Letter of Transmital:

27th August 2018

Dr. Mahmood Osman Imam
Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Subject: Submission of the term paper titled “Measuring Several Aspects of Corporate
Finance on Textile Industry of DSE.”
Dear Sir,
It is my recognition to inform you that I took a great pleasure in preparing the report on
Corporate Finance. I have collected the annual reports of Saiham Textile Mills Ltd. &
Sonargaon Textiles Ltd. for preparing this report. During preparing the report, I have gained
lots of experience contrary to the limited theoretical knowledge on various aspects.
Your crafted guidance made it possible for me to prepare this report successfully.

Yours Faithfully,

__________________________
Md. Mohi Uddin
ID# 31006

1
Acknowledgement:
First of all, I am very thankful to Allah who is most beneficent and merciful. The completion
of this term paper work could not have been possible without the participation and assistance
of so many people whose names may not all be enumerated. Their contributions are sincerely
appreciated and gratefully acknowledged. However, I would like to express my deep
appreciation and indebtedness particularly to the following:

I would like to thank our course teacher Dr. Mahmood Osman Imam, Professor, Department
of Finance, University of Dhaka for providing us proper guidelines and basic idea to prepare
this report. Finance is a very essential part of our life and we are grateful to him for assigning
to us such a practical report that boosted our knowledge from different aspects.

I would also like to thank to my classmates & relatives, friends and others who in one way or
another shared their support either morally, financially or physically. Nevertheless, my
parents love and confidence in me have always been encouraging in many ways to prepare
this report.

Thanks to all from the core of my heart.

__________________________
Md. Mohi Uddin
ID# 31006

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Executive Summary:

In finance, analysis of the Annual Report of a listed Company provides better opportunity to
extract the real position and financial condition of the concern the study. Annual Report
provides the information about financial statements and other non-financial activities of the
concern which helps us to know about how much the concern is making profit actually and
how much the concern in constructing capital structure of the company.

Capital structure and Dividend Policy are very important for the firm particularly textile
sector. Because they have an impact on long-term corporate profits, firm’s valuation and
capital budgeting decisions. Capital structure and Dividend Policy are influenced by many
factors like size, growth, profitability and specific industry plays its role in capital structure
decisions. Textile industry is the most important segment of Bangladesh, which contributes
main part in country’s exports. Performance of this segment has a powerful influence on state
economy. The study tries to examine the determinants of capital structure and Dividend
Policy of Saiham Textile Mills Ltd. & Sonargaon Textiles Ltd. in a systematic way. Study
initiates the major determinants of Capital structure, Dividend Policy and their different
aspects. We also tried to evaluate the financial performance of the companies for the last five
years based on the Annual Report of the companies (2013 to 2017). Based on these published
reports we tried to find out various financial parameters to find out the financial status of the
companies.

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Table of Contents

No Description Page no
1 Chapter 1: Introduction (5-6)
2 1.1 Preface 5
3 1.2 Objectives 5
4 1.3 Data Source 5
5 1.4 Time Frame 5
6 1.5 Scope of Report 5
7 1.6 Limitation 6
8 Chapter 2: Industry, Company Goal & Corporate Social (7-13)
Responsibility Analysis.
9 2. 1 Textile Industry of Bangladesh 7
10 2.2 Porter’s Five Forces Analysis on Textile Industry: 7
11 2.3 Profile of The Company 10
12 2.4 Corporate Goal 11
13 2.5 Analysis of Goal Strategies 12
14 2.6 Corporate Social Responsibility 13
15 2.7 Composition of the Shareholders of the firm 13
16 2.8 Ownership Structure 14
17 Chapter 3: Cost of Capital 15-17
18 Chapter 4: Analysis of Capital Structure 18
19 4.1 Analysis of Capital Structure in Stock Concept 18
20 4.2 Analysis of Capital Structure in Flow Concept 20
21 4.3 Factor Affecting Capital Structure (Checklist) 22
22 Chapter 5 : Dividend Policy (31-37)
23 5.1 Dividend Policy 31
24 5.2 Types of dividends 31
25 5.3 Different Dividend Policies 31
26 5.4 Dividend Policy Sonargaon Textiles 34
27 5.5 Dividend Policy Saiham Textiles 35
28 Chapter 6 : Conclusion 38
29 Chapter 7 : References 39

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1.1 Preface:
To analyze different aspects of capital structure and Dividend Policy of a company, industry
& financial analysis are done to evaluate the condition of the company. I have taken two
companies from textile sector, Saiham Textile Mills Ltd. & Sonargaon Textils Ltd. There
after the capital structure and Dividend Policy aforesaid companies are analyzed and
evaluated to employ the bookish knowledge in empirical arena.

Annual Report is of utmost importance for determining the company’s growth and
profitability. This article is intended to analyze the financial position of Saiham Textile Mills
Ltd. & Sonargaon Textils Ltd. The financial performance of the firms, corporate goal and
pecking order and agency theory perspectives are reviewed in order to formulate sizeable
levels of long-term, short-term and total debt, the valuation of the firm and liquidity, financial
condition of last five years, capital structure. Financial data were collected from Dhaka Stock
Exchange Library. Data were up to 2017 from 2013.

1.2 Objectives:

The specific objectives are as follows:

 To analyze the capital structure pattern of the aforesaid companies.
 To evaluate the divided policy and dividend pattern of the companies.
 To analyze the corporate goal/objectives & CSR activities of the selected Companies.

1.3 Data Source:

This report is mostly based secondary data, which were available on the web. My main
source of secondary data was the DSE (web) and company’s web, Lankabd.com and
stockbangladesh.com.

1.4 Methodology:
Methodology is the way to come out with solution systematically. This paper has been
completed by following systematic and sequential steps. The study was based on financial
data and information collected from the ‘Annual Reports’ of Saiham Textile Mills Ltd. &
Sonargaon Textils Ltd. The disclosure of information is inadequate. In many cases, we found
that further explanation or elaboration was necessary to understand financial data. In those

5
cases, we had to make some assumptions to calculate the different financial ratios and
multiples.
1.5 Time Frame
This report is based on 5 years data for Saiham Textile Mills Ltd. (June 30, 2013 to June 30,
2017) and for Sonargaon Textils Ltd. (December 2013 to December 2017).

