Table of Contents

Description

Page

Letter of transmittal

Profile of GlaxoSmithKline Bangladesh Ltd

Part I: Ratio Analysis

4-15

Du-pont Analysis

15-20

Overall Comparison

21

Part II: Pro-Forma Statements

22-23

Part III: Annual rate of return, Beta

coefficient, Treasury bill rate, CAPM,
WACC.

24-25

Part IV: Free cash flow, Enterprise

Value

26

Value of the companies

27

Conclusion

28

Reference

28

Letter of Transmittal
May 4, 2015
Mr. Kamrul Huda Talukdar
Here is the group project report on Financial Statement Analysis of GlaxoSmithKline that you
have asked us to prepare as a part of requirement for our Corporate Finance course.
In presenting this report, we have contributed our level best to include all information and
explanation to make the report informative and comprehensive.
It was a very enriching and enthralling experience for us to prepare this report. Our excel
working and report writing skills have improved a lot while doing it. If further any report is
required, we will be available by any means.
Thank you Sir for believing in us and giving us this opportunity.
Sincerely,

______________

______________

Nusrat Jahan Heaba

Abdur Rouf Khan

______________
F.M.SafiulAlam

__________________
Salma Akter

______________
Ismat Zerin Sachi

1. Profile of GlaxoSmithKline Bangladesh Ltd:

GlaxoSmithKline Bangladesh Limited carries with it an enviable image and
reputation for the past 6 decades. GSK Bangladesh as a subsidiary of
GlaxoSmithKline

plc-

one

of

the

worlds

leading

research

based

pharmaceutical and healthcare companies continues to be committed to

improve the quality of human life by enabling people do more, feel better
and live longer. The organizations principle activities include secondary
manufacturing of pharmaceutical products and marketing of vaccines,
pharmaceutical healthcare products and healthcare drinks.
One

of

the

pioneering

pharmaceutical

companies

in

Bangladesh,

GlaxoSmithKline started its operation in 1967.

The most important fact of GSK is:
1. GSK is a secondary producer, principally packaging and distributing
advanced pharmaceuticals products produced by its parent company.
Consequently, local value added is low.
2. In certain novelty products such as asthma and dermatology, GSK enjoys a
clear advantage because of its parents excellent research efforts and
product development. However, a significant part of the GSKs pharmacy
portfolio

comprises

of

price-controlled

essential

products.

So,

GSK

Bangladesh does not enjoy price advantage for such products.

3. Local pharmacy companies of Bangladesh take advantage of liberal patent
regime for least developed countries (LDCs), sanctioned by the WTO, which
shall remain in place till 2016. They produce copies of patented products for
the local market. As the subsidiary of a global company, GSK does not take
advantage of this liberal patent regime and does not produce copy drugs.
4. Although GSK has trailed the overall industry in sales growth before a few
years at a stretch due to the dominance of local manufacturers, they have
managed to recover from that with large growth in the last couple of years.
3

Part I
Ratio analysis of GSK:
1. Liquidity Ratio Analysis:
1.1 Current Ratio:
Current ratio is a financial ratio that measures whether or not a company
has enough resources to pay its debt over the next business.
Year

2010

2011

2012

2013

2014

Current

2.59

1.89

1.74

1.69

1.73

Ratio

Interpretation: In 2010, GSKs current assets were 2.59 times of current

liabilities. In 2011, current ratio was 1.89. That means, their current asset
decreased and current liabilities were increased in relation to previous year,
which is not good sign indeed. However, in 2012 it fell down 1.74, and again
in 2013 it decreased slightly and became increased in 2014 at 1.73.Still, from
2010-2014, GSKs current ratio was greater than 1, which is good.
1.2 Quick Ratio/ Acid Test/ Liquid Asset Ratio:
The quick ratio/ the quick assets ratio / the acid-test ratio - is a liquidity
indicator that further refines the current ratio by measuring the amount of
the most liquid current assets there are to cover current liabilities
Year

