RESEARCH REPORT

ON
Linkage between Information disclosure and cost of capital: Evidence
from Dhaka Stock Exchange

SUPERVISED BY
Mostafa Saidur Rahim Khan
Lecturer
Department of Business Administration
Stamford University, Bangladesh

PREPARED BY:
Md. Ahsanuzzaman
ID:00405311
Batch: 21st (A)
Stamford University, Bangladesh

Date of Submission:

STAMFORD UNIVERSITY BANGLADESH

 CERTIFICATE

This is to certify that the internship on “Linkage between Information disclosure and
cost of capital: Evidence from Dhaka Stock Exchange ” has been submitted for the
award of the degree of Bachelor of Business Administration major in Finance from
Stamford University Bangladesh, carried out by Md. Ahsanuzzaman of 21st (A) batch
bearing ID: BBA 00405311, under my supervision. To the best of my Knowledge and as
per his declaration, any part of this report has not been submitted for any degree before.

He has been permitted to submit the Internship report.

----------------------------
Mostafa Saidur Rahim Khan

Lecturer
Department of Business Administration
Stamford University Bangladesh
 DECLARATION

I, the student of Bachelor of Business Administration batch 21st (A) bearing

ID:00405311 major in Finance from Stamford University Bangladesh, would like to
declare here the declaration on An Internship report on “Linkage between Information
disclosure and cost of capital: Evidence from Dhaka Stock Exchange” in Bangladesh
which I have not submitted for any other degree before.

_______________________
BBA (Major in Finance)
21st (A)Batch
ID: 00405311
Stamford University Bangladesh.
 Letter of Submission

Date-

To
Mr. Mostafa Saidur Rahim Khan
Lecturer
Department of Business Administration
Stamford University Bangladesh

Sub: Submission of Internship Report

Dear Sir,

It is my great pleasure to submit you my internship report on the project title of “Linkage
between Information disclosure and cost of capital: Evidence from Dhaka Stock
Exchange”. I tried my best to complete this report properly for your kind consideration.

I have confident that the internship program has increased both of my practical
experience and theoretical knowledge to a great extent. I will be obliged to answer any
query that may arise during the evaluation of this report. So, I fervent requesting and
hope that you would be kind enough to accept my report and oblige thereby.

Please call me if you require further clarification.

Sincerely Yours,

______________________
(Md. Ahsanuzzaman)
MBA (Major in Finance)
21st (A) Batch
ID:00405311
Stamford University Bangladesh.
 ACKNOWLEDGEMENT

In the process of preparing this report I received genuine cooperation from number of
individuals whose names are not possible to mention in this report but I would remember
them with my heart felt appreciation and gratitude.

First of all, I am very much grateful to God whose gave blessings me to courage and
ability to prepare this report. I am very much grateful to Mr. Mostafa Saidur Rahim
Khan, Lecturer, Department of Business Administration, Stamford University
Bangladesh, for guiding me to complete properly my internship program. I am also
highly indebted to him for his scholarly and constructive suggestion which was of much
assistance to prepare this report of “”.

____________________
(Md. Ahsanuzzaman)
MBA (Major in Finance)
21st (A) Batch
ID: 00405311
Stamford University Bangladesh.
 PROLOGUE

Thesis and research program is a scope for acquiring knowledge after

successful completion of academic curriculum. Theoretical knowledge gets a
complete shape only when it is applied in a practical field.

Every Organization is concerned about the competence of its executive to

cope with the technological advances in industrial and commercial
development in the fast-moving global environment. The capability of the
executive must be enhanced so as to make them efficient and effective in the
execution of their duties and responsibilities. The principal emphasis on
BBA program has been given on the operation of business organization
mostly in private sector. The objective of this program is to prepare students
in such a manner so as to equip them with Accounting and financial skills,
competence in to depth knowledge of business Administration so as to
enable them to meet any challenging situation and to work with the
competence in the competitive business environment.

I have accomplished my thesis and research program on portfolio

management in the stock market.

During my 03 (Three) months research program, I’ve tried my best to get

knowledge about the overall operations of stock market.

This program is, in fact, is at endeavor to make the students familiar with the
real business situation and to prepare themselves to match their theoretical
knowledge with practical field.
 EXECUTIVE SUMMARY

As an integral part of BBA program I was sent to Dhaka Stock Exchange to

have practical exposure on investment activities. There are two stock
exchanges in Bangladesh- Dhaka sock exchange and Chittagong stock
exchange that are operating under the regulatory authority Security
Exchange Commission.