1.5 Scope of Report

Our focus of this report is to analyze:
 Cost of Capital
 Capital Structure
 Dividend Policy
 Corporate Goal

1.6 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, Company Goal & Corporate Social Responsibility Analysis

2. 1 Textile Industry of Bangladesh:

Bangladesh is a developing country that is classified as a Next Eleven emerging market and
one of the Frontier Five. According to recent opinion, Bangladesh has the second most pro-
capitalist population in developing world. Between 2005 and 2020, Bangladesh averaged a
GDP growth rate of around 6%. The year under review was much less politically active than
the previous year. Most macroeconomic indicators, such as GDP growth, inflation, exchange
rate and foreign exchange reserve were favorable. Sustained growth was also prevailed in
exports and remittance inflows that led to the phenomenal rise in foreign exchange reserve.
The economy is increasingly lead by export-oriented industrialization.

Bangladesh textile industry is the second largest in the world. Textile Industry has to look
forward for robust growth in the years ahead taking advantage of the availability of raw
materials, competent technical, managerial personnel and vast domestic market besides
export potential. Bangladesh Textile Mills Association is trying to attract large investment for
the development and growth of textile industry as the industry has vast potential for
employment generation. We therefore need to take stock of these situations and chalk out a
plan of action for the development and growth of our company in the years ahead.

Textile industry is a very important industry in our country providing employment over 5.0
Million Jobs of which 80% are woman, mostly come from rural areas. This the industry helps
in the country social development, women empowerment and poverty alleviation. It also
plays a crucial role to promote the development of other key sectors of the economy like
banking, insurance, shipping, hotel, tourism, road transportation, railway container services,
etc. Around 40% of the total demand of Woven Fabrics for Export oriented RMG is supplied
by the local weaving mills, 90% of the domestic fabrics and 100% yarn requirements of Knit
Garments are met by Primary Textile Sector (PTS). The industry has developed rapidly with
significant growth. It has to grow continuously. Hence, long-term approach for its
development is the need of the hour. Textile industry is the largest exporting industry in
Bangladesh. Over 81% of the export earning comes from Textile & Textile related products.
The last 20 years witnessed unparalleled growth in this sector. It has attained a high profile in

7
terms of foreign exchange earnings, exports, industrialization and contribution to GDP within
a short span of time. It contributes 13% to GDP. Saiham has track record to upkeep with
technology investment, which has proven them as trendsetters. Also due to its superior
quality and competitive pricing, Saiham Textile Mills Limited has been able to capture a
dominant position in the market. The Company is continuously working on product
development through research and development being the market leader with the best quality
product, operational efficiency, organized marketing and distribution network.

2.2 Porter’s Five Forces Analysis on Textile Industry:

1: Rivalry among competing Sellers:

Bangladesh Textile Mills Association (BTMA) is the national trade organization of Primary
Textile Industry i.e. Yarn Manufacturing, Fabric Manufacturing and Dyeing-Printing-
Finishing mills of the country under private sector. BTMA is registered in 1983. Currently
the number of Membership of BTMA is 1306 under:

1. Yarn Manufacturing Member Mills = 373

2. Fabric Manufacturer Member Mills = 703

3. Dyeing-Printing-Finishing Member Mills = 230

Over 4.00 billion EURO has been invested in these mills and about 4.00 million people are
currently employed. BTMA fulfills:

 100 % of the domestic fabric and yarn requirement.

 50% of the cotton oven fabric requirement of export oriented garments sub-sector.

 Over 95% of the yarn and fabric requirement of export oriented knitwear sub-sector.

Bangladesh is the 6th largest apparel and textile supplier in the US & EU market. It is
shaping itself as a potential market player by providing the most quality with the cheapest
price possible. Whilst the market is controlled by the bigger players like China and India, the
role of Bangladesh is still important because of its cheap labor. It has been facing tremendous
growth even after the alleviation of the quota from the US market. This is due close customer
relationship and quality production. Bangladesh has this advantage against its rivals.

8
Several firms have invested heavily in sophisticated manufacturing technology such as
Square textiles, Bextex etc. The industry has numerous firms and the largest have less than 10
market share. Therefore, the rivalry in this sector is stronger.

Textiles are not branded products. The volume and quality of textile industry’s output are
unable to fully meet the demand of the garments industry. Most of Bangladesh garments
exports are made from imported textiles. But recently tariffs on some imported textiles have
been implemented. Therefore, it helps local textile industry to grow and compete.

Weapons for battling rivals:

 Lower Prices: This industry need to keep price lower by using low cost
labor force to attract foreign buyers.

 Higher quality: The products’ quality must be high and better to gain
competitive edge.

 Wider selection of products: To get competitive advantage, there should

be wider range of products. Suppose Bextex has wide collections of
products - Yarn (Count, Fiber, CVC, Tc etc), Fabric (Poplins, Stripes,
Wrinkle Free etc.), Knit (Jersey, polo etc), Denim (Chambray, Denim blue
etc) and Unique Wrinkle-Free Product (Cortek-2000, Cotra DP 3.5+).

 Stronger capabilities to provide buyers with custom-made products:

By providing customized, innovative, well-designed products with higher
quality, a firm can build long-term relationship with its customers,
especially foreign customers.

2. Threat of New Entrants:

The greatest advantage that Bangladesh has right now is its cheap labor. Therefore,
newcomers can expect to earn attractive profits. Thus, it allows potential entrants to pose a
threat to its growth.

But one factor is important that, due to the unstable political scenario in recent years,
investors and foreign firms are reluctant in investing in Bangladesh. Using this opportunity,
countries like Sri Lanka and other small Latin American countries can steal away potential

9
buyers from Bangladesh. Also because of power and gas crisis foreign investors are reluctant
in investing here. Moreover, labor strikes also a vital factor.

Therefore, as being a cheap labor country Bangladesh is attractive for investment but because
of some other factors mentioned earlier, many firms and investors are now hesitating to
invest in Bangladesh.

