FIN552 Corporate Finance

Introduction:

This report has been prepared to identify and evaluate the position, performance and worth of the Almarai Company. For evaluating the worth of the company, various financial tools and non financial tools have been analyzed. Firstly, the stockholder analysis has been done to evaluate the position and management style of the company. For this analysis, it has been evaluated that why the people are investing into this project. Further, it has been evaluated that who are the marginal stockholders of the company and how the corporate governance of the company is working. Further, it has been evaluated that what is the risk of the company in concern of the investment and how much return would be offered by the company to its shareholders (Zhang, 2012).

In addition, investment return of the company has been measured and the study has been conducted on the long term and short term projects of the company. Further, capital structure choices of the company has also been evaluated and to analyze the debt and equity level of the company. Further, the optimal capital structure has been evaluated to identify the solvency risk of the company and a better balance among the stock of the company. Various theories have also been read to evaluate and identify the optimal capital level of the company.

Lastly, dividend policy of the company has been evaluated and it has been analyzed that through which trend the dividends are offered by the company to its shareholders. A dividend framework of the company has been evaluated and lastly, a valuation study has been given which expresses about the total worth of the company and the position of the investment funds of the company (Thanatawee, 2013). Further, it also explains that how much earnings would be earned by an investor against his investment money in the company.

Stockholder analysis:

Firstly, the stockholder analysis has been done to evaluate the position and management style of the company. For this analysis, it has been evaluated that why the people are investing into this project. The annual report of the company expresses that the corporate has invested 63.74% in the company whereas 36.26% of stock has been owned by the individuals. Individuals have invested in the company to reduce the level of the tax burden (Tucker, 2011). Further, the mutual fund companies have invested 52.4% of total investment in the company. Government has invested 4% and the rest amount has been invested for the individual and the corporate to enhance the invested amount. The following table explains about the total investment in the company.

investor type	Number of investors	Number of Shares	Percentage of ownership
Corporate	254	509957679	63.74%
Individual	49472	290042321	36.26%
Total	49726	800000000

Further it has been analyzed that who are the marginal investors of the company and handling the business of the company on the behalf of other stakeholders of the company. Further, it explains that how the other people of the company are looking on the market position and the performance of the company (Travlos, Trigeorgis and Vafeas, 2015). Through the study on annual report of the company, it has been found that the HH Prince Sultan bin Mohammed bin Saud Al Kabeer is the main marginal investor of the company. He handles all the business and the activities of the company n the behalf of other shareholders of the company.

More to it, it has also been found that the mutual fund companies are also involving into the activities of the company to look over the profitability position of the company. It has been expected from the marginal investor of Almarai Company to work with dignity and the stockholders benefits must also be considered (Shao, Kwok and Guedhami, 2013). Marginal investors must be the person who is a well diversified investor and must have knowledge about the stock market.

Since, the marginal investor of Almarai Company is well diversified and working with dignity in the market, it could be said that the performance of the company is better and this company would offer a great dividend to its stockholders and the associated risk of the stock of the company would also be lesser.

Risk and Return:

Further, for evaluation the position of the company and the investment opportunity in the company, risk and return of the company has been evaluated and it has been analyzed that how the company and its stock is operating in the market. Firstly, the risk profile of the company has been calculated and it has been found that overall systematic risk of the company is 0.67 (Bloomberg, 2018). Further, the unsystematic risk of the company could not be calculated but the annual report and financial analysts report explains that the company is managing and performing the activities and operations in a good manner. Further, the performance profile of the company has been evaluated and it has been found that the position and the performance of the company have been better. The risk of the company is 0.67 which express about a lower level of risk. The company’s report explains that the stock of the company is out performed. The resources of the company have been utilized by the company in a proper way (Naser, Nuseibeh and Rashed, 2013).

Further, for performing this study, various subsidiary companies of Almarai limited have been evaluated and it has been found that how much stock and the capital of the company is owned by the people and what is weight of the company, how much the systemic risk of the company and what is the risk and return of the company. According to the stock price of the companies, the best of the companies have been calculated and the weight has been calculated through dividing the total market capital of each company with the total market capital of Almarai limited. According to the calculations and the measurements, following data has been calculated:

Business	Estimated value	Unlevered beta	Division weight	Weight * Beta
Western Bakeries Limited	588005395	0.63	73.50%	0.46305
International Banking services co	55497757	1.25	6.94%	0.08672
Almarai Bahrain co	33479206	1.5	4.18%	0.06277
Markley Holdings co	45082982	1.1	5.64%	0.06199
Almarai investment co	23592877	0.7	2.95%	0.02064
Almarai baby food co	54341783	1.25	6.79%	0.08491
	800000000		100%	0.78008

