Question 1

Considering the rapid growth in demand of cement in Pakistan, and a fairly low consumption of
cement per capita relative to other emerging economies, the Board of Lucky Cement has decided to
undergo an expansion, which would be able to produce cement up to 5 million tons per annum. It is
estimated that the capital cost of establishing a cement plant is roughly US$ 90 per ton. The total
capital expenditure for Lucky Cement in this case would be the product of the capital cost per ton,
and the total production expected.

Lucky Cement would like to finance this project with a debt-equity ratio of 75-25. The Board expects
that Lucky Cement would be able to raise debt from the market at KIBOR+0.5%, where KIBOR is
equal to 8%. The Board understands that in order to calculate weighted cost of capital, it is also
essential to calculated cost of equity – in such a scenario, the Board has been advised that the Beta
for Lucky Cement is 1.3. The Board also noted that the yield on a 10-yr risk free bond is 10.98%,
while the Market Risk Premium is 6%. The corporate tax rate is 29%.

The Board expects that the project will be completed 12 months – which means revenue would start
accumulating from the first year. The Board also expects the capacity utilization of the plant to be
30% for the first year, 60% for the second year, and 90% for the next eight years. The Board expects
the useful life of the plant to be 20 years, which it feels is a safe number to use for depreciation.

On the operations front, the Board also assumes that the price per bag of cement would be PKR 750.
One bag of cement has 50 kg of cement. It also expects the price to increase by 10% every year. It
also assumes that the project has an Operating Margin of 15.45% -- which means that after adjusting
for all costs, the company is able to generate 15.45% of revenue as income, before any payment of
interest or taxes.

You have recently joined Lucky Cement’s corporate finance team as an analyst, and the Board has
asked you the following questions:

a) What will be the total capital expenditure for the project?

b) How much debt will be raised? How much equity will be required?
c) What is the weighted average cost of capital for the project?
d) What will be the Net Present Value of the project? Assume project timeline of ten years (1
year for construction + 9 years for operations)? Should Lucky Cement go ahead with the
project or not?

The cement industry has an oligopolistic structure – assume that the oligopoly is broken, and cement
imports flood the local market which will reduce the price at which Lucky Cement can sell cement

e) Assume a price per bag of PKR 400. What would be the Net Present Value of the project in
this case? Should Lucky Cement still go ahead with this?
Question 2

Gul Ahmed is one of the leading textile companies in the country. Please review the balance sheet
and income statement of Gul Ahmed
(https://gulahmed.com/wp/wp-content/uploads/2020/04/Financial_Statements_30_Jun_2020.pdf)
and answer the following questions for the years 2019 and 2020

a) What is the Receivable turnover? What is the number of receivable days?

b) What is the Inventory turnover? What is the number of inventory days?
c) What is the Payable turnover? What is the number of payable days?
d) What is the Cash Conversion Cycle?
e) How has Cash Conversion Cycle has changed over the year? What are the key factors
underlying this change?