3. Threat of substitute products:

Traditional fabric materials (such as cotton and wool) have recently been threatened by the
development of alternative chemical- based materials (such as nylon and rayon). Although
many textile companies have begun manufacturing with this new materials as well.

On a country perspective, Bangladesh, as a substitute, plays both the roles of an affected and
an opportunist. China and India are growing their customer base though their price is than
Bangladesh. This is due to poor country branding, and less power to influence customers.
Due to these reasons, customers sometimes prefer China or India to Bangladesh.

4. Bargaining power of Supplier:

Most raw materials are widely available but Bangladesh has very few input or raw materials
of its own. Most of them are imported. Although this leads to a problem by increasing the
supplier power, Bangladesh still manages to acquire the inputs at world price from its
suppliers.

Bangladesh has a good reputation in terms of timely payment to the suppliers. This reputation
is helping create a longer-term relationship with the suppliers (foreign) and is giving the local
firms initiative to step into the supply chain.

Bangladesh domestic suppliers power is increasing in a slow but steady manner as more and
more local companies are stepping up to the task. They are creating an integrated system of
supply channel management by which the manufacturer workload is reduced. Moreover, the
favorable attitude of the government is helping this growth. The back-to-back LC process
was approved by the government to facilitate the growth of the industry.

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5. Bargaining power of Buyer:

There are numerous textile customers. But textile costs are usually a large percentage of their
final products total costs. Many buyers shop around the world for the lowest textile prices.

Local companies like Bextex, Square Textile are giving Bangladesh a look of the best
outsourcing place in the world. Many of the reputed companies, brands are outsourcing their
products in Bangladesh as they get the most quality in the cheapest price possible. As an
example- Bextex Partners with Major Retailers & International Brands such as VanHeusen,
CK, Springfield, Dkny, Zara, JCPenny, Levis’ etc.

Bangladesh has a good reputation for highest quality textile products with lowest possible
cost. Therefore, it attracts foreign buyers. Bangladesh is providing a large space of choice to
the provider in terms of quality and cost. However, Bangladeshi manufacturers realize that
the buyer possess more power than they do, because China lead and India march to the top
keep the Bangladeshi manufacturers below them.

Due to high switching opportunities for the customers, Bangladesh has to perform or allow
the customers to win in many cases. Bangladesh plans to use cost-effectiveness to present
itself as the best option to the buyers.

At the end, it can be concluded that Bangladesh is growing as a major player in the textile
and apparel industry globally. Many countries are planning to use Bangladesh as a hub and
buy the service to export under its label. That gives Bangladesh a comparative advantage
against the buyers of its services.

2.3 Profile of the Company

Saiham Textile Mills Limited

Saiham Saiham Textile Mills Limited was incorporated on March 27, 1981 as a Public
Limited Company vide incorporation no. C-8864/703. The Authorized capital of the
company is Tk. 1,500 million and paid up capital is Tk. 862.5 million the company was listed
with the Dhaka Stock Exchange Ltd. in the month of August 1988 and Chittagong Stock
Exchange Ltd. in the month of March 1999. The company was formerly known as Saiham
Spinning Mills Limited and changed its name to Saiham Cotton Mills Ltd. in April 2003.

11
Saiham Cotton Mills Ltd. was incorporated in 2002 and is based in Madhabpur, Bangladesh.
Saiham Cotton Mills Ltd. is a subsidiary of Saiham Group of Industries.

Sonargaon Textiles (PLC)

Sonargaon Textiles Ltd. (STL), established in the year 1985, is basically a spinning project in
textile sector. It is the biggest textile concern in entire South Bengal. STL is 100% export
oriented spinning industry. It has generated employment opportunity for more than 2,000
workers including the officials of different desks.

It is a public limited company listed with Dhaka & Chittagong Stock Exchange in the year
1995. It has been offering dividend regularly. It produces cotton yarn of different counts for
knitting & weaving. It financed by different banks (both Nationalized & Private).

Target and Peer Firm at a glance:

Name of the Company Saiham Textile Sonargaon Textile

Estabished 1981 1985

Listed with DSE and CSE 1988, 1999 1995, 1995

Authorized Capital Tk. 1,500.00 Million Tk. 500 Million

Paid up Capital (July 2018) Tk. 905.63 Million Tk. 264.67 Million

Sales Revenue (FY 2016-17) Tk.1639.00 Million Tk. 447.00 Million

2.4 Corporate Goal

Saiham Textile Mills Limited

Their goal is to create added value to the common wealth and to benefit the society. It means
to improve the wellbeing of our valued equity holders, investors, employees and members of
the society without interrupting or disordering the universal socio-ecological-economic
position and the process of human civilization leading to peaceful co-existence of all the
living beings.

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Sonargaon Textiles (PLC)

They have a singular vision toward a significant development of different scheme at a target
of increased volume of production and improved market share including more employment
opportunities in industrial establishment and equally the transaction in international business
on a regular basis.

2.5 Analysis of Goal Strategies

Saiham Textile Mills Limited has also well-defined corporate goals which is they are
concerned wellbeing of equity holders, investors, employees and members of the society.
The objective of Sonargaon Textiles is very well defined There are some distinctive
objectives related to employment opportunities. However, they are very strict to increased
volume of production and improved market share.

2.6 Corporate Social Responsibility

By analyzing, the annual report there is no information found about any corporate social
responsibility of the Saiham Textile Mills Limited & Sonargaon Textiles Limited.
My opinion regarding CSR activities is that it should have well designed and managed CSR
policy in order to secure loyalty and trust of various stakeholder.

2.7 Composition of the Shareholders of the firm

Saiham Textile
Name of the Shareholders Portions as on July 2017
Director 32.93%

General Public 33.17%

Financial Institutions 33.00%

Sonargaon Textile
Name of the Shareholders Portions as on July 2017
Director 44.45%
General Public 41.45%
Financial Institutions 13.66%
Govt. 0.34%

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2.8 Ownership Structure

Capital structure of the firm sometimes influenced by the sponsor shareholder of the
company. To detect this effect we will see the ownership structure of Saiham Textiles &
Sonargaon textile.

