The name of Allah, the Beneficent, the Merciful

Table of Content:
Acknowledgement

03

Dedication

04

Declaration

05

Executive Summary

06

1.0 Chapter No1:

2.0 Introduction
3.0 Banking History
4.0 MCB Vision And Mission Statement
5.0 Objective of MCB
6.0 Product & Services of MCB
7.0 Board of Directors
Head Office

07
07
09
09
11
14
15

10.0 ChapternNo2:

16

11.0 Capital Budget Cash flow Estimation

16

11.1 Initial Investment

17

11.2 Operational Cash flow

18

11.3 Calculation of Incremental Cash flow

19

11.4 Terminal Cash Flow

12.0 Chapter No3:

20

12.1 Capital Budgeting Techniques

20

12.2 Net Present Value

22

13.0 Chapter No4:

24

13.1 Cost of Capital

24

13.2 Cost of Debt

24

13.3 Cost of Preferred Stock

25

13.4 Cost of Common Stock

25

13.5 WACC Calculation

25

14.0 Chapter No5:

26

14.1 Leverage & Capital Structure

26

14.2 Leverage Calculation

27

14.3 Degree of Operating Leverage

27

14.4 Degree of Financial Leverage

28

14.5 Degree of Total Leverage

28

16.0 Chapter No3:

29

16.1 Conclusion & Recommendation

29

References

31

Acknowledgement:
Every praise is to Allah alone, The Merciful, The Kind, who give us the understanding and
courage to complete our project report and The Grace of Allah be on Prophet Muhammad (Peace
Be upon Him), who is eternal source of guidance and knowledge for humanity.
We are deeply indebted to our supervisor Prof. Dr.Ch.Mazhar Hussain whose help, suggestions
and encouragement helped us a lot during the research and writing of this report.

Dedications:
Dedicated to Our Respected Parents and Teachers and Friends is well.

Declaration
It is declared that this is an original piece of our own work, except where otherwise
acknowledged in text and references. This work has not been submitted in any form for another
degree or diploma at any university or other institution for tertiary education and shall not be
submitted by us in future for obtaining any degree from this or any other University or
Institution.

Executive Summary
We visit the Company and take the appointment from the Concern officers .At the appointment
date we meet with the Finance Manager, and told him about our visit, the main objective, &
purpose of our project, and then we ask many relevant Questions from the Concern Officers
which is required for our project. We have done Qualitative & Quantitative analysis of Cash flow
estimation, capital budgeting technique, cost of Capital and Leverage by keeping in view the
main Concept which we have learn in class as well as from the discussion with the concern
officers.
Due to their prohibition the company did not provided the data but cooperated and
discussed all the processes and working of the projects verbally. We have taken the estimated
data just to complete the projects as there was no company ready to provide its financial data.
Then we collect the data from the different sources that are required for our project.

1.0CHAPTER NO: 1
PURPOSE OF PROJECT
To Estimate the Cash Flows for MCB that a proposed unit will generate. It represents the cash
flow benefits that are likely to accumulate as a result of executing the investment. To calculate
the Net Present Value of project So that company can decide that proposed investment will be
fruitful or not. To calculate the expected average future cost of capital for MCB. To discuss the
leverage, capital structure, to explain EBIT-EPS approach to capital structure.

2.0 Introduction to MCB Bank Limited:

MCB is one of the leading banks of Pakistan with a deposit base of about Rs. 280 billion and
total assets of. Incorporated in 1947, MCB soon earned the reputation of a solid and conservative
financial institution managed by expatriate executives. In 1974, MCB was nationalized along
with all other private sector banks. This led to deterioration in the quality of the Banks loan
portfolio and service quality. Eventually, MCB was privatized in 1991.
During the last fifteen years, the Bank has concentrated on growth through improving service
quality, investment in technology and people, utilizing its extensive branch network, developing
a large and stable deposit base and managing its non-performing loans via improved risk
management processes.

3.0 Banking History:

It has not so far been decided as to how the word Bank originated. Some authors opinion that
this word is derived from the words Baucus or Banquet which mean a bench. Other authorities
hold the opinion that the word Bank is derived from the German word Back, which means
joint stock fund. It is therefore, not possible to decide as to which of the opinion is correct, for
no record is available to ascertain the validity of any of the opinions.
Banking in fact is primitive as human society, since man came to realize the importance of
money as a medium of exchange; the necessity of a controlling or regulating agency or
7

institution was naturally felt. Perhaps it was the Babylonians who developed banking system as
early as 2000 BC. It is evident that the temples of Babylon were used as Banks because of the
prevalent respect and confidence in the clergy.