Portfolio management is the management of investment by diversifying the

investment rather than investing in one. It reduces the risk of loss by
diversifying the investment. In this term paper efficient portfolio has been
made from the five companies. For the input of the portfolio 36 months data
has been used. By using single index model portfolio has been formed at the
same time naïve portfolio risk and return has been calculated to judge the
same result of efficient portfolio. As naïve portfolio consists of all the
securities of equal weight so the return under this method is much lower
than what is found in the efficient portfolio. Cut off point has been
calculated by using the formula, which exclude short sales, which means
that in our efficient portfolio we did not allow short sales. Out of the five
companies only one security has been taken to form the portfolio. This is
BATC. Thus in the portfolio full weight has been imposed on the BATC. In
our portfolio we considered twenty companies and most of the companies
face negative return. Only BATC has a better return and as full weight has
been imposed on BATC thus the efficient portfolio has a reasonable return.
After forming the portfolio, performance evaluation has been made. In this
section we found that.
Chapter 1

1.1 Introduction
1.2 Background of the study (why you choose it?)
1.3 Objective of the study
1.4 Scope of the Study ( things that are included)
1.5 Methodology ( model used, data source etc)
1.6 Limitation (data collection, sensitive information, time frame, information
disclose etc.)

Chapter 2

2.1 Introduction
2.2 Overview of (Industry)
2.3 Organizational overview (History, Vision, Mission)
2.4 Operating and financial performance

Chapter 3

3.1 Introduction

Chapter 4

4.1 Introduction

Chapter 5

5.1 Introduction

Chapter 6

Findings, Recommendation & Conclusion

Bibliography
Appendix
Reference
TABLE OF CONTENTS

Chapter 1:
1.0. Introduction
1.1. Origin of the study
1.2. Background of the study
1.3. Significance of the study
1.4. Objective of the study
1.5. Scope of the study
1.6. Methodology of the study
1.7. Conceptual framework of the report

Chapter 2:
2.0. Organization Overview
2.1. Profile of Square Textiles Ltd.
2.2. Profile of Atlas Bangladesh Ltd.
2.3. Profile of Janata Insurance Ltd.
2.4. Profile of PRAN (AMCL)
2.5 Profile of Southeast Bank
2.6 Profile of ACI Ltd.

Chapter 3:
3.0. Linkage between information disclosure and cost of capital
3.1. Correlation between information disclosure and cost of capital

Chapter 4:
4.0.Findings and Conclusion

Chapter 5:
5.0.Bibliography
5.1.References
1.0 Introduction

1.1. Origin of the study

This report is originated as the course requirement of the BBA program

under the coordinator of BBA program, Stamford University-
Bangladesh. Under this program students of every department
of this faculty must go through an internship or thesis program
of 3 months duration. As practical orientation is an integral part
of the BBA degree requirement, I was sent to take real life
exposure of the activities.

1.2. Background of the study

This paper has been prepared based on five randomly selected listed
companies in the Dhaka Stock Exchange. This paper has been prepared
based on the price and dividend information of these companies and the
market index of the Dhaka Stock Exchange. All information is secondary
and collected from different books published by the Dhaka Stock Exchange.
Based on this information basic input to the portfolio meaning return, risk
for security and market, alpha, beta & standard error have been calculated.
For the calculation of return of the securities, security index has been
calculated to measure the proportion of investment in the security. For
efficient portfolio formation single index model has been used and for the
purpose of ranking the securities cut off rate without short sales has been
used. Then based on this information, weight has been determined to find
out the efficient portfolio. In the second part of the report performance
evaluation of the securities has been performed. For this purpose average
price and standard deviation have been used to compare with past return and
risk. At the same time differential return has been used to compare with the
market performance.

1.3 Significance of the study:

The study carries much importance in view of the fact that the economic
development of Bangladesh is closely linked with the strong and healthy
financial organizations, which facilitate mobilization of domestic and
foreign funds on a large scale. Investment organizations are doing their jobs
more competitively now a day. Attracting the people to save their money by
developing various products and schemes, investing the fund in different
profitable shares, etc. is the main focus of this study. This research gap
induced me to undertake the study. It is hoped that the findings of the study
will be useful for the readers and young learners to get knowledge about the
topic. It will also add to existing stock of reports in the library section.

1.4 Objective of the study

The main objective of practical orientation on stock market is to get a clear

idea about investment environment, how it runs and what function it does.
Again, the information of various companies totally enhance the trainee gets
a chance to familiarize himself with a new knowledge. Furthermore, the
orientations is very useful to detect whether the theoretical knowledge match
with real life scenario or not.
 1 Broad Issue: Analysing the variable, like different shares, dividends
and share price, and their impact on the profitability on the investment
is one of the objectives of the study.

2 Specific Issue: In addition to the principal objective, the following are

some of the common but significant objectives of the study:

1. To know about the nature of the stock market.

2. To know about the scope of investment in the stock market.
3. To know about the company details.
4. To know about the procedure of securities exchange commission.