Fig : Share Distribution of Saiham & Sonargaon textile

We can see that, in case of Saiham textile the percentage of director share is less than the
percentage of Sonargaon textile.

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 Chapter -3
Cost of capital
The Capital Asset Pricing Model

Pronounced as though it were spelled "cap-m", this model was originally developed in 1952
by Harry Markowitz and fine-tuned over a decade later by others, including William Sharpe.
The capital asset pricing model (CAPM) describes the relationship between risk and expected
return, and it serves as a model for the pricing of risky securities. 

CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free
security plus a risk premium. If this expected return does not meet or beat our required return,
the investment should not be undertaken. 

Formula:

Cost of Equity (RE):

RE = RF + β (RM-RF)

Calculation of Beta:

The covariance between average market index return and average return have been
calculated, and also the variance of the market index return. Then divided covariance by
variance. The calculation of Beta has been given in Appendix.

Beta Adjustment:

Adjusted Beta= (.33*historical beta+.67*1)

Cost of Debt:

The cost of debt is the effective rate that a company pays on its current borrowed funds from
financial institutions and other resources. These cost of debt can be calculated in pre-tax as
well as after-tax cost of debt.

Return on Equity (CAPM) = RF + β (RM-RF)

In capital budgeting, hurdle rate is the minimum rate that a company expects to earn
when investing in a project. Hence, the hurdle rate is also referred to as the company's
required rate of return or target rate. In order for a project to be accepted, its internal rate of
return must equal or exceed the hurdle rate. In capital budgeting, projects are evaluated either

15
by discounting future cash flows to the present by the hurdle rate, so as to ascertain the net
present value of the project, or by computing the internal rate of return (IRR) on the project
and comparing this to the hurdle rate. If the IRR exceeds the hurdle rate, the project would
most likely go ahead.

Weighted Average Cost of Capital (WACC) is the average rate of return a company
expects to compensate all its different investors. The weights are the fraction of each
financing source in the company's target capital structure. A company is typically financed
using a combination of debt (bonds) and equity (stocks). Because a company may receive
more funding from one source than another, we calculate a weighted average to find out how
expensive it is for a company to raise the funds needed to buy buildings, equipment, and
inventory.

Here is the basic formula for weighted average cost of capital:

WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]

E = market value of the firm's equity

D = Market value of the company's debt

V = E + D = total market value of the firm’s financing (equity and debt)

Re = Cost of Equity

Rd = Cost of Debt

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = Corporate Tax Rate

Risk Free Rate: Average risk free rate of last five years 91 days T-bill rate is taken.

Market Return: Market return is calculated from market index return

Saiham Sonargaon
Textile Textiles
Covariance 2.03765E-05 1.70114E-05
Variance of Market Return 4.20392E-05 4.20392E-05
Beta 0.484701291 0.404654937
Adjusted Beta 0.833252543 0.805796643
Market Return 0.000774915 0.000774915
Market Return - Yearly 0.278969383 0.278969383
Re 0.24 0.23

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 Saiham Textile Sonargaon Textile
Risk free rate 0.0500 0.0500
Risk premium 0.23 0.23
Debt 678.00 581.26
Equity 2,386.50 776.47
Weight of debt 0.22 0.43
Weight of Equity 0.78 0.57
Interest 74.07 49.07
Rd 0.1093 0.0844
Rd after tax 0.0735 0.0960
Re 0.24 0.23
Tax rate 32.77% -13.73%
WACC 20.38% 17.52%
Interpretation:
If we look at the capital structure of Saiham Textile limited we will see that the company is
using very much less debt compare to its equity. The debt is only 22.0% compare to 78.00%
equity. Here the risk premium is 0.23, market yearly return is 0.27896 and debt and equity is
678.0 million & 2386.5 million respectively in 2017. Here I calculate the WACC of 2017 by
using cost of debt, cost of equity, weight of debt and weight of equity. So the WACC of 2017
is 20.38%.
If we look at the capital structure of Sonargaon Textile Limited, we will see that the company
is using 43% debt & 57.0% equity. So, This firm is levered compared to Saiham Textile.
Here the risk premium is 0.23, market yearly return is 0.27896 and debt and equity is 581.26
million & 776.47 million respectively in 2017. Here I calculate the WACC of 2017 by using
cost of debt, cost of equity, weight of debt and weight of equity. WACC of 2017 is 17.52%

Chapter -4
Analysis of Capital Structure in Stock Concept
1. Debt to Total Asset Ratio/Debt Ratio

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A direct measure of debt is a debt ratio. Debt ratios provide direct information on the
financial leverage of an enterprise. Debt ratios measure how many of the firm’s assets are
financed by debt. The higher the debt ratio, the higher the degree of financial leverage
(amount of debt) and the higher the risk.

  2013 2014 2015 2016 2017 Avg.

Saiham 5.99% 4.12% 26.14% 17.67% 16.79% 14.14%
Sonargaon 38.76% 42.87% 50.49% 53.62% 56.93% 48.53%

100

80

60 East

40 West
North
20

0
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

Interpretation:

Debt ratio of Saiham Textile Mills Ltd. is much less (average 14.14 %) compare to
Sonargaon Textiles Ltd. (average 48.5%), which means that Sonargaon Textiles Ltd. is using

18
higher external financing like debt financing and bear higher financial risk than Saiham
Textile. In 2015, Saiham Textile has taken an overseas loan from HSBC of 635.7 million taka
to reduce the cost of fund, that is why debt ratio was increased to 26.14% from 4.12% in
2014.

2. Debt Equity Ratio:

It is a financial ratio indicating the relative proportion of shareholders' equity and debt used to
finance a company's assets. Closely related to leveraging, the ratio is also known as Risk,
Gearing or Leverage. The two components are often taken from the firm's balance sheet or
statement of financial position (so-called book value), but the ratio may also be calculated
using market values for both, if the company's debt and equity are publicly traded, or using a
combination of book value for debt and market value for equity financially.
A high debt/equity ratio generally means that a company has been aggressive in financing its
growth with debt. This can result in volatile earnings, which causes additional interest
expense.

  2013 2014 2015 2016 2017 Avg.