Further, the financial statement of the company expresses that the total equity of the company and total debt of the company is as follows:

	Price
Debt	10,54,31,25,000
Equity	12,93,92,83,000
	23,48,24,08,000

It explains that the debt level of the company is bit lower than total equity of the company. Further, the risk free rate of the market has been evaluated and it has been found that the total risk free rate is 6.08% and the market premium of the company is 6%. At the same time the best of the company is 0.67 (Masum, 2014). The tax rate of the company is 36% and the interest rate on debt of the company is 8%. It explains that the cost of equity of the company is 6.03% and the cost of debt of the company is 5.12%. Calculations are as follows:

Calculation of Cost of Debt
Outstanding debt	10,54,31,25,000
interest rate	8%
Tax rate	0.36
Kd	5.12%
Calculation of cost of equity (CAPM)
RF	6.08%
RM	6.00%
Beta	0.67
Required rate of return	6.03%

Further, the total cost of capital of the company has been evaluated on the basis of cost of debt and cost of equity of the company and it has been found that the total cost of capital of the company is 5.62% which explains that the company should invest in those projects which would offer it more than 5.62% of internal rate of return.

Calculation of WACC
	Price	Cost	Weight	WACC
Debt	10,54,31,25,000	5.12%	0.44898	0.02299
Equity	12,93,92,83,000	6.03%	0.55102	0.03321
	23,48,24,08,000	Kd		5.62%

Measuring Investment Returns:

The typical project of the company has been evaluated for further study and it has been found that the main typical project of every subsidiary company of Almarai limited is different. Through the analysis on every subsidiary company, it has been found that all the companies are working on long term as well as sort term typical project. Further, the annual report of the company explains that the main typical project of the company is Davidson creek hub project. It is a short term project of the company and the company is working on this project from last 9 months. This project is related to minerals and it expresses that this project has helped the company to enhance the stock price as well as the financial performance of the company has also been enhanced. The cash flow patterns of the company have also been changed due to its new project, Davidson Creek Hub Project (Annual Report, 2018).

The current book value of the investment of the company is SAR 9,480,000. It depicts that the short term investment position of the company has been enhanced from last years in current year. It explains that the company is focusing on investment in the new projects and the stocks to enhance the financial position and the performance of the company. The future trends of the investment and the current projects of the company explain about the great performance of the company which is way better than the past trends of the company. Further, it has been investigated that the position of the company in terms of investment and the return from the investment is higher (Davies and Crawford, 2011). Through the study on the return on investment of the company from last 3 years, it has been found that the return on investment of the company in current year is 0.45% which is quite higher than the position and the performance of 2016 and 2015.

Investment	94,80,000	46,80,000	34,38,000
Net profit	2,11,11,44,000	2,01,50,91,000	1,91,56,91,000
Return on investment	0.45%	0.23%	0.18%

It explains that the current project of the company has helped the comapny to enhance the net profit of the company and that is why the return of the company has also been enhanced.

Capital structure choices:

For further study, the funds of the company have been analyzed through which the funds have been raised. Through the study, it has been found that the company has used the short term debt, long term debt, retained earnings, equity and various other ways to raise the funds of the company (Breuer, Rieger and Soypak, 2014). Following are the ways of the company and the accounting figure of each fund of the company:

	2017	2016	2015	2014	2013
Short-term debt	2258988000	1484416000	2039057000	1821342000	1682970000
Taxes payable	272906000
Other current liabilities	3239215000	3308904000	2767579000	2221592000	2037493000
Total current liabilities	5771109000	4793320000	4806636000	4042934000	3720463000
Non-current liabilities
Long-term debt	10543125000	10134730000	9343435000	7737026000	8288900000
Deferred taxes liabilities	48060000	56492000	67123000	84394000	119985000
Pensions and other benefits		540143000	472186000	408073000	340045000
Minority interest	396867000	421250000	559783000	744080000	621718000
Other long-term liabilities	652315000	41212000	63427000	45556000	46389000
Total non-current liabilities	11640367000	11193827000	10505954000	9019129000	9417037000
Total liabilities	17411476000	15987147000	15312590000	13062063000	13137500000
Stockholders' equity
Retained earnings	1998246000	2796393000	3659639000	2569564000	1714303000
Treasury stock	-453156000	-378994000	-330699000	-146386000	-146386000
Accumulated other comprehensive income	12939283000	10618194000	8729505000	8463674000	8574553000
Total stockholders' equity	14484373000	13035593000	12058445000	10886852000	10142470000
Total liabilities and stockholders' equity	31895849000	29022740000	27371035000	23948915000	23279970000