1.5. Scope of the study

The study covers all the best possible ways of fuming an efficient portfolio.
In my report I have tried at my level best to describe each and every function
elaborately.
1.6. Methodology of the study

1 Data collection: For conducting the study I used the following

Method-

 Collection of primary data: Some study-related data are collected

from designing questionnaires, personal interview, and from related
instruments.

 Collection of secondary data: to prepare the report, I used many

data and literary information for which I had depended on secondary
sources. Secondary Sources include -

1 Annual reports of the selected five companies

2 Different journals and magazines and
3 Other related books.

Along with these, Observation is another method that was given emphasis in
the study.

1.7 Conceptual Framework of the Report

To get ready my report, in the very beginning will discuss about the
company profiles, activities and operation. Then in next chapter I will
discuss all the necessary calculations to form an efficient portfolio. Then I
will show what I find from my analysis and my discussion. And then I will
give my recommendation for the research on which I think the share is
strong enough to build an efficient portfolio. And at the end appendices and
bibliography will be given as require.

2.0. Organization’s Overview

2.1.PROFILE OF SQUARE TEXTILES LTD.

Corporate history:
1 Establishment: 1994
2 Year of operation: 1997
3 Stock exchange listings: 2002
4 Business line: Manufacturing and marketing of yarn
5 Authorized capital: Tk. 1000 million
6 Paid up capital: Tk. 304.79 million
7 No. Of employees: 1454 persons

Vision: Our conception of business germinates from our vision, which sees
it as a means to the well being of the investors, stakeholders, employees and
members of the society at large by creating new wealth in the form of goods
and services that go to satisfy the wants of all of them without disturbing or
damaging the socio- ecological economic balance of the mother earth and
the process of human civilization leading to peaceful existence of all the
living beings.

Mission: Our mission is realization of vision through maximum production

of goods and services strictly on ethical and moral standards at minimum
costs to the society ensuring optimum benefits to the shareholders and other
stakeholders.

Objective:
1 To strive hard to optimize profit through conduction of transparent
business operations.
 2 To create more jobs with minimum investments.
3 To be competitive in the internal as well as external markets.
4 To maximize export earning with minimum imported inputs.
5 To reduce the income gap between top and bottom categories of
employees.

Last five years operational results:

2005 2004 2003 2002 2001(Thousands)

(Thousands) (Thousands) (Thousands) (Thousands)
Turnover 2390979 2459201 2102670 1789018 2076925
Gross profit 543160 375498 365615 288737 400234
Net profit 397812 229759 181253 87204 174723
before tax
Net profit 255494 198690 167894 81453 174723
after tax
Shareholders 1513511 1349457 1233894 1146608 1140724
equity
Total assets 2585177 2537295 2501397 2382055 2613633
Total current 1391410 1357092 1284065 1055413 1182235
assets
Total current 989212 1187839 1267503 1214172 1418293
liabilities
Current ratio 1.41 1.14 1.01 0.87 0.83
No of shares 30479900 27709000 25190000 25190000 25190000
outstanding
Earning per 8.38 7.17 6.06 2.94 6.31
share
Price 9.75 19.29 6.46 8.33 ___
earnings
ratio
Dividend 3 3 3 3.20 3
(cash)
Dividend 8:1 10:1 10:1 ___ ___
(stock)
WACC of Square Textiles Ltd.
Square textile:
Total loan: 197314717
Total equity: 1513511233
Tax rate: 15.05%
Total interest: 67966406
Interest rate: 34.44%
Dividend: 30, 1B: 10 (2004), 30, 50% (2005), 55% (2006)

G (growth rate) = Div (2006) – Div (2005)

Div (2005)

=55-50
50

= .10

Ke (cost of equity) = Do (1 + g)
Po

=55(1+.10)
74.9

= .8077

WACC (weighted average cost of capital)

= Kd ( 1 – Tc ) * Total Debt +Ke * Total equity
D+E D +E

=. 3444(1-.1505) * 197314717 + .8077 * 1513511233

1513511233+197314717 1513511233+197314717

=.7482
2.2.

Profile of Atlas Bangladesh Ltd.

Background:

The Company was established in 1966 under the private management by the
then West Pakistani entrepreneur established The Company in 1966 under
private management. It was nationalized and placed under the management
of Bangladesh Steel & Engineering Corporation (BSEC) in 1972 and
converted into a Public Limited Company in 1987 when 49% of its share
was sold to general public and 51% is retained with BSEC.
Amount of authorized capital of the company is TK.10.00 Crore and Paid-
up Capital is TK.6.00 Crore. Mission of the company is to develop
communication system by producing Motorcycle and Mishuk (Tri-wheeler)
and widen its activities aiming at creating job opportunities, adapt latest
technology, provide fast and accurate customer service to ensure steady
return on stockholder equity. At present it is meeting about forty percent of
domestic demand.