2014

2013

2012

2011

2010

Quick

1.4

1.1

1.05

.96

1.60

Ratio
4

Interpretation: The table shows that GSK Bangladesh Ltd had highest quick
ratio in 2010 but was dropped in 2011 and then again rose in 2012 and in
2013 it rose very little. Over these four years GSK has maintained very
efficient quick ratios these were quite high than 1 but in 2011 there was
huge fall and the ratio was below 1 which is very disappointing. This means
in 2011 GSK was not enough able to pay back its short term debt but if we
analyze he trend then we will find that GSK is capable to tackle liquidity crisis
and to recover from bad situations. Another important point is, the current
ratio in 2011 was quite high than 1 which means it had enough current
assets but yes there were lacings in quick assets. It actually means that
when the current assets will generate cash then GSK will gain a high quick
ratio. This impact we really can see in 2012, as in this year the ratio is 1.05
so it means GSK has recovered from the lacings in quick assets
1.3 Cash ratio: The cash ratio is effective and quick way to determine if a
company could have potential short-term liquidity issues.
Year

2014

2013

2012

2011

2010

Cash

.83

.71

.63

.97

Ratio

Interpretation: Here, we can see that in first two years the cash ratio was
very poor which signals that GSK faced much liquidity crisis and had not
sufficient cash in hand to pay back the short term liabilities. On the other
hand, from 2012 to 2014 the cash ratio took huge increase and it was above
0.5 then. Highest cash ratio was achieved in 2014 which was 1 which
indicates that there were enough cash assets in this year. Although there
was a fall in cash ratio in 2011 but still that was a satisfying figure.

1.4. NWC to Total assets:

Net working capital asset to total assets a

companys ability to cover its short term financial obligations total current
liabilities by comparing its total current assets to its total assets.

Year
NWC

2014
to .16

2013

2012

2011

2010

.14

.10

.10

.216

TA

Interpretation: Here we can see that GSK Bangladesh Ltd has maintained
positive net working capital which indicates their operational efficiency. In
2010 the working capital ratio was too high and these were above 2 which is
a sign that GSK is slow at payment collections and operating cycle is not
enough efficient.

2. Long term solvency:

2.1. Total Debt ratio:
This ratio measures the financial leverage of a company.
Year
Times

2014
0.578

2013
0.592

2012
0.573

2011
0.529

2010
0.385

Interpretation: A debt ratio less than .50 is considered as good, In2010 the
debt ratio of GSK was impressive as the debt ratio was less than .50 at those
years. In 2011 the ratio was very near to .5 and in 2012 it was more than .5
which is not fruitful for the business and it signals towards higher
dependency on debt. It rose higher and higher now which is not good for the
company.
2.2. Debt-equity ratio:

A high debt-equity ratio generally means that a company has been

aggressive in financing its growth with debt.
Year
Times

2014
1.1706

2013
1.159

2012
1.061

2011
0.962

2010
0.603

Interpretation: The greater a company's leverage, the higher the ratio.

Generally, companies with higher ratios are thought to be more risky
because they have more liabilities and less equity. The company, in 2014
year has 1.1706 and its means theyre has more liabilities than 2013 year.
2.3. Equity Multiplier:
The equity multiplier is a financial leverage ratio that measures the amount
of a firm's assets that are financed by its shareholders by comparing total
assets with total shareholder's equity.
Year
Times

2014
2.17

2013
2.16

2012
2.06

2011
1.96

2010
1.60

Interpretation: The equity multiplier is a ratio used to analyze a company's

debt and equity financing strategy. A higher ratio means that more assets
were funding by debt than by equity. In other words, investors funded fewer
assets than by creditors. So, 2014 year has more assets than the previous
year for 1.921.
2.4. Long-term debt ratio:
In risk analysis, a way to determine a company's leverage. The ratio is
calculated by taking the company's long-term debt and dividing it by the
sum of its long-term debt and its preferred and common stock.
Year
Times

