/Total Asset: Firms frequently keep reserves of cash and
marketable securities-these hoarded cash represent the spared debt capacity of firms. This
unused debt capacity represents financial slack which is derived by dividing a firms financial
asset and its total asset:

UPGDCL BARAKA INDUSTRY

Year Financial Debt Financial Debt Financial Debt
Slack ratio Slack ratio Slack ratio
2013 0.010 0.258 0.055 0.121 0.03 0.18
2014 0.021 0.166 0.052 0.121 0.04 0.16
2015 0.038 0.083 0.077 0.155 0.06 0.20
2016 0.053 0.035 0.090 0.131 0.07 0.19
2017 0.099 0.000 0.054 0.088 0.08 0.19
2018 0.083 0.000 0.068 0.173 0.08 0.21
2019 0.061 0.001 0.035 0.133 0.05 0.24

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4.6 Firms size: ln(Sales): Defining the firm size of the firms, natural Log of Sales has been used. As
there is Negative relationship between UPGDCL’s Firm size and Debt ratio it is following Peeking
order theory and there is a positive relationship between BPCL’s Firm size and debt ratio it is
following Trade off theory. And the power industry maintained both negative and positive
relationship between firm size and debt ratio.

Year Target Company: United Peer Company: Baraka Industry

Power Generation & Power Company
Distribution Company Limited.
Limited
Firm Size Debt ratio Firm Size Debt ratio Firm Size Debt ratio
2013 8.11 0.258 6.52 0.375 15.11 0.18
2014 8.28 0.166 6.64 0.133 15.28 0.16
2015 8.49 0.083 6.71 0.173 15.60 0.20
2016 8.57 0.035 6.73 0.088 15.71 0.19
2017 8.66 0.000 6.66 0.131 15.76 0.19
2018 8.72 0.000 6.55 0.155 15.87 0.21
2019 8.78 0.001 6.71 0.121 15.96 0.24

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4.7 Uncertainty of Operating Income: CV(EBIT)

Uncertainty of operating income has an impact on the debt equity ratio because firms with high
uncertainty of income will have a high chance of financial distress events. Firms that do not have
debt also have such probability. In this part to determine the uncertainty of operating income, we use
Co-Efficient of Variation of EBIT of both company and The industry data is the average of the data
of all firms.

Year UPGDCL BARAKA Industry

CV(EBIT) D.Ratio CV(EBIT) D.Ratio CV(EBIT) D.Ratio

2017 0.24 0.000 0.18 0.131 0.307 0.19

2018 0.18 0.000 0.14 0.155 0.287 0.21
2019 0.09 0.001 0.20 0.121 0.287 0.24
13-19 0.23 0.26 0.33

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The graph illustrates that the moving average of coefficient of Variation of EBIT of BARAKA (0.26)
is higher than UPGDCL (0.23). It said that BARAKA has a more volatile EBIT than UPGDCL.
However, this should not be taken into consideration as an only measurement for investment
decision as because the EBIT of UPGDCL and BPCL have been changing over the period of time. It
shows that the negative relationship between CV(EBIT) and debt ratio.

4.8 Managerial Ownership:

Managerial Ownership of UPGDCL:

No. Name and Designation % of share held %Total Share

01 Moinuddin Hasan Rashid-MD 8.58%
02 Md. Samsul Hasan Miah-Advisor -
03 Md. Mejbahuddin-CEO -
8.58%
04 Sheikh Ashraf Hossain-COO -
05 Mir Akhterul Alam-Head of Internal
-
Control and Compliance

Managerial Ownership of BARAKA:

No. Name and Designation % of share held %Total Share

01 Fahim Ahmed Chowdhury-MD 0.5%
02 Mufti Abdul Mokshit Al Malum-Head 0.555%
0.055%
of Internal Control and Compliance

Managerial ownership drives the capital structure into a nonlinear shape, but in an opposite direction
to the effect of managerial ownership on firm value. The results of simultaneous regressions suggest
that managerial ownership affects capital structure, which in turn affects firm value.

At a low level of managerial ownership, it is positively related to debt-equity ratio, assuming that
managers use more debt, possibly seeking for higher returns on equity or higher stock price by
leveraging. Managerial opportunism may explain this tendency, though the
causal relationship requires further discussion.

It is shown that the target company’s managerial ownership is higher than Peer company and also the
debt ratio of target company is lower than peer company.

4.9 Family Ownership:

Family Ownership of UPGDCL:

No. Name and Designation % of share held %Total Share

01 Moinuddin Hasan Rashid-MD 8.58%
02 Abdul Mubeen-Chairman 52.31%
03 Hasan Mahmood Raja-Director 8.58% 78.05%
04 Akhter Mahmood Rana-Director 8.58%

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Family Ownership of BARAKA:

No. Name and Designation % of share held %Total Share

01 Fahim Ahmed Chowdhury-MD 0.5%
02. Ms. Abeda Khanom Chowdhury-Spouse 0.298%
03. Faisal Ahmed Chowdhury-Chairman 2.078%
04. Ms. Rushina Ahmed Chowdhury-
0.004%
Spouse
05. Mr. Abdul Bari-Director 2.002%
15.467%
06. Ms. Mohibun Bari Chowdhury-Spouse 0.124%
07. Mr. Gulam Rabbani Chowdhury-
2.078%
Director
08. Ms. Momtaz Chowdhury-Spouse 0.178%
09. Mr. Robin Choudhury-Director 7.354%
10. Ms. Shaheda Begum Shanti 0.851%

At a high level of family ownership, it is negatively related to debt-equity ratio, assuming that
directors don’t use more debt they refers internal source of fund to possibly seeking for higher
returns on equity or higher stock price.

It is shown that the target company’s family ownership is higher than Peer company and also the
debt ratio of target company is lower than peer company.

Thank You

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