Strategies:

The Company is looking forward to replace the existing assembly lines with
most modern and automatic ones. It has planned to manufacture motorcycle
components progressively through development of linkage between Atlas
Bangladesh Ltd. and other engineering industries in the country.

Name of the Members of the Board of Directors of the enterprise:

Sl. Name Designation

1 Mr. Mohammad Abu Jafar Chairman
Chairman, BSEC.
Telephone: 88-02-8114616, 8112808.
2 Dr. Mohammad Ayub Mia Director
Addl. Secretary, Ministry of Industries.
Telephone: 88-02-9563561
3 Mr. Mahfuzur Rahman Director
Director (Planning & Development), BSEC
88-02-9116340, 9138336
 4 Mr. Md. Fazlul Bari Director
Director (Production & Engineering)
88-02-9115148, 9118349
5 Mr. M Akbar Ali Director
Telephone: 88-02-9551917 & 88-02-9336671
6 Mr. Md. Mojibur Rahman Director
Telephone: 88-081-63447
7 Mr. Md. Saiful Islam Director
Telephone: 88-01711533749
8 Mrs. Nasima Akter Director
Telephone: 88-081-63447
9 Mr. Md. Shamsul Haque Farajee Director
Managing Director, Atlas Bangladesh Ltd.
Telephone: 88-02-9803172

Manpower:

Officer Staff Worker Total

44 52 93 189

Products:

Motorcycle (ranging from 50cc to 125cc) & Three- wheeler (Mishuk).

Performance of last 5(five) years:

(Figure in Nos.)
Financial Year
2000- 2001- 2002- 2003- 2004-
01 02 03 04 05
Motorcycle 8, 581 12, 015 13, 244 16, 864 22, 002
Mishuk (Tri- 159 316 424 114 190
wheeler)
Motorcycle 7, 513 11, 983 13, 359 16, 531 22, 185
Mishuk (Tri- 497 317 420 121 190
wheeler)

Atlas:
Total loan: 7184296
Total Interest: 182582
Interest Rate: 2.55%
Total equity: 394805178
Tax rate: 26.99%
Dividend: 120%, 1B: 3 (2004), 100,50%B (2005), 85%, 1B:3 (2006)

G (growth rate) = Div (2006) – Div (2005)

Div (2005)

= 85-50
50

= .70

Ke (cost of equity) = Do (1 + g)
Po

= 85(1+.70)
190

= .7605
WACC (weighted average cost of capital)
= Kd ( 1 – Tc ) * Total Debt +Ke * Total equity
D+E D +E

= .0255*(1-.2699)* 718426 +.7605* 394805178

7184296+394805178 394805178+7184296

= .7472
2.3.
Profile of Janata Insurance Co. Ltd.
Janata Insurance Company Limited (JICL) incorporated as a public
limited company under the COMPANIES ACT 1994 on 23 September 1986. It
commenced business on 6 November 1986 with a view to running all types
of general insurance business except life pursuant to the Insurance Act 1938
and other related laws and regulations. Authorized capital of the company is
Tk 100 million that remained unchanged, while the paid up capital increased
from the initial amount of Tk 30 million to Tk 60 million in December 2000.
The capital is divided into ordinary shares Tk 100 each. The company was
enlisted with both Dhaka and Chittagong STOCK EXCHANGE in 1994. Managed
by a 13-member board of directors with the managing director as the chief
executive, the company has its head office at Dhaka and 37 branches all over
Bangladesh. It underwrites risks involved in trade and properties and thus
provides their security through insurance and reinsurance services. Major
risk underwriting businesses of the company cover fire insurance, marine
insurance, motor insurance and miscellaneous areas. In accordance to the
Re-Insurance Treaty, the company re-insures the risks undertaken with the
SADHARAN BIMA CORPORATION (SBC). It sponsored a leasing and financing

company jointly with the UNITED COMMERCIAL BANK and some private
individuals.
 In 1998, the net premium incomes of the company were Tk 118.34 million
and the net claims paid by it were Tk 12.99 million. It earned underwriting
profits almost each year of its operations except 1996. The company earns
incomes each year also from its investments in National Investment Bond,
shares and debentures and other investments including FDR and short-term
deposit accounts. It maintains two special reserve funds namely, reserves for
exceptional losses and reserves for un-expired losses. The pre-tax profits of
the company were Tk 20.70 million in 1998. In that year, the assets of the
company were valued at Tk 337.40 million.
Board of Directors:

Chairman Vice Director Managing Deputy Executive Vice Assistant vice

chairman director managing vice presidents presidents
director president
M A Md. Mir Md. Saiful
Hasem Rashed Mahmud Islam
Ali Ali
Md. Abu Musa
M A Chowdhury
Sabur
Belal Md. Humayun
Ahmed Kabir
Aziz al Md.
Kaiser Moniruzzaman
Aklima
Begum