History of Banking Pakistans Perspective:

At the time of independence, there were 631 offices of scheduled banks in Pakistan, of which
487 were located in West Pakistan alone. As a new country without resources it was very
difficult for Pakistan to run its own banking system immediately.

Therefore, the expert

committee recommended that the Reserve Bank of India should continue to function in Pakistan
until 30th September 1948, so that problems of time and demand liability, coinage currencies,
exchange etc. are settled between India and Pakistan. The non-Muslims started transferring their
funds and accounts to India. By the end of June 1948 the number of officers of Scheduled banks
in Pakistan declined from 631 to 225. There were 19 foreign banks with the status of small
branch offices that were engaged solely in export of crop from Pakistan, while there were only
two Pakistani institutions, Habib Bank of Pakistan and the Australian Bank. The customers of the
bank are not satisfied with the uncertain condition of banking. Similarly the Reserve Bank of
India was not in the favor of Govt. of Pakistan. The Govt. of Pakistan decided to establish a fullfledge central bank. Consequently the Governor-general of Pakistan Quaid-e-Azam
inaugurated the State Bank of Pakistan on July 1, 1948. Thus a landmark was made in the
history of banking when the state bank of Pakistan assumed full control of banking and currency
in Pakistan. The banking structure in Pakistan comprises of the following types.
State Bank of Pakistan
Commercial Bank of Pakistan
Saving banks.
Commercial banks have been the most effective mobilizes of savings and have been providing
short-term requirements of working capitals to trade, commerce and industry.
Up to December 31, 1973, there were 14 Pakistan commercial banks that functioned all over the
country and in some foreign countries through a network of branches. All these commercial
banks were nationalized in January 1, 1974, and were recognized and merged into the following
five banks:
8

 National Bank of Pakistan

Muslim commercial bank limited
Habib Bank Limited
United Bank Limited
Allied Bank of Pakistan
The Government of Pakistan in the late 90s introducing the need for the privatization of state
owned banks and companies. The private sector has accepted the challenge and most of the
banks are privatized today. The State Bank of Pakistan issues the shares of these periodically.
Bank employees and other common peoples can also purchase these shares and earn profit.
Throughout the period of banking history the banks have been expanding rapidly and achieved
the desired goal of progress.

4.0 MCB Vision and Mission Statement:

Vision Statement:
To be the leading financial services provider, partnering with our customers for a more
prosperous and secure future
Mission Statement:
We are a team of committed professionals, providing innovative and efficient financial solutions
to create and nurture long-term relationships with our customers. In doing so, we ensure that our
shareholders can invest with confidence in us.

5.0 Objectives of MCB:

The following are the objectives of MCB Bank Limited:
Creating and Managing Values:
The first objective of MCB Bank Limited is to create and manage the values, which is one of the
backbones of the objective of any well organized and managed organization.
9

Human Capital:
The second objective of MCB Bank is to take care of the Human capital which is a necessary
thing for the development and prosperity of any well established organization.
Best Place to Work:
The third objective of Muslim Commercial Bank Limited is to make it a place which is much
feasible and comfortable for employees of the bank. The MCB is always conscious in developing
such place where employees of the bank feel easiness.
Technology:
The forth objective of MCB Bank Limited is to bring new and latest technology in the operations
of the bank. At MCB, technology has a direct relation with your needs; it is a means for creating
value and convenience for the customer. Over the last few years MCB has invested heavily into
strengthening its technology backbone. Today it is leading the way in banking technology and
setting new standards for the banking industry; penetrating into the local market, listening to the
needs of the people and educating them of simple financial products and services that create both
value and convenience. MCBs strength lies in providing a technological base at the grass roots
level of the society with a challenge to educate and assimilate such systems across vast cultural
and economic backgrounds. With over 768 automated branches, 243 online branches, over 151
MCB ATMs in 27 cities nationwide and a network of over 16 banks on the MNET ATM switch,
MCB continuously innovate new products and services that harness technology for the
customers benefit.
Understanding & Relationship:
The fifth and very important objective of MCB Bank Limited is to create such an environment
which is suitable for creating understanding and relationship between the employees, thus going
towards the way of development and prosperity. Over the years, MCB has fostered strong bonds
with its customers. Understands them; their needs. They feel comfortable with MCB; its their
bank; it responds to them; listens to them; partners with them; grows with them. At MCB,
banking is all about being there for people, making a home in their hearts-continuously building
relationships on mutual trust and confidence. We understand that relationships are about
expectations-our products and services are based on your customers, expectations. Be it
financing for personal or business related needs, funds transfer and trade related facilities or need