Through the analysis, it has been found that the debt and equity which has been enhanced by the company in terms of raising the funds are as follows:

	Price
Debt	10,54,31,25,000
Equity	12,93,92,83,000
Total funds	23,48,24,08,000

It explains that the total quantity of debt has been enhanced and it explains that the debt amount has been enhanced by the company to reduce the level of the cost. In terms of quantity, the debt amount has been enhanced by the company to manage the cost and in terms of quality; the debt amount would lower the level of ownership in the company. Further, it explains that the debt amount is used by the companies to manage the risk and return level and it also assists the company to manage the lower level of cost of capital of the company (Correria, 2013). The below calculations express that the cost of debt of the company is lower than the cost of equity and thus the debt amount would reduce the level of the cost of capital of the company :

Calculation of WACC
	Price	Cost	Weight	WACC
Debt	10,54,31,25,000	5.12%	0.44898	0.02299
Equity	12,93,92,83,000	6.03%	0.55102	0.03321
	23,48,24,08,000	Kd		5.62%

Further, it has been found that the debt amount has some cons as well. The debt amount enhances the borrowings of the company and it directly burdens on the balance sheet of the company (Breuer, Rieger and Soypak, 2014). Further, the debt amount increases the risk of the company as it is required for the company to pay the debt amount to the debt holders after a period of time.

In addition, it has been found that the level of debt has been enhanced by the company lot in current year in comparison with the past 2 years. Further, it has been found that the current debt ratio of the company is 54.59% which explains about the company that current debt amount of the company is moderate it is not too much nor it is too lower (Bradford, Chen and Zhu, 2013). The following table explains about the debt amount of the company:

Total liabilities	17411476000	15987147000	15312590000
Total assets	31895849000	29022740000	27371035000
Debt ratio	54.59%	55.08%	55.94%

Optimal capital structure:

Further, the optimal level of the capital structure of the company has been evaluated and the current debt financing of the company is 44% debt and the 55.10% of equity. This debt amount includes only long term debt of the company which has maturity of 5years. Further, the entire debt is floating as long term debt. Following are few of the factors which have been considered by the company in managing the performance of the company:

	Price	Weight
Debt	10,54,31,25,000	0.44898
Equity	12,93,92,83,000	0.55102
	23,48,24,08,000

It explains that the debt of the company is quite lower than the cost of equity of the company (Bodie, 2013). For the optimal capital structure of the company, following calculations have been done:

Debt	Equity	Cost of debt	Cost of equity	Cost of capital
0%	100%	5.12%	6.03%	6.03%
10%	90%	5.12%	6.03%	5.94%
20%	80%	5.12%	6.03%	5.85%
30%	70%	5.12%	6.03%	5.75%
40%	60%	5.12%	6.03%	5.66%
50%	50%	5.12%	6.03%	5.57%
60%	40%	5.12%	6.03%	5.48%
70%	30%	5.12%	6.03%	5.39%
80%	20%	5.12%	6.03%	5.30%
90%	10%	5.12%	6.03%	5.21%
100%	0%	5.12%	6.03%	5.12%

It explains that the cost of capital would be lower when the entire funds are raised by the company through debt, but in that case the risk of the company would be higher. Optimal capital structure must be the point where the risk and the cost, both of the company would be lower so the optimal capitals structure of the company should be 40% of debt and 60% of equity of the company (Baker and Weigand, 2015).

Further, it has been evaluated that the current debt ratio of the company is 44% and 55%. It explains that the company would reduce the level of the debt to manage the optimal capitals structure. The optimal capitals structure of the company has been evaluated in context with the sector optimal capitals structure and market capitals structure and it has been evaluated that the current debt structure of the company is according to the sector ratio but the decrement in the debt ratio would assist the company to manage the risk and cost both of the company (Schlichting, 2013). The agro industry of Saudi Arabia explains that the debt structure of the company has been enhanced in 2017 from last year to manage the debt structure of the company and reduce the cost of the company.

Mechanics of moving to the optimal:

From the above study, it has been found that the current debt ratio of the company is 44% and 55%. And according to the optimal capital structure equation and study, the debt ratio of the company must be the point where the risk and the cost, both of the company would be lower so the optimal capitals structure of the company should be 40% of debt and 60% of equity of the company It explains that the company must reduce the level of the debt to manage the optimal capitals structure (Phillips and Stawarski, 2016).