Tabassum
Kaiser
Syeda
 Shaireen
Aziz
Savera H
Mahmood

Zannatul
Ferdous
Zeena
Sultana
Hasem
Fahima
Akhter
Aziz Al
Masud

2.4.
Profile Of Pran

Pran in Bangladesh are blessed with a climate ideally suited to agriculture,

especially fruits and vegetables rich in taste and flavor, sweet, mellow and
juicy. Our deltaic plan is among the most fertile in the world created and
drained by the mighty rivers. Our comparative advantage as an economy lies
in agriculture. We believe the way to economic prosperity is through agri
and agro-business. Pran is the largest grower and processor of fruits and
vegetables in the country.
Operations:
During the year under review Agricultural Marketing Co Ltd. Made a gross
sales of Tk. 94 crores in comparison to Tk. 84 crores during the previous
year. The cost of principal raw materials i.e. sugar &packing materials like
resin, tetra pack foils etc increased abnormally. The cost of sugar increased
from an average price of Tk. 30 per kg to Tk. 45. On the other hand it is
difficult to increase the selling price of finished products correspondingly in
order not to lose market share. In spite of this adverse development we
earned Tk. 3.29 Crore operating profit & Tk. 2.90 Crore net profit after
deducting workers profit participation fund &corporate tax.
Corporate directory:

Chairman LT Col Mahtabuddin Ahmed

Managing Director Maj Gen Amjad Khan Chowdhury

Deputy ManagingDirector Mr. Ahsan Khan Chowdhury

Director Mrs. Sabiha Amjad

Director Barrister Akhter Imam

Director Mr. Nathendre Nath Paul

Executive Director Mr. Md. Eleash Mridha

ED & Company secretary Mr. Chowdhury Atiur Rasul

Five-year financial statistics:

Particulars 2001- 02 2002- 03 2003- 04 2004- 05 2005- 06

Authorised capital 5000008 5000008 5000008 500000 500000
Paid up capital 0000 0000 0000 80000 80000
Share premium 40000 40000 40000 40000 40000
Turnover (gross) 7892377 8396397 868255 888312 939529
Turnover (net) 1688318 5271019 775132 797683 867001
Gross margin 264844 604246 200780 204813 199232
Profit before tax 167 150 41653 42535 31228
Tangible fixed assets 2865971 3447551 327236 316813 300381
Cumulative surplus 3025327 5471429 169815 189238 196888
Shareholders Equity 253 3914 309015 330038 337688
Dividend proposed 25% 24% 24% 26% 26%
Return on paid up capital 54.26% 55.48% 50.39% 50.96% 36.18%
Book value per share 337.81 367.39 386.27 412.55 422.11
Earning per share 54.26 55.48 50.39 50.96 36.18
Market value per share 366 412 323.50 519.25 386
Price earning ratio 6.75 7.43 10.39 10.19 10.67

PRAN(AMCL):
Total loan: 44209923
Total Interest: 4471647
Interest Rate: 10.11%
Total Equity: 337687792
Tax rate: 7.30%
Dividend: 22% (2004), 26% (2005), 26% (2006)

G (growth rate) = Div (2006) – Div (2005)

Div (2005)

=0

Ke (cost of equity) = Do (1 + g)
Po

= 26 (1+ 0)
363.25

= .0715
WACC (weighted average cost of capital)
= Kd ( 1 – Tc ) * Total Debt +Ke * Total equity
D+E D +E

= .1011 ( 1 - .0730) * 44209923 + .0715 * 337687792

44209923+337687792 44209923+337687792

= .074

2.5.
Profile of Southeast Bank:

Southeast Bank has a long and relishing heritage. It is a second-generation

bank, which was established in 1995 with the vision to stand out as a pioneer
banking institution in Bangladesh and contribute significantly to the national
economy. It was incorporated on March 12, 1995 as a public limited
company. Certificate of commencement of business of the bank issued by
Bangladesh Bank on March 23, 1995. The authorized capital of the bank is
Tk. 2500 million. Its paid up capital and reserve reached Tk. 1300.14 million
as on 31st December 2003.

The ethos of harmony and co-operation is widely practiced in the bank.

Resultantly, the public and private face of the bank is one and identical.
Transparency in decision making, monitoring mechanism and full disclosure
to shareholders and regulatory authorities are essential aspects of bank’s
corporate governance and they create intense pressure to rationalize bank’s
service and search for new competitive advantage.

Vision: To stand out as a pioneer banking institution in Bangladesh and

contribute significantly to the national economy.