2014
0.056

2013
0.063

2012
0.088

2011
0.092

2010
0.085

Interpretation: As the percentage gets higher, this means that a higher

proportion of debt is used for the permanent financing for the firm as
opposed to investor funds (equity financing). As the proportion of debt gets
higher, so does risk and the chance of bankruptcy. So, in 2011 year had
0.092 % for the risk and 2014 year has low risk.
2.5. Time interest earned ratio:
The interest coverage ratio is used to determine how easily a company can
pay interest expenses on outstanding debt.
Year
Times

2014
382.374

2013
169.792

2012
79.498

2011
123.790

2010
674.097

Interpretation: In 2011 and 2012, the interest coverage ratio was relatively
very low and it indicates that then GSK was not much efficient to pay back its
interests from the earnings but there is a conflicting point and that is, the
ratio is greater than 1 which means the firm can meet up the obligation, yes
of course more high the ratio then the firm is more capable but by the two
figures of 2011 and 2012 we cannot say that GSK failed, GSK then definitely
had enough capacity. So, we can say that it could have been better. In 2010
the ratio was abnormally high which is also not good for business and
indicates that the money is being spent much on repaying debts rather than
reinvesting. It means that the firm has now fewer debts so they can
concentrate on more business growth but they are not doing so. In 2011 and
2012 the ratio decreased rapidly, which signals that the firm has less debts
and at the same time now they have realized the importance of business
extension. In 2014 it went up at 382.374 tk.
2.6. Cash coverage ratio:The higher the coverage ratio, the better the
ability of the enterprise to fulfill its obligations to its lenders.
Year
Times

2014
631.933

2013
326.830

2012
192.851

2011
262.720

2010
1262.820

Interpretation: If the number is less than 1, this leaves the company in a

bad place. This means the company cannot pay all of its debts. A number
less than 1 is seen as an indicator that the business will go bankrupt,
typically within a few years. The higher the number, the better the company
is doing. So, the company went the best position in 2010 of 1262.820 times
and 2014 year it will be increasing.

3. Asset management or turnover ratios:

3.1. Inventory turnover:
Inventory Turnover ratio measures the activity of a firms inventory. It
commonly measures the activity, or liquidity, of a firms inventory. It is
calculated comparing Cost of Goods Sold (COGS) to average inventory. The
higher the turnover the better the company is.
Year
Times

2014
5.1565064

2013
3.6886357

2012
3.7420814

2011
2.9737786

2010
3.4373352

93

77

99

74

17

Interpretation: In 2011 the ratio is very low, it may mean the company has
much more inventory than it really needs at any one time. Therefore it has
too much of its capital tied up in goods or raw materials that it will take a
long time to sell or make a profit on. A high inventory turnover ratio could
mean the company has had unexpectedly strong sales. It is very high in
2014 its a good sign. Or it could mean the firm is not managing its buying as
well as it might and is having difficulty in administering its inventory.

3.2. Days sales in inventory:

This is an important to creditors and investors for three main reasons. It
measures value, liquidity, and cash flows. Both investors and creditors want
to know how valuable a company's inventory is. Older more obsolete
inventory is always worth less than current, fresh inventory.
9

Year
Days

2014
70

2013
98

2012
97

2011
122

2010
107

Interpretation: A relatively small number of days' sales in inventory

indicate that a company is more efficient at selling off its inventory, while a
large number indicates that a company may have invested too much in
inventory, and may even have obsolete inventory on hand. However, a large
number may also mean that management has decided to maintain high
inventory levels in order to achieve high order fulfillment rates

3.3. Receivable turnover:

An accounting measure used to quantify a firm's effectiveness in extending
credit as well as collecting debts.
Year
Times

2014
6.8783328

2013
13.387487

2012
13.177210

2011
11.799542

2010
7.8463245

29

65

29

48

08

Interpretation: A low ratio is a sign of less liquid receivables and may

reduce the true liquidity of the business in the eyes of the analyst even if the
current and quick ratios are satisfactory. In 2014 it is very low so that the
company should re-assess its credit policies in order to ensure the timely
collection of credit sales that is not earning interest for the firm
3.4. Days sales in receivables:
The sooner cash can be collected, the sooner this cash can be used for other
operations. Both liquidity and cash flows increase with a lower days sales
outstanding measurement.
Year
Times

2014
53.06518

2013
27.2642641

2012
27.699337

2011
30.933402

2010
46.518596

441

87

77

02
10

Interpretation In 2013 it is low so its a good sign for the company. A higher
ratio indicates a company with poor collection procedures and customers
who are unable or unwilling to pay for their purchases. In 2014 the ratio is
higher; its a bad sign for the company. Companies with high days sales
ratios are unable to convert sales into cash as quickly as firms with lower
ratios.