Saiham 7.07% 6.75% 46.68% 32.65% 28.41% 24.31%
Sonargaon 78.69% 79.29% 86.84% 89.60% 74.86% 81.86%

Fig: Trend of Debt to Equity Ratio

Interpretation:

Target Company Saiham Textile Mills Ltd. has maintained low level of debt to equity ratio
(avg. 24.31%) which means that the majority of assets are financed through equity financing

19
and earnings are more stable compare to peer company Sonargaon Textiles Ltd., having
significantly higher D/E ratio (avg. 81%). In 2015, Saiham Textile has taken a overseas loan
from HSBC of 635.7 million taka to reduce the cost of fund, that’s why D/E ratio was
increased to 46.68% from 6.75% in 2014.However, the D/E ratio in FY 2017 for both Saiham
Textiles & Sonargaon Textiles Ltd. has been shown a decreasing trend

3.2 Analysis of Capital Structure in Flow Concept

1. Debt Service Coverage Ratio
The debt service coverage ratio (DSCR) is the ratio of cash available for debt servicing to
interest, principal and lease payments. It is a popular benchmark used in the measurement of
an entity's (person or corporation) ability to produce enough cash to cover its debt (including
lease) payments. The higher this ratio is, the easier it is to obtain a loan.

Description Debt Service Coverage Ratio

2013 2014 2015 2016 2017 Avg.
Saiham 5.89 8.81 1.40 2.01 0.51 3.72

Sonargaon 0.30 0.36 0.11 0.18 0.42 0.27

Debt service Coverage Ratio

10.00
8.81
8.00

6.00 5.89
Saiham
4.00 Sonargaon
2.01
2.00 1.40
0.36 0.11 0.18 0.51
- 0.30
2012 2013 2014 2015 2016

Fig: Trend of DSCR

Interpretation:
Debt Service Coverage Ratio over 1.0 means that the company generates sufficient cash flow
to pay its debt obligations. Debt Service Coverage Ratio below 1.0 indicates that there is not

20
enough cash flow to cover interest & short term loan payments. In this context, Saiham
Textile Mills Ltd. is in a better position than Sonargaon having an average DSCR of 3.72 to
meet the debt obligation by generating enough cash flow from the earning before tax.
However, for Saiham Textile DSCR has been reduced significantly from 8.81 in 2014 to 0.51
in 2017 due to high short-term borrowings on 2015 & 2017 due to manage the working
capital of new Melange unit.

2. 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. 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. CFCR = OCF / (Interest expense + Principal
payment) / (1-Tc)
Description Cash Flow Coverage Ratio
2013 2014 2015 2016 2017 Avg.
Saiham Textile Mills Ltd. 4.40 3.63 0.26 1.35 (0.29) 1.87
Sonargaon Textils Ltd. (0.01) 0.32 0.22 0.23 0.17 0.19

Fig: Comparison of Interest Coverage Ratio

Interpretation:
Cash Flow Coverage 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

21
operating activities. In 2015, CFCR of Saiham was reduced to 0.26 due to principal payment
of debt of Mélange unit. & in 2017 it is negative as OCF is negative (payment to supplier is
higher than payment received from customer). For Sonargaon CFCR is very low due to high
debt & interest payment. So, Saiham Textile Mills Ltd.is in a better position to meet its
financial obligations through the cash generated by operating activities.
3. Interest Coverage Ratio

The Times Interest Earned Ratio (TIER or Interest Coverage Ratio) measures the ability of
the enterprise to meet its financial obligations (interest payments on debt that come due).
Commonly, the lower the Times Interest Earned Ratio the higher the degree of financial
leverage (amount of debt) and the higher the risk.

The formula for the Times Interest Earned Ratio is as follows:

Times Interest Earned Ratio =EBIT/interest charges

2013 2014 2015 2016 2017 Avg.

Saiham Textile 8.29 10.03 5.66 2.55 2.54 5.82
Sonargaon Textile 1.11 0.82 0.33 0.45 0.68 0.68

Fig: Comparison of Interest Coverage Ratio

Interpretation:

It is generally advisable that the Times Interest Earned Ratio should be between 3.0 and 5.0.
The above table shows that the average Interest Coverage Ratio of Saiham Textile Mills Ltd.

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is about 5.8 which means the company’s operating profit is solvent enough to pay the interest
charges. On the other hand, the average Interest Coverage Ratio of Sonargaon Textiles Ltd. is
less than 1 which means this company can’t fulfil the obligation the o ligation of interest
expense from its operating profit, the company is at a risky condition. However, due to less
earning & high interest of debt, ICR has been gradually reduced to 2.54 in 2017 from 10.03
in 2014 & still showing a decreasing trend.

3.3 Factor Affecting Capital Structure (Checklist)

1. Tangibility:
Tangibility is defined as the ratio of tangible assets to total assets. The firm with higher
liquidation value will have more debt. On the contrary, intangible assets such as good will
can lose market value rapidly in the event of financial distress or bankruptcy. Formally, the
higher the tangibility higher the debt equity ratio, other things being equal.

  Tangibility Ratio
  2013 2014 2015 2016 2017 Avg.
33% 21% 49% 46% 48% 39%
Saiham Textile
52% 52% 51% 50% 54% 52%
Sonargaon Textils

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Interpretation:
We can find from the graph that, tangibility of Saiham Textile Mills Ltd. (Average 39%) is
lower than Sonargaon Textils Ltd (Average 52%), which means Debt to Equity ratio of
Soanargaon Textiles Ltd is higher. However, for Saiham Textile, tangibily is showing an
increasing trend over last 5 years. In, 2015 tangibility increased significantly due to
establishment of new Mélange unit. However, for Soanragon the tangibility showing a
decreasing trend over the as no expansion of on plant or equipment has been observed.

2. Growth rate:
Growth rate is a measure of how much a firm can grow without borrowing more money.
More stable and mature firms typically need less debt to finance growth as their revenues are
stable and proven. Growth rate is computed as follow:
Growth rate= Retention rate * Return on equity

Growth Rate
2012 2013 2014 2015 2016 Avg.
Saiham Textile Mills Ltd. -0.12% 3.08% 4.75% 3.31% 1.59% 2.52%

Sonargaon Textils Ltd. 0.78% -2.40% -6.82% -7.34% -2.28% -3.61%

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 Fig: Comparison of Growth rate
Interpretation:
Saiham Textile Mills Ltd. has an average growth rate of 2.52 % which means the company is
improving over the year, however since 2016 growth rate showing a decreasing trend due to
price hike of raw materials, spare parts etc. On the other hand, Sonargaon Textils Ltd. has a
negative growth rate that means this company is experiencing decline in sales and earnings
and that’s why Sonargaon Textile Ltd. is getting highly debt burdened.

3. Sales Stability:

Saiham Textiles
2013 2014 2015 2016 2017
Sales 706.98 791.59 1,584.43 1,741.46 1,639.90
3 years moving average 1,027.67 1,372.49 1,655.27
SD Sales 484.03 509.17 79.64
CV of Sales 0.47 0.37 0.05

Sonargaon Textiles
2013 2014 2015 2016 2017
Sales 821.57 866.89 788.02 711.74 447.64
3 years moving average 825.50 788.88 649.13
SD Sales 39.58 77.58 178.62
CV of Sales 0.05 0.10 0.28

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Interpretation:
CV of sales Saiham Textile is showing a decreasing trend whether Sonargaon Textile is
showing an increasing trend, which means sales stability is getting for Saiham Textile. Since
2015 Saiham Textiles sales has been increased significantly due to the introduction of New
Melanage unit. That’s why CV in 2015 & 2016 is little bit high, however in 2017 CV of sales
is only 0.05, which means sales are getting stable. On the other hand for Sonargaon textiles
sales are reducing since 2014 & CV in 2017 is 0.28, sales are getting unstable. Probable
reason might be the price hike of raw cotton & spare parts.

4. Profitability analysis:
i) Basic Earning Power ratio (BEP):
Basic Earning Power ratio (BEP) is a profitability ratio which determines how effectively a
firm uses its assets to generate income. BEP ratio is simply calculated by EBIT divided by
total assets. The higher the BEP ratio, the more effective a company is at generating income
from its assets. BEP disregards different tax situations and degrees of financial leverage while
still providing an idea of how good a company is at using its assets to generate income.

Basic Earnings Power Ratio

2013 2014 2015 2016 2017 Avg.
Saiham Textile Mills Ltd. 5.86% 6.19% 9.97% 4.57% 5.60% 6.44%

Sonargaon Textils Ltd. 8.05% 7.22% 2.56% 4.56% 3.53% 5.19%

Fig: Comparison of BEP

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Interpretation:
From the above figure and table, we find that BEP of target firm Saiham Textile Mills Ltd is
higher than the peer firm Sonargaon textile Ltd which means Saiham Textile Mills Ltd. is
more effective at generating income from its assets. In 2015 Saiham Textile’s BEP is 9.97 %,
this due to high EBIT earned by the company for the operation of new Melange unit. After
that BEP has become normal like earlier (Avg. 6.0 %). For Sonargaon Textile BEP is
showing a decreasing trend due to decreasing EBIT over the years.

ii) Return on Net Operating Asset (RNOA):

The return on (RONA) helps the investors to determine the percentage net operating income
the company is generating from the operating assets. This ratio tells how effectively and
efficiently the company is using its operating assets to generate earnings.
It is calculated by RNOA = Net Operating Profit after Taxes / Net Operating Assets

Return on Net Operating Asset (RNOA

2013 2014 2015 2016 2017 Avg.
Saiham Textile Mills 7.85% 5.83% 6.65% 3.51% 3.41% 5.45%
Ltd.

Sonargaon Textils Ltd. 3.82% 6.04% 3.74% 5.31% 4.07% 4.60%

Fig: Comparison of RNOA

Interpretation:
From the above figure and table, we find that average RNOA of target firm Saiham Textile
Mills Ltd is higher than the peer firm Sonargaon textile Ltd which means Saiham Textile
Mills Ltd. is more effective at generating operating income after tax from its operating assets.
However, in 2017 RNOA of Sonargaon textile is little bit higher.

5. Uncertainty of Income:

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Firms with uncertain operating income have a high probability of experiencing financial
distress, even without debt. In this case, lower the coefficient of Variance of EBIT lower the
uncertainty.
Saiham Textile Mills Ltd.
Year 2013 2014 2015 2016 2017
EBIT 143.90 225.79 320.73 167.53 188.35
Moving average EBIT( 3 years) 230.14 238.02 225.54
S D of EBIT 88.49 77.33 83.10
Coefficient of Variation 0.38 0.32 0.37

Sonargaon Textils Ltd.

Year 2013 2014 2015 2016 2017
EBIT 95.27 80.37 26.74 45.73 33.50
Moving average EBIT ( 3 years) 67.46 50.95 35.32
S D of EBIT 36.04 27.19 9.62
Coefficient of Variation 0.53 0.53 0.27

Uncertainty of Income
Year 2014 2015 2016 2017 Avg.
CV of EBIT Saiham - 0.38 0.32 0.37 0.22
CV of EBIT of Sonargaon - 0.53 0.53 0.27 0.27

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 Fig: Comparison of uncertainty of income
Interpretation:
In this case, Average Co-Variance of Saiham Textile Mills Ltd. is lower (.022) than the Co-
Variance of Sonargaon Textils Ltd. (0.27), which indicates lower uncertainty of earnings for
Saiham Textile Mills Ltd.

6. Financial Slack:
Financial slack is the habit of firms to keep a reserve of cash and marketable securities. In
other words, firms keep a certain amount of unused debt capacity. This idea adds credibility
to the pecking order hypothesis.

Financial Slack
Description 2013 2014 2015 2016 2017 Avg.

Saiham 45.91% 23.38% 20.40% 19.61% 10.46% 23.95%

Sonargaon 3.00% 0.22% 0.62% 1.63% 0.04% 1.10%

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 Fig: Comparison of Financial Slack

Interpretation: If we look into the financial slack of the two comparing firm, we can see that
Saiham Textile Mills Ltd. is in a far better financial position than Sonargaon textile to
undertake any new project. The average financial slack of prime textile (24 %) is more than
the Sonargaon textile So Saiham Textile Mills Ltd. Requires less debt. However, for Saiham
textile financial slack is showing a decreasing tend due to reduction of available cash and the
increasing of operating asset. Moreover, for Sonargaon average financial slack is only 1.10%
due to very low cash & equivalent.

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 5.0 Dividend Policy:
The term dividend usually refers to a cash distribution of earnings, decided by the board of
directors, to its shareholders. Dividends can be issued as cash payments, as shares of stock or
other property. A company's net profits can be allocated to shareholders via a dividend, or
kept within the company as retained earnings. A company may also choose to use net profits
to repurchase their own shares in the open markets. Dividend payments must be approved by
the shareholders. Dividend policies shape the attitude of the investors and the financial
market in general towards the concerned company. The policies are decided according to the
current and future financial positions of the company. The dividend policy acts as a signal for
predicting the future earning possibilities. The dividend policies are directed towards
attracting investors to their company.

5.1 Types of dividends:

1. Cash Dividends: These Dividends are paid in cash, usually quarterly.
2. Companies can declare both regular and “extra” dividends. Regular dividends usually
remain unchanged in the future, but “extraordinary” or “special” dividends are unlikely to be
repeated.
3. Stock dividend: Shareholders receive new stock in the corporation as a form of a dividend.
Like a “stock split”, the number of shares increases, but no cash changes hands.

5.2 Different Dividend Policy:

The term dividend policy refers to the policy concerning quantum of profits to be distributed
as dividend. Many theories have tried to provide rational explanations for why firms dis-
tribute dividends and why investors like them. MM provided their irrelevance theory of
dividend policy; this theory is based on the assumptions of perfect markets. They concluded
that dividend policy has no effect on either the price of firm’s stock or its cost of capital.
Research in the area of dividend policy has been concerned with relaxing the assumptions of
MM model. Bird-in-the-hand theorem suggests that the relationship between dividend policy
and the firm’s value can be explained by investors preference for dividend payments rather
than the expected capital gains from stocks.

However, investors have different tax preferences, which lead them to prefer firms with
dividend policies that fit their tax preferences. This is what is called in the financial literature
the “clientele effect”. Furthermore, the signaling theory reveals the way that investors receive

31
the signals from firms due to the asymmetric information. According to agency theory, the
persistent distribution of cash out of the firm disciplines managers and reduces the extent of
agency costs

Dividend policy can be of four types:

a) Sticky dividend policy: Fixed rate of dividend per year. In this case, firms are reluctant to
change dividends; in particular, firms avoid cutting dividends even when earnings drop.
b) Constant pay out dividend policy: A company pays out a specific percentage of its
earnings each year as dividends, and the amount of those dividends therefore vary directly
with earnings.
c) Stable dividend policy- steady progression of dividend in line of the growth of the
company.
d) Residual dividend policy. In residual dividend policy, the amount of dividend is simply the
cash left after the firm makes desirable investments using NPV rule. In this case, the amount
of dividend is going to be highly variable and often zero. The optimal dividend policy is the
one that maximizes the company’s stock price, which leads to maximization of shareholder’s
wealth. Whether or not dividend decisions can contribute to the value of firm is a debatable
issue.

5.3 The dividends puzzle- stylized facts:

Wide agreement exists on the empirical stylized facts about dividends, which are as follows:
1. Managers smoothen dividend.
2. Managers are concerned with changes in dividend; changes in dividend convey
information to the market place.
3. Managers increase the dividend only when there is increased in earnings that are
sustainable in the long run.
4. Managers cut the dividend only when they forced to cut.
Payout Ratio:
The most common type of Dividend is in the form of cash. When companies have sufficient
cash then they will give cash dividend. Stock Dividend announced when there is no sufficient
cash left in the company. Another one is Stock Split; it increases the number of shares
outstanding.

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Dividend payout ratio is the ratio of dividend per share (DPS) to Earnings per share (EPS). It
is a measure of how much earnings a company is paying out to its shareholder as compared to
how much it is retaining for reinvestment.
Retention Ratio (RR): Retention Ratio is opposite to dividend payout ratio and is calculated
by subtracting Total Dividend from Total Earnings and then dividing the resulting amount by
Earnings.
Earnings Per Share (EPS): Earning per Share is the ratio of net profit after tax to total
number of outstanding common shares of the company. It is measure of how much earnings
company can generate for each share after payment of all the current expense. This ratio
provides an idea of the profitability of firm. Stable growth in EPS indicates solid performance
of the company. EPS serves as an indicator of company’s profitability. Two companies could
generate the same EPS number, but one could do so with less equity (investment), that
company would be more efficient at using its capital to generate income and, all other things
being equal, it would be “better” company.
5.4 Dividend Policy Saiham Textile:

Particulars 2013 2014 2015 2016 2017

DPS (Cash) 0.50 1.50 1.16 1.26 0.00
0.00 0.00 0.00 0.15 0.05
DPS (Stock)
1.46 2.12 2.81 0.92 0.85
EPS
1.00 1.00 1.00 1.00 1.15
Scaling Factor
1.46 2.12 2.81 0.92 0.98
Rescaled EPS
0.34 0.71 0.41 1.37 0.00
Dividend Pay-out Ratio
1.65 1.59 2.02 6.25 -2.87
OCF per share
-0.39 -14.23 0.94 5.77 -3.25
FCF per share
28.40 28.50 31.00 18.66 18.00
Market Price
19.40 13.46 11.03 20.18 21.22
P/E
1.76% 5.26% 3.76% 6.78% 0.00%
Dividend Yield
2,212 2,319 2,440 2,407 2,387
Book Value of Equity
2,130 2,138 2,325 1,609 1,630
Market Value of Equity
29.50 30.92 32.53 27.91 26.35
BV per share
3.38% 2.04% 5.33% -1.20% 3.33%
Sustainable Growth Rate
5.20% 8.15% 10.68% 8.79% 6.80%
Inflation Rate

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 5.88% 5.93% 6.71% 6.32% 6.01%
GDP growth rate
75.00 75.00 75.00 86.25 90.56
No. of Shares Outs

Dividend Pattern:

We know that dividend is the return of investment to the shareholders. Dividend pays crucial
role because shareholders’ investment after valuation largely depends on it in addition to
capital gain. However, the EPS vs DPS pattern of five years for Saiham Textile is presented
in the following table:

DPS vs EPS
2013 2014 2015 2016 2017 Avg.
DPS 1.50 1.20 1.50 0.00 0.50 0.94

EPS 1.46 2.12 2.81 0.92 0.85 1.63

FCFS -0.39 -14.23 0.94 5.77 -3.25 -2.23

Fig: Relation of DPS with EPS & FCFS of Saiham

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Interpretation:

From the above figure, we can say that Saiham Textiles has paid cash dividend in every year
except 2016, in 2016 Saiham Textile issued 15% stock dividend.