The current scenario of the company explains that the debt level of the company must be altered by the company with time. The sudden changes into the debt structure of the company would affect on the stock price and financial performance of the company. Further, it explains that the company should buy back retiring the debt to reduce the level of the debt in the company (Palicka, 2011). It would help the company to manage the optimal capital structure as well as the risk and cost factor of the company would also be better.

Further, it has also been found that the current amount has been invested by the company in projects. So, it would be difficult for the company to administer the financial position and reduce the debt level of the company (Madhura, 2014). So, it is recommended to the company to enhance the funds through equity when the new funds are invested into the new project.

Dividend policy:

The dividend policy of the company has been evaluated and it has been found that the company is paying a good amount of dividend to its stockholders from last 4 years. It explains that the dividend amount of the company has been enhanced in 2017 from last years.

Dividend paid

-717905000

-687721000

-598542000

-598275000

Further, it has been found that the company not only offers the dividend to the stockholders, it also returns the cash to the stockholders through buy back the shares. Form last 4 years the buyback report of the company is as follows:

Common stock repurchased

-75533000

-75414000

-260530000

Further, the dividend yield of the company has been evaluated to determine the debt level of the company and it has been found that the dividend yield of the company is 3.98% which explains that the dividend of the company is modest (Krantz, 2016).

Dividend yield	Annual dividend / current stock price	0.039813
Annual dividend	2.13
Current stock price	53.5

Further, for evaluating the performance of the company, it has been found that the various stocks have been bought back by the company. It has been found that the company has paid the following cash amount to its stockholders in last 4 years:

Year	FCFE	Dividend + Stock Buybacks
2014	458314000	598275000
2015	306984000	859072000
2016	-769690000	763135000
2017	1099507000	793438000

Further, through the above analysis it has been found that this company is paying a great amount of cash to its stockholders. The evaluation on the market and the literature explains that the cash return to the stockholders is not good for the financial performance of the company (Kinsky, 2011). If the company has a great amount of cash than this cash amount must not be paid back by the company to its stockholders rather than the company must invest this amount into new projects so that the financial and market performance and position of the company could be better.

A framework for analyzing dividends:

Further, the study has been done to manage a framework for the company to evaluate and analyze the dividend. Firstly, it has been analyzed that the following amount has been returned by the company to the stockholders in last few years:

Year	FCFE	Dividend + Stock Buybacks
2014	458314000	598275000
2015	306984000	859072000
2016	-769690000	763135000
2017	1099507000	793438000

According to the study and the evaluation on total cash which has been paid by the company to the stockholders, it is recommended to the company to reduce the level of cash payment and must invest this amount to the new projects and proposal (Elton, Gruber, Brown and Goetzmann, 2009). The company has a great amount of cash currently so this cash amount must not be paid back by the company to its stockholders rather than the company must invest this amount into new projects so that the financial and market performance and position of the company could be better.

The comparative study has been done on the stock by back and dividend amount of the company with its competitive company and it has been evaluated that the competitive company and the industry explains that the no company is currently buying back the shares. All the companies are just giving the dividend amount to the company in terms of cash.

Valuation:

Lastly, the valuation study has been done on the company and it has been found that the net cash flow from operating activities of the company is continuously increasing. The following table explains that the current increment trend in the operating activities of the company is 5.02% (Baker and Nofsinger, 2010). On the other hand the financial analyst report and the industry trend explain that the operating income of the company would definitely increase in near future due to the new operations and old loyal customers of the company.  

	2017	2016	2015	2014
Net cash provided by operating activities	4614147000	4393591000	4931941000	3198763000
Trend	5.02%	-10.92%	54.18%

Further, it has been found that the current growth rate of the company in the industry is quite better. Still, it would take around 10 years for the company to be leader in the market and to set the industry trend. Through, the annual report of the company explains that the growth rate of the company is 5.79% which explains about better position of the company. Still, there is a lot time to go for the company to become a leader in the market and manage the performance of the company (Ackert and Deaves, 2009).

Lastly, the equity worth of the company has been evaluated and it has been found that the intrinsic value of the company is 50 whereas the current stock price of the company is 53.3. It explains that the stock price of the company is overvalued and the stock of the company must be sold.

Dividend Discount Model
Dividend expected	2.50
Growth rate	3.00%
Discount rate	8.00%
Intrinsic Value	50.00
Share Price	53.30 (Infront analytics)
	Overvalued

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