3.5. NWC turnover:

Working capital is defined as the amount by which current assets exceed
current liabilities. A higher working capital turnover ratio is better. It means
that the company is utilizing its working capital more efficiently i.e.
generating more revenue using less investment.
Year
Times

2014
8.693053

2013
12.4025343

2012
22.764603

2011
16.787161

2010
0.8854933

032

41

25

35

Interpretation: Generally, a high working capital turnover ratio is better. A

low ratio in 2010 it indicates inefficient utilization of working capital. The
ratio should be carefully interpreted because a very high ratio may also be a
sign of insufficient working capital.
3.6. Fixed Asset turnover:
A higher fixed asset turnover ratio is generally better. However, there might
be situations when a high fixed asset turnover ratio might not necessarily
mean efficient use of fixed assets.
Year
Times

2014
12.42813

2013
11.5538410

2012
9.8687241

2011
9.8512489

2010
9.3105096

024

12

03

11

Interpretation: Generally, a high fixed assets turnover ratio indicates better

utilization of fixed assets and a low ratio means inefficient or under-utilization
of fixed assets. The level of ratio has generally same over the first three
years but in 2014 it is very high and its a good sign for the company.
3.7. Total asset turnover:
Asset turnover ratio is the ratio of a company's sales to its assets. It is an
efficiency ratio which tells how successfully the company is using its assets
to generate revenue.
Year
Times

2014
12.813024

2013
11.5538410

2012
9.8687241

2011
9.8512489

2010
92.875827

.42

12

03

86

Interpretation: In 2011, a low asset turnover ratio suggests problems with

excess production capacity, poor inventory, or lax collection methods.
Increases in the asset turnover ratio over time may indicate a company is
"growing into" its capacity and in 2010 the total asset turnover ratio is high,
it is good for the company to earn profit.

4. Profitability Ratios:
4.1 Profit margin:
The profit margin ratio is a profitability ratio that measures the amount of net
income earned with each dollar of sales generated by comparing the net
income and net sales of a company.
Year

2014

2013

2012

2011

2010

Profit

.11

.08

.043

.60

.11

Margin

12

Interpretation: Over the last years, the gross profit margin has increased
gradually by slight amount every year but in 2011 there was a downfall and
in 2012 it decreased by only one point. In 2011 the sales were higher than
previous four years but the costs associated with the sales were also too
high, for this reason the margin was low. From this result, GSK tried to control
the cost and as a result the situation was little better in 2013 than that of
2012. One positive thing we can notice that the performance of GSK was
quite stable in terms of gross profit margin which means throughout these
years the GSK Bangladesh Ltd faced less fluctuations.
5.4.4| Earnings per Share (EPS):
EPS represents the number of currency amount earned on behalf of each
outstanding share of common stock.
Year

2014

2013

2012

2011

2010

EPS

34.05

23.42

20.25

45.35

68.63

Interpretation: In the year 2010, the EPS was very high but 2011 it
decreased a lot which indicates that earnings against each share were low on
those years. In 2011 the EPS dropped by 45.35tk and in 2012 it again
dropped by 20.17 tk. So, GSK should take initiative to increase the EPS
otherwise it may create confusion about the financial condition to the
general public.
5.4.5| Return on Total Assets (ROA):
The higher the return, the more efficient management is in utilizing its asset
base. The ROA ratio is calculated by comparing Earnings Available for CS
Holders to Total Assets, and is expressed as a percentage.
Year