In 2014, EPS increased to 2.12 from 1.50. But, FCFS is highly negative due to investment of
1123 million taka on new Melange unit. However, they paid dividend DPS 1.20 taka.

In 2015, EPS increased to 2.81 & FCFS also increase to 0.94. DPS also increased a bit to
1.50.

In 2016, EPS reduced to 0.92 due to increase of cost of production (raw materials, spare
parts) & administrative cost. FCFS increased to 5.77, but they need cash to repay the loan
borrowed from Melange unit. That is why they did not pay any cash dividend, however they
issued 15% stock dividend to make the shareholder happy & keep the cash inside company.

In 2017, EPS reduced to 0.85 due reduction of sales & increase of cost of production (raw
materials, spare parts). Both OCFS & FCFS are also negative. However, company paid 5%
cash dividend & 5% stock dividend.

From the above discussion, we can say that Saiham textile follow Sticky Dividend Policy as
they have been paid dividend wither cash or stock even though their EPS is low & FCF is
negative.

5.5 Dividend Policy Sonargaon Textile:

2013 2014 2015 2016 2017

Particulars
0.00 0.00 0.00 0.00 0.00
DPS (Cash)
0.00 0.50 0.00 0.00 0.00
DPS (Stock)
0.28 -0.81 -2.15 -2.21 -0.67
EPS
1.00 1.00 1.50 1.50 1.50
Scaling Factor
0.28 -0.81 -3.23 -3.31 -1.00
Rescaled EPS
0.00 0.00 0.00 0.00 0.00
Dividend Pay-out Ratio
-0.22 2.93 3.24 3.93 2.08
OCF per share
-2.34 0.79 3.46 3.93 2.08
FCF per share
26.67 17.14 14.70 11.05 8.93
Market Price
94.53 -21.16 -6.83 -5.01 -13.35
P/E
0.00% 0.00% 0.00% 0.00% 0.00%
Dividend Yield
913 892 834 796 776
Book Value of Equity
672 454 389 292 236
Market Value of Equity

35
 36.23 33.69 31.53 30.06 29.33
BV per share
0.78% -2.35% -6.39% -6.84% -2.23%
Sustainable Growth Rate
5.20% 8.15% 10.68% 8.79% 6.80%
Inflation Rate
5.88% 5.93% 6.71% 6.32% 6.01%
GDP growth rate
25.21 26.47 26.47 26.47 26.47
No. of Shares Outs
Relation of DPS with EPS & FCFS pattern of five years for Sonargaon Textile is
presented in the following table:

DPS vs EPS
2013 2014 2015 2016 2017 Avg.
DPS 0.00 0.00 0.00 0.00 0.00 0.00

EPS 0.28 -0.81 -2.15 -2.21 -0.67 -1.11

FCFS -2.34 0.79 3.46 3.93 2.08 1.59

Fig: Relation of DPS with EPS & FCFS of Sonargaon

Interpretation:

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EPS of Sonargaon textile is negative since 2014 due to reduction in sales & increase of
interest expense. But, free cash flow of Sonargaon textile has been increasing over the years.
The reason behind this is the significant change in net working capital of the firm. Firm’s
current asset was lower than its current liability, which is a good indicator of efficient
management of short-term fund.

We know that a firm should pay dividend from its available FCF, but Sonargaon did not pay
any cash dividend for last 5 years, only gave 5% stock dividend in 2014. This is because of
high short term & long-term debt of Sonargaon textile & need free cash to pay back the loam
with interest.

From the above discussion, we can say that Sonargaon textile has been following a to some
residual dividend policy.

6.0 Conclusion
This paper is about the different Corporate finance aspects of a Textile sector of Bangladesh
specially analysis of five major areas. For doing so, I have to first analyze the selected
industry and then selected two companies to complete previously mentioned corporate
finance aspects. Firstly, I have analyzed the corporate goal and CSR activities of the
companies. Secondly, capital structures are analyzed by using stock and flow ratio. Thirdly,
capital structure and checklist of the optimal capital structures are analyzed and finally,
dividend policy and stylized factors of divided policy are analyzed. By analyzing all these, I
have found that Saiham Textile is operating with lower D/E ratio against industry average.
Therefore, it has lots of opportunity to increase D/E ratio.

From capital structure analysis, it shows that Saiham textile has better Interest Coverage
Ratio, Debt service Coverage Ratio, Cash flow coverage ratio, Growth rate, Basic Earning
Power than Sonargaon Textiles. On the other hand, Sonargaon has more leveraged capital
structure than Saiham Textile has. This might boost up their return on equity. However, the
danger of default or financial risk is higher.

Saiham Textile & Sonargaon Textile have different dividend policy. The historical data
shows Saiham Textile has been paying DPS at constant dividend policy whereas Sonargaon
Textile has a very unusual dividend policy like residual dividend policy as last 5 years they
have not paid any cash dividend.

7.0 References

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1. Ross S. A., Westerfield R. W., and Jaffe J., Corporate Finance (Seventh Edition),
McGraw-Hill/ Irwin, Singapore, 2005.
2. Annual Reports of Sonargaon textile Mills Limited from 2013 to 2017.
3. Annual Reports of Saiham Textiles Ltd. from 2013 to 2017.
4. Official Website of Dhaka Stock Exchange Ltd.
5. www.stockbangladesh.com

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