Missions:
 1 High quality financial services with the help of the latest technology
2 Fast and accurate customer service.
3 Balanced growth strategy
4 High standard business ethics
5 Steady return on shareholders equity
6 Innovative banking at a competitive price
7 Attract and retain quality human resource
8 Deep commitment to the society and the growth of national economy

Management executives:

President and managing Syed Abu Naser Bukhtear Ahmed

director

Deputy managing director M.A. Muhith

Senior executive vice Syed imtiaz hasib

presidents Md. Mosharraf Hossain
Mahbubur Rashid
A.K. Qureshi
Executive vice presidents M.M.A Moquit
A.H.M Wali Khan
Enamul Hoque
Shabbir Ahmed Imtiaz
Chowdhury Khaled Saifullah
Muhammad Shajaha
Mohammad Gofran
Senior vice presidents Md. Ali Ahmed
Md. Mubin ul Khalique
Shabuddin Md. Jafar
A.S.M Bulbul
Akram H. Khan
Khandakar Fajhim Uddin Ahmed
Ahmad Tabsir Chowdhury
Md. Altafur Rahman
 Shahid Hossain

Vice presidents Md. Sawkat Hossain

Mustafizur Rahman
Kazi Mahmood Karim
Md. Sams Tabrez
A.F.M. Sariful Islam
Mohammad mahmud Hasan
M. Kamal Hossain

Five years Financial Highlights:

(In million)
Particulars 2003 2002 2001 2000 1999
Authorized 2500 2500 500 500 500
capital
Paid up capital 677.16 399.30 363 330 300
Reserve fund 622.99 571.66 394.20 235.28 145.70
Equity fund 1300.14 970.96 757.20 565.28 445.70
Deposit 20118.82 16598.45 12630.25 10309.70 7512.49
Advance 15548.11 13027.13 9178.03 7061.87 5051.88
Investment 2581.66 2282.08 1727.44 1369.92 971.81
Import business 16270.80 12817.01 12187.37 11239.14 8228.50
Export business 3033.79 2263.45 2675.05 1319.51 704.47
Gurantee 3391.19 2502.48 1854.50 1306.24 907.18
business
Total income 2772.52 1936.54 1748.18 1259.03 862.86
Total 2107.36 1443.98 1256.05 921.70 661.02
expenditure
Operating profit 665.16 492.56 492.13 337.33 201.84
Net profit after 256.06 253.56 270.74 172.84 85.48
tax
Fixed aseets 288.02 48.81 36.26 71.13 78.37
Total assets 23142.35 18882.48 14468.66 11710.56 8336017
Earning per 45.38 69.85 82.04 57.61 56.99
share
Dividend(cash) 20% 20% 30% 25% 15%
Dividend(stock) 20%(5: 1) 10% (10: 10% 10% ___
1) (10:1) (10:1)
ROE 19.69% 26.11% 35.76% 30.58% 19.18%
ROA 1.11% 1.34% 1.87% 1.48% 1.03%
Non performing 2.09% 1.99% 2.78% 2.95% 3.75%
loans as % of
total loans
Capital 9.20% 8.23% 8.77% 8.40% 9.52%
Adequacy ratio

Southeast Bank:
Total loan: 4275371862
Total equity: 1257606617
Tax rate: 53.89%
Total interest: 1729415702
Interest rate: 40.45%
Dividend: 20%, 20B:100 (2004), 30% (2005), 50% (2006)

G (growth rate) = Div (2006) – Div (2005)

Div (2005)

= 50-30
30

= .6667

Ke (cost of equity) = Do (1 + g)
Po

= 50(1+.6667)
320.75

= .2598
WACC (weighted average cost of capital)
= Kd ( 1 – Tc ) * Total Debt +Ke * Total equity
D+E D +E

= .4045(1-.45)* 4275371862 +.2598* 1257606617

1257606617+425371862 425371862

= 1.33
2.6.
Profile of ACI Ltd.:

Mission: ACI’s mission is to enrich the quality of life of people through

responsible application of knowledge, skills and technology. ACI is
committed to the pursuit of excellence through world-class product,
innovative processes and empowered employees to provide the highest level
of satisfaction to its customers.

Values:
1 Quality
2 Customer focus
3 Fairness
4 Transparency
5 Continuous improvement

Vision:
To realize the mission ACI will:
1 Endeavor to attain a position of leadership in each category of its
businesses
2 Attain a high level of productivity in all its operations through
effective and efficient use of resources, adoption of appropriate
technology and alignment with our core competencies
3 Develop its employees by encouraging employment and rewarding
innovation
4 Promote an environment for learning and personal growth of its
employees
 5 Provide product and services of high and consistent quality, ensuring
value for money to its customers
6 Encourage and assist in the qualitative improvement of the services
of its suppliers and distributors
7 Establish harmonious relationship with the community and promote
greater environmental responsibility within its sphere of influence

Corporate governance:
ACI board of directors is committed to meeting the highest standard of
corporate governance and disclosure. The directors are conscious of their
responsibilities in supervision and direction of the affairs of the company in
conformity with the practices of sound corporate governance. In fulfillment
of those responsibilities the directors have set for themselves the principles
that will be followed in their own involvement in the oversight function and
in setting up clear guidelines for the executive management.