2014

2013

2012

2011

2010

13

ROA

.164

.134

.18

.10

.18

Interpretation: In 2010 the ROA was 18% and then it fell down to 10% in
2011 which indicates unsuccessful management policies of GSK. Then in
2012 the ROA was 18% which is very impressive but in 2013 it decreased
and became 13.4%. In 2014 the ROA was 16.4%, so there was again downfall
but this year the percentage of downfall was lower than that of 2013.
5.4.6| Return on Equity (ROE):
This ratio indicates how profitable a company is by comparing its Earnings
Available for CS Holders to its Stock holders Equity.
Year

2014

2013

2012

2011

2010

ROE

.35

.29

.16

.19

.29

Interpretation: The graph interprets that, from 2010 to 2014 there was a
huge improvement in ROE, over these 3 years it increased by almost 29%
but in 2011 it decreased by 19.83% which is not a good indication. In 2012
the downfall continued which indicates that GSKs management efficiency is
lower than previous years and it is earning less profit from the equity capital.
But the impressive part is that in 2014 it rose high and become 35%.
5.4.8 DPS (Dividend per Share):
The amount of dividend that a stockholder will receive for each share of
stock held. It can be calculated by taking the total amount of dividends paid
and dividing it by the total shares outstanding.
Year

2014

2013

2012

2011

2010

DPS (TK)

42

30

15

15

20

14

Interpretation: In 2010, the DPS for the common shareholders was 20tk but
in 2011 it fell down. It became constant up to 2013. In 2014 shareholders
receive 42tk for each shares outstanding which is greater than the previous
year.
5.5| Market Ratio:
5.5.1| P/E Ratio:
The price/earnings ratio (P/E) is the best known of the investment valuation
indicators. The P/E ratio has its imperfections, and commonly used to assess
the owners appraisal of share value.
Year

2014

2013

2012

2011

2010

P/E ratio

22.04

21.08

28.15

28.37

33.17

Interpretation: A higher price earnings ratio of GSK indicates better

expectations of investors. It signifies that the investors of GSK are willing to
pay more but P/E ratio decreases from 33.17 to 22.04 at the year 2014.
5.5.2| Market/Book Ratio:
The M/B ratio provides an assessment of how investors view the firms
performance. It relates to the market value of the firms shares to their book
values.
Year

2014

2013

2012

2011

2010

Market
to book
ratio

151.23

95.57

57.00

66.45

112.96

Interpretation: In 2010, market to book ratio was 112.96 times then it

decreased over the year and it became 66.45 at the year 2011. That means
15

firm sold its share at a lower rate. In 2012 it decreases at a greater amount
and became 57. But in 2013 it rises and GSK sell its share at a higher value
151.23.

Du-pont analysis
The Du-pont analysis also called the Du-pont model is a financial ratio based
on the return on equity ratio that is used to analyze a company's ability to
increase its return on equity. In other words, this model breaks down the
return on equity ratio to explain how companies can increase their return for
investors. The Du-pont analysis looks at three main components of the ROE
ratio
Operating efficiency - as measured by profit margin.
Asset use efficiency - as measured by total asset turnover.
Financial leverage - as measured by the equity multiplier
Analysis
2010

16

In 2010, GlaxoSmithKline Bangladesh Limited ROE was 29% due to an

increase in the net profit margin. The profit margin was 11%. This is a very
positive sign for the company. From (2010-2014) Du-pont analysis this is the
second highest rate of return on equity. ROE could be leveraged up by
increasing the amount of debt in the firm but GSK has low amount of debt
which indicates that the interest expense is also low. The profit margin is
high because of the low interest expense. In 2010, the interest expense was
only $820.

2011

17

In 2011, GlaxoSmithKline Bangladesh Limited ROE goes down from 29% to

19% due to decrease in the net profit margin. The profit margin is decreased
by 10%. This is a negative sign for the company. From last five years Du-pont
analysis this is the second lowest rate of return on equity. ROE could be
leveraged up by increasing the amount of debt in the firm but GSK has high
amount of debt which indicates that the interest expense is also high. The
profit margin is low because of the high interest expense. In 2011, interest
expense increased. The profit margin is reduced because the net income
significantly goes down from $410177 to $282068.