10

for different types of deposit accounts, MCB offers you a variety of products and services
customized to satisfy your individual needs.
Understanding Convenience:
The next objective of MCB Bank Limited is to make understanding a convenient thing for the
whole environment of the bank, for the purpose of boosting up its values and prosperity in such a
competitive environment. Convenience is what the customer is looking for; and this is what we
at MCB are continuously striving to provide. Whether it is the 24 hours cash convenience of our
ATM network or the easy availability of financing requirements or simple opening of account,
MCB has tailored its products and services to make your life easier. MCB knows the particular
needs of its diverse customer base d continuously develop products and services that fulfill these
needs.
Understanding Reliability:
The last but not least objective of MCB Bank Limited is to make an environment which have an
understanding of reliability in the whole structure of the bank. With a strong financial base, a
promising team and the right resources, MCB has proved to be a reliable partner indeed. MCB
understands the special needs of the business, trading and agricultural sectors. Strategically
located branches in small towns and cities provide warm services and advice to the small
businessmen and local traders. MCB speaks their language; it understands their needs and
provides tangible results. By responding in a timely manner with a flexible approach, MCB
provides its clients with the reliable financial service and support they require to successfully
achieve their business objectives. With a solid foundation of over 50 years in Pakistan and
having recently completed 10 successful years of privatization, MCB is
Strongly positioned to lead the banking sector in the new millennium you can feel safe in our
hands.

6.0 Products and services offered by MCB bank limited:

7.0 Products:
MCB bank offers a wide range of products geared towards the customers. The following

11

products are available for customers are:

Account:
Current Account
PLS Saving Deposits
Allied Basic Banking Account
Foreign Currency Deposits
Allied Profit Plus Term Deposit
Allied Profit Plus Deposit Account
Allied Monthly Income Scheme
Allied Bichat Scheme: (ABS)
Allied e-Savers Accounts (ESA)

Alternative Delivery Channel:

Allied Cash+ Card

Online Banking
Internet Banking
Helpline

Consumer Products:
Master Card
Lending Products:
Seasonal Finance
Agricultural Finance
Import Export Business/Trade Finance
Running Finance
Demand Finance

8.0 Services:
You can rely on MCB banks friendly staffs that are eager to assist their customers as best as
possible. MCB Bank offers the following services to its customers
Home Remittances
Remittances
Hajj Services
12

 Utility Bills
Lockers
Commodity Operations
Consultancy Services:
In the process of privatization of public sector units, prospective buyers need professional
assistance and MCB, with its expertise offers to their specialized service for valuation of the
market value of the industrial unit, preparing bid documents and arranging finance for the
purchase of the unit.
Self-Supporting Scheme:
Loan for poor/needy people
No mark-up charged
Maximum amount of Rs. 25,000/=
Minimum amount of loan Rs. 5,000/=
FAX Utility:
Pioneer to introduce Fax for customer service.
Facilitates speedy transfer of funds.
Within an hour anywhere in Pakistan.
Charges are debited to Customer account.
Night Banking Services:
To facilitate business community
Only in commercial trades centers premises
Clients can make deposits up to 8:00 pm
Date moved to next for all such transaction
Utility Bills Collection:
Utility bill collection for maximum customers
Objective is to create interaction with customers
Currently 1050 branches are performing this job

13

MCB Rupee Travelers Cheques:

Can be a safest way to carry cash
Cheques is accepted at trade centers & branches
No need to be a/c holder for traveler cheques
Cheques are signed once when issued.
Upon delivering second signed are made
In case of theft no fair to encase
ATM (Automated Teller Machine):
Minimum balance of Rs. 500/=
No charges are debited per transaction
Only two hundred per annum debited

9.0 Board of Directors:

Main Mohammad Mansha

Mr. S. M. Muneer
Mr. Tariq Rafi

Chairman
Vice Chairman
Member
14

Mr. Shazad Saleem

Mr. Sarmad Amin
Dr. Muhammad Yaqub
Mian Raza Mansha
Dato' Mohammed Hussein
Mr. Aftab Ahmad Khan
Mr. Abdul Farid Bin Alias
Mian Umer Mansha
Mr. Muhammad Ali Zeb
Mr. Imran Maqbool

Member
Member
Member
Member
Member
Member
Member
Member
Member
President/ CEO

Head Office:
Service Quality Division,
Complaint Resolution Unit,
20th Floor, MCB Tower,
I.I Chundrigar Road, Karachi 74000
Fax: +9221- 32270037

15

Email:
Info@mcb.com.pk
Phone: 021- 9212432
Branch Selected For Project:

Ranch Code. 0619

Lal Kurti Rawalpindi Tariq Abad Lalkurti, Rawalpindi

051-5568268 / 5111266

mcb0619@mcb.com.pk

10.0 CHAPTER NO: 2

11.0 Capital Budgeting Cash Flow Estimation:

Data about MCB:

16

MCB is considering to purchasing a new unit by replacing it with existing unit. The existing unit
is 2 years old, cost 25, 00,000 and is being depreciated under MACRS using a five year recovery
period. The existing unit is expected to have useful life of 5 more years. The new unit can be
purchased at 4,000,000 and requires 400,000 installation cost, it has a 5-year usable life and
would be depreciated by using a five year recovery period. It can currently sell the exiting unit
for Rs. 2,200,000 without incurring any removal or cleanup cost. At the end of 5 years, the
existing unit has zero market value; the new unit would be sold out to net 1,500,000. The Firm is
subject to a 40% tax rate. The estimated earnings before depreciation, interest, and taxes over the
5 years for both and existing units are given below

Buying of new units following items increased:

Current assets

Current liabilities
Accounts payable=1,200,000

Accounts receivable=1,200,000
Inventory

= 1,600,000

Earnings before depreciation, interest and taxes

Year New unit
1
2,200,000
2
2,200,000

Existing unit
900,000
700,000
17

3
4
5

2,200,000
2,200,000
2,200,000

650,000
500,000
450,000

11.1 Initial Investment:

Installed cost of new Asset

Cost of new Asset

4,000,000

+Installation Cost

400000

Total Cost of New Asset

4,400,000

-After-tax Sale proceeds from old asset

Proceeds from sale of old Asset
Tax on sale of old Asset

(2,200,000)
360,000

Total proceeds from sale of Asset

(1,840,000)

+Change in Working Capital

1,600,000

Initial investment

4,160,000

Tax Calculations:
Book Value of old Asset
Accumulated Depreciation= 2,500,000*(.20+.32) = 1,300,000
Book Value= 2,500,000-1,300,000

=1,200,000

Recapturing Depreciation=2,200,000-1,300,000
Tax=900,000*40%

=900,000
=360,000

18

11.2Incremental operating cash inflows

New unit

Profit
Year

1
2
3
4
5
6

before

Depreciatio

Dep. and n
Tax
2,200,00
0
2,200,00
0
2,200,00
0
2,200,00
0
2,200,00
0
0

N.P
before

N.P

Taxes

Taxes

Tax

880,000
1,408,000
836,000
528,000
528,000
220000

1,320,00
0
792,000
1,364,00

after

Operating
Cash Flows.
Inflows

528,000

792,000

1,672,000

316,800

475,200

1,883,200

545,600

818,400

1,654,400

668,800

1,003,200

1,531,200

668,800
0
(220000) 88000

1,003,200

1,531,200

(132000)

88000

0
1,672,00
0
1,672,00

Existing Unit
Profit

before

Year depreciation
and tax
1
2
3
4
5
6

900,000
700,000
650,000
500,000
450,000
0

Net
profit

before

500,000
800,000

Taxes
400,000
(100,000

160,000
40000

240,000
(60000)

740,000
740,000

475,000
300,000
300,000
125,000

)
175,000
200,000
150,000
(125,000

70,000
8,0000
150,000
50,000

105,000
120,000
60,000
(75000)

580,000
420,000
360,000
50,000

19

Taxes

Net

Profit

Operating

Depreciatio

after Taxes

Cash flow
Inflows

11.3 Calculation of Incremental Cash Flows:

Incremental
Year

New Unit

Existing Unit

Operating
Flow

1,672,000

740,000

932,000

1,883,200

740,000

1,143,200

1,654,400

580,000

1,074,400

1,531,200

420,000

1,111,200

1,531,200

360,000

1,171,200

88,000

50000

38,000

11.4 Terminal Cash Flow:

After Tax Sale proceeds from sale of new Asset
20

Cash

Proceeds from sale of new Asset

1,500,000

Tax on sale of new Asset

512,000

Total proceeds from sale of new Asset

988,000

After Tax proceeds from sale of old asset

Proceeds from sale of old asset

+Tax on sale of old Asset

Total proceeds from sale of old Asset

+Change in networking capital

1,600,000

Terminal Cash Flow

2,588,000

Tax Calculations:
Book Value of asset at the end of year 5= 220,000
1,500,000-220,000=1,280,000 Recaptured depreciation
Tax

1,280,000*.40=512,000

12.0 CHAPTER NO: 3

12.1 Capital Budgeting Techniques:
12.2 Net Present Value

Net Present Value

It is a budgeting technique found by subtracting a projects initial investment from the present
value of its cash inflows discounted at a rate equal to the