Executive management:
Mr. M Mohibuz Zaman
Chief operating officer

Dr. F H Ansary
Executive Director

Mr. Azmal Hossain

Executive Director

Company Secretary:
Ms. Sheema Abed Rahman

Auditors:
Rahman Rahman Huq

Financial consultant:
Mr. M Sekander Ali
Principal Bankers:
Standard Chartered Bank
The Hongkong Shanghai Banking corporation Ltd.
Commercial Bank of Ceylon Ltd.
Citibank NA
Arab Bangladesh Bank Ltd.
Mutual Trust Bank Ltd.
Mercantile Bank Ltd.

Five years comparative statistics:

Particulars 2001 2002 2003 2004 2005
Taka in
Thousands
Authorised 500000 500000 500000 500000 500000
capital
Issued and paid 161700 161700 161700 161700 161700
up capital
Turnover 163740 205291 223956 255777 3088715
8 4 5 2
Gross profit 453334 630666 639354 740378 957176
Profit before tax 136715 163603 92968 141390 169075
Profit after tax 91715 109181 84941 89516 112271
Current assets 816321 109946 139640 134233 1537156
0 0 6
Net current 206401 192222 216094 181380 12952
assets
Shareowners 547186 590384 667512 861487 905935
equity
Dividend 60638 60638 64680 68723 72765
Current ratio 1.3 1.2 1.2 1.2 1
Quick ratio .6 .5 .5 .5 .6
Return on 16.8% 18.5% 12.7% 10.4% 12.4%
equity
Inventory 2.5 2.7 2.3 2.4 3
turnover
Debtors 24 23 16 12 11
turnover
Working capital 7.9 10.7 10.4 14.1 238.5
turnover
Fixed assets 7.7 8.8 7.3 3.8 4.2
turnover
Net asset per 33.8 36.5 41.3 53.3 56
share
Market price 55.3 54.2 66.7 94.4 69.6
per share
Earnings per 5.67 6.75 5.25 5.54 6.94
share
Dividend per 3.75 3.75 4 4.25 4.50
share
Dividend 88.2% 66.1% 55.6% 75.8% 76.7%
payout ratio
Effective 6.8% 6.9% 6% 4.5% 6.5%
dividend rate

ACI:
Total Loan: 846979658
Total Interest: 83396936
Interest Rate: 9.84%
Total Equity: 905935269
Tax Rate:33.59%
Dividend: 40% (2004), 42.50% (2005), 45% (2006)

G (growth rate) = Div (2006) – Div (2005)

Div (2005)

= 45 – 42.50
42.50

= .0588

Ke (cost of equity) = Do (1 + g)
Po

= 45(1+ .0588)
70.20

= .6787
WACC (weighted average cost of capital)
= Kd ( 1 – Tc ) * Total Debt +Ke * Total equity
D+E D +E

= .0984 (1 - .3359) * 846979658 + .6787 * 905935269

905935269+846979658 846979658+905935269

= .3823

Company Cost of Capital Average Average Disclosure

Return Risk Index
Janata Insurance .1723 .0087 .1646 5.71
Atlas .0255 .0014 .1229 5.43
Pran .1011 .00028 .0616 5.43
Square Textile .3444 .0223 .0790 6.0
Southeast Bank .4045 .0189 .1218 4.57
ACI .0984 .0331 .0533 6.57
Summary of the calculation:
3.0.
Linkage between information disclosure and cost of capital
We have developed an asset pricing model in which both public and private
information affect asset returns. Because the return investors demand
determines a firm's cost of equity capital, our analysis provides the linkage
between a firm's information structure and its cost of capital. We have
demonstrated that investors demand a higher return to hold stocks with
greater private information. This higher return reflects the fact that private
information increases the risk to uninformed investors of holding the stock
because informed investors are better able to shift their portfolio weights to
incorporate new information. Private information thus induces a form of
systematic risk, and in equilibrium investors require compensation for
bearing this risk.