18

2012

In 2012, GlaxoSmithKline Bangladesh Limited ROE goes down from 19% to

16% due to decrease in the net profit margin. The profit margin is decreased
by 3%. This is a very negative sign for the company. From last five years Dupont analysis this is the lowest rate of return on equity. ROE could be
leveraged up by increasing the amount of debt in the firm but GSK has high
amount of debt which indicates that the interest expense is also high. The
profit margin is low because of the high interest expense. In 2011, interest
expense increased and the highest interest expese. The profit margin is

19

reduced because the net income significantly goes down from $282068 to
$243967. This year the total asset turnover ratio is higher than the last year.

2013

In 2013, GlaxoSmithKline Bangladesh Limited ROE goes up to 29% due to an

increase in the net profit margin. This is good comeback for the company.
The profit margin is increased by 13%. This is a very positive sign for the
company. From last five years Du-pont analysis this is the second highest
20

rate of return on equity. ROE could be leveraged up by increasing the

amount of debt in the firm but GSK has low amount of debt which indicates
that the interest expense is also low. The profit margin is high because of the
low interest expense.

2014

In 2014, GlaxoSmithKline Bangladesh Limited ROE goes up to 35% due to an

increase in the net profit margin. The profit margin is increased by 6%. This
is a very positive sign for the company. From last five years Du-pont analysis
21

this is the highest rate of return on equity. ROE could be leveraged up by

increasing the amount of debt in the firm but GSK has low amount of debt
which indicates that the interest expense is also low. The profit margin is
high because of the low interest expense. This year the net income is also
high which helps to maintain higher profit margin. But the total asset
turnover rate is decreased due to increase in total asset.

Overall Comparison
1. Although GSK is maintaining a fair current ratio, but from 2011 to 2014
it is gradually decreasing which is an indication that current liabilities
are increasing. So, GSK must concentrate on this issue and should be
careful to control the debts.
2. The debt ratio of GSK is not so high but it is increasing gradually and in
2012 it was above .52. Although the figure is no so violent but if it is
below .5 then more secured condition is expressed. So, from now GSK
should check that its dependency on the trade creditors is increasing
or not. If it is increasing then GSK must take effective steps to reduce
it.
3. There is an upward trend in debt to equity ratio, again it is pointing out
that debts are increasing. Although higher debts can give financial
leverage but there is also a risk of meeting up the debt obligations. So,
GSK should realize that higher debts can lead it to higher risk. From
now it should be little conservative in case of taking debts.
4. Most of the profitability ratios are decreasing. So, it means the growth
is lowering day by day. In this case GSK must needs to think that how
more profit can be achieved and needs to find ways to capture the
significant portion of the market thus profit level goes up.
5. GSK needs to change its policy of not pursuing the doctors to prescribe
its drugs, otherwise it will not be able to cope up with the local giants.

22

Part II
Pro-Forma Income Statement:
A Pro-Forma Income statement is planned and prepared in advance to of a
transaction to project the future status of the company. Pro forma income
statement includes revenue, COGS, operational expenses and nonoperational expenses. To prepare the Pro-Forma Income statements; we have
forecasted the Sales revenue with the help of Forecast function in Microsoft
Excel. To make a simple pro forma income statement by evaluating this
year's sales to date as compared to last year's total sales. Then we calculate
the percentage change of this year's sales compared to last year's sales.
Taking the current "Total Sales," divide by the number of months into the
year it represents and multiply by 12 to annualize the number. After that we
compare that number to "Total Sales" for last year and figure out the
percentage change: In 2015 the growth rate was 6% and 2016 it was 13%
By multiplying the tax rate with consecutive years Sales we have calculated
the total amount of tax. Next to find the Finance cost (Interest expense) we
have kept the ratio of Interest expense to Long term debt constant. Then we
have calculated each years interest expense by multiplying that ratio with
the consecutive years Long term debt. Addition to Retained Earnings is
calculated by multiplying the Net Income with the Retention Ratio. Other
components of Income Statement were just changed according to the growth
rates.
23

Retained earnings represent what is left after expenses, taxes, and dividends
are paid. However, if there is a loss and the retained earnings from a
previous period will not be enough to cover it, there may be a negative
retained earnings figure.

Pro-forma Balance Sheet:

A pro forma balance sheet is similar to a historical balance sheet, but it
represents a future projection. Pro forma balance sheets are used to project
how the business will be managing its assets in the future. For example, the
pro forma balance sheet can quickly show the projected relative amount of
money tied up in receivables, inventory, and equipment. It can also be used
to project the overall financial soundness of the company.
Pro forma total assets:
Cash obtain the companys estimated cash position, and need to do a careful
cash flow projection. Accounts receivable estimate the accounts receivable
on December 31, and need to take into consideration the average collection
time of receivables and the sales projections for prior periods. Property, plant
and equipment are the easiest of pro forma asset values to calculate.
Because land does not depreciate, it will always have the same value. Just
enter the value of the land at its original purchase price. Buildings do
depreciate. The company has increasing their total assets form 2012 year to
next 5 years.
Pro forma total liabilities:
Pro forma trade and others payable are determined by figuring out how
much they will spend on supplies during the last years and how long it takes
them to pay their bills. It should be easy to determine a pro forma accrued
payroll. Just check your payroll calendar to find out what employee pay
periods will remain unpaid by the beginning of the pro forma balance sheet
24

period. The size of a pro forma mortgage note payable is calculated by

taking the mortgage note payable at the end of the current year and
subtracting the principal, not interest, payments that will be made during the
upcoming year. To obtain that portion of the mortgage that will be classified
as a long-term liability, they subtract what is classified as current liability.
Pro forma owners equity:
The share capital and others reserve portion of the owners equity will not
change from year to year unless new stock is issued. Pro forma retained
earnings can be tricky to determine. They are the last item to be calculated
on a pro forma balance sheet. Total assets must balance the total liabilities
and owners equity.

Part III
Annual & Market Return:
Recession can have a negative effect on companys annual rate of return. For
example, in 2010 GSks annual rate of return is 55% where in 2011 it has a
yearly return on -41% and later on negative value goes down at 2012 at
14%. In 2013 ARR rises 67.7% and 50.51% in 2014. But DSE yearly rate of
return is 81.4% in 2010 and -36.7% in 2011. If we compare to DSE index then
we will get a clear view that in 2011 and 2012 both have negative value and
in 2013 and 2014 both of them positive. So GSK is slightly in better position
in annual rate of return than DSE index as in 2013 GSKs ARR was higher
than DSEs ARR.
We use Excel formula to calculate Annual Rate of Return. ((last day of year
price first day of year price) / first day of year price.)

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Beta Co-efficient:
We know if the stocks price experiences movements greater (more volatile)
than the stock market, then the beta value will be greater than 1. If a stocks
price movements are less than the market fluctuations then the beta value
will be less than 1. And if the stock price is moving along with the market
movement then the beta will be near about 1. Since beta also represents risk
factor then a beta value higher than 1 will indicate more risk and in turn
more expected return for invest. GSK has a beta value of near 75.6% So, GSK
is riskier and investors will expect more return in GSK. Companies growth
opportunities are a very important determinant of their beta value. Generally
firms with more growth opportunities tend to have higher betas. Another
indicator is GSK has a beta near to 1 so their stock price is moving according
to market movement.
We use Excel to find Beta Co-efficient which is attached with this project later
on.
Treasury bill Rate
We searched it on the Bangladesh Bank website to find out the Treasury bill
rate of 365 year government bonds. The Treasury bill rate is 9.85% for 365
days bonds in 2014.

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Required Rate of Return:

GSK has a required rate of return 14.8%. We calculate this by using CAPM
formula. Here the Treasury bill is used as risk free factor which is 9.85% and
beta is 75.6%. The time value of money is represented by the risk-free (rf)
rate in the formula and compensates the investors for placing money in any
investment over a period of time. The other half of the formula represents
risk and calculates the amount of compensation the investor needs for taking
on additional risk. This is calculated by taking a risk measure (beta) that
compares the returns of the asset to the market over a period of time and to
the market premium (Rm-rf).
WACC:
Investors use WACC as a tool to decide whether to invest. The WACC
represents the minimum rate of return at which a company produces value
for its investors. If the companys return is less than WACC, the company is
shedding value, which indicates that investors should put their money
elsewhere. Here, GSK has a required rate is 14.79% and WACC is more than
11.7% that means for every dollar company invest in capital company can
generate .11 dollar value for the company surely a good sign for the
company and later on company is generating more value than the previous
year. GSk is in positive side .

Why it matters:
It's important for a company to know its weighted average cost of capital as
a way to gauge the expense of funding future projects. The lower a
company's WACC, the cheaper it is for a company to fund new projects. A
company looking to lower its WACC may decide to increase its use of
cheaper financing sources. For instance, GSK may issue more bonds instead
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of stock because it can get the financing more cheaply. Because this would
increase the proportion of debt to equity, and because the debt is cheaper
than the equity, the company's weighted average cost of capital would
decrease.

Part IV
Free Cash Flow
In order to calculate the free cash flow of both of the companies, we have
followed the straight forward direction. We took the earnings before income
and tax for both of the companies and found out the after tax value of it. As
there was no depreciation mentioned in the annual reports, we have taken
the amortization of deferred IPO expense. In order to find the capital
expenditure for GSK, we have subtracted the previous year fixed asset from
the current year fixed asset for the three forecasted year. Then we just
applied the formula mentioned to us which is FCF= EBIT (1-T)+Amortization
of deferred IPO-Capital expenditure-Change in net working Capital.
Stock price of the last pro-forma year
In order to calculate the stock price of the last pro-forma year, firstly we have
found out the earnings per share of the last pro-forma year. We have
calculated it by the formula of net income/ number of shares. As we are
supposed to keep the price earning ration constant, we have not changed it.
Then, we have just us the formula of Price earnings ratio to calculate the
stock price of both of the companies. Stock price of GSK is 280.96tk.

Enterprise Value of the last pro-forma year

In order to calculate the enterprise value, we have firstly found out the
market capitalization for both of the companies. We have multiplied stock
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price of last pro- forma year with the number of shares. Then we have
calculated the enterprise value by adding both the market capitalization and
book value of debts as it would be difficult for us to calculate the market
value of it. Then, we have subtracted the cash and bank balances of the last
pro-forma year to calculate the enterprise value. In case of GSK, it is Tk.
1,272,160,821 in the last pro-forma income statement.
Value of the Companies
In order to calculate the value of GlaxoSmithKline in 2014, we have found out
the present value of all the forecasted free cash flow. In this case, we have
taken the weighted average cost of capital for each of the preceding year for
both of the companies. Then, we have found out the present value of the
enterprise value using the 2019 of the weighted average cost of capital.
Then, we have just added both of these values to calculate the value of each
of the companies. The value of GSK is1,310,334,618 which means in order to
acquire the company the acquirer needs to have that amount of value.

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Conclusion
First of all we have calculated their ratios to understand their financial
statements. In part 1, we calculated their liquidity ratios to understand
whether they have the capability to pay their short term obligations, then we
calculated their asset management ratios to compare their assets to their
sales revenue, then we calculated their profitability ratios to generate their
earnings as compared to its expenses. In part 2 we make pro forma income
statement, balance sheet and EFN for both companies. In part 3, we
calculated their cost of capital. In part 4 we calculated their value of the
enterprise. Thus we completed the whole project.

References:
1.
2.
3.
4.
5.

http://www.gsk.com.bd/publications/annual-reports.aspx
http://www.dsebd.org/
http://www.dsebd.org/latest_share_price_scroll_l.php
We collect information from Dhaka Stock Exchange.
Fundamentals of Corporate Finance by Randolph W. Westerfi eld

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