An important implication of our research is that firms can influence their

cost of capital by affecting the precision and quantity of information
available to investors. This can be accomplished by a firm's selection of its
accounting standards, as well as through its corporate disclosure policies.
Attracting an active analyst following for a company can also reduce a
Company’s cost of capital, at least to the extent that analysts provide
credible information about the company. Yet another way to influence its
information structure is through the firm's choice of where to list their
securities for trading. Because investors learn from prices, the
microstructure of where a firm's securities trade can influence how well and
how quickly new information is impounded in the stock price. These factors
suggest that a firm's cost of capital is determined, at least partially, by
corporate decisions unrelated to its product market decisions. These findings
suggest an important role for the accuracy of accounting information in asset
pricing. Here greater precision will directly lower a company's cost of
capital because it will reduce the riskiness of the asset to the uninformed.
This finding is consistent with the extensive accounting literature
documenting the effects of accounting treatments on stock prices.
.
 life cycle of a firm may also influence its cost of capital. In
particular, it seems reasonable that investors will better know a firm with a
long operating history. Attracting an active analyst following for a company
can also reduce a company's cost of capital, at least to the extent that
analysts provide credible information about the company. Yet another way
to influence its information structure is through the firm's choice of where to
list their securities for trading. Because investors learn from prices, the
microstructure of where a firm's securities trades can influence how well and
how quickly new information is impounded in the stock price. These factors
suggest that a firm's cost of capital is determined, at least partially, by
corporate decisions unrelated to its product market decisions.

Our findings here raise a number of issues for further study. If, as our
analysis suggests, the quality of information affects asset pricing, then how
information is provided to the markets is clearly important. Recently, the
SEC has considered allowing individual investors access to IPO electronic
road shows, has proposed tighter restrictions on what companies can
disclose privately to analysts, and has pondered whether internet investment
chat rooms are positive or negative influences for stock prices. While
addressing each of these topics is beyond our focus here, the framework we
develop does provide a way to consider how particular market practices
affect equilibrium asset pricing. Our results also raise interesting questions
about security market design and the cost of capital. In particular, how
transparency of trades and orders influence the informative ness of stock
prices, or even how the speed of the trading system affects information flows
to investors, seem important directions for future research.
3.1.
Correlation between information disclosure and cost of capital

Disclosure Index Cost of capital

5.71 0.1723
5.43 0.0255
5.43 0.1011
6 0.3444
4.57 0.4045
6.57 0.1011
Correlation -0.40726

Greater information will directly lower a company's cost of capital because

it will reduce the riskiness of the asset to the uninformed and vice versa.
That’s why; we can see that there is a negative correlation between
disclosure index and cost of capital.
The effect of disclosure level on the cost of equity capital is a matter of
considerable interest and importance to the financial reporting community.
However, the association between disclosure level and cost of equity capital
is not well established and has been difficult to quantify. In this paper
examine the association between disclosure level and the cost of equity
capital by regressing firm-specific estimates of cost of equity capital on
market beta, firm size and a self-constructed measure of disclosure level. My
measure of disclosure level is based on the amount of voluntary disclosure
provided in the last five years annual reports of a sample of 7 firms. For
firms that attract a low analyst following, the results indicate that greater
disclosure is associated with a lower cost of equity capital. The magnitude of
the effect is such that a one-unit difference in the disclosure measure is
associated with a difference of fewer units in the cost of equity capital, after
controlling for market beta and firm size. For firms with a high analyst
following, however, I find no evidence of an association between my
measure of disclosure level and cost of equity capital perhaps because the
disclosure measure is limited to the annual report and accordingly may not
provide a powerful proxy for overall disclosure level when analysts play a
significant role in the communication process.

5 Conclusion
The primary focus of this paper has been to demonstrate possible linkages
between intangible assets and a firm's cost of capital. We highlight the
accounting bias towards recognized intangible assets, which present only a
fraction of a firm's overall intangible assets that also include internally
generated intangible assets. By addressing the efficient market hypothesis,
this paper has attempted to draw managerial and academic attention to
possible implications of intangible assets on a firm's cost of capital.
Accounting-driven information distorts the market perception of the true
impact of intangible assets. Market values of equity may not fully
incorporate intangible assets. As the cost of capital is a weighted average,
the market-driven weight of equity may be incorrect due to inadequate
assessment of a firm's intangible assets. An inaccurate cost of capital wills
not only results in flawed corporate financial decisions; it will also result in
incorrect estimations of a firm or project's value. Information asymmetry has
been linked to increased cost of capitals and intangible asset-
Intensive companies. In this context, we refer to research that demonstrates a
negative correlation between disclosure of information and the cost of
capital. Based on our findings, we have put forward suggestions for possible
managerial actions. We assume that a firm may be able to manage its cost of
capital by means of intangible assets. Optimizing and leveraging the
potential of intangible assets may result in higher and less volatile cash
flows and reduced business risk. As part of managing the cost of capital, we
also see managerial implications by means of enhanced disclosure and
transparency that could result in lower information asymmetry and perceived
risk.
 BIBLIOGRAPHY

1. Modern Portfolio Theory & Investment Analysis

By Edwin J. Elton & Martin J. Gruber
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Published by Bangladesh Bank
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Published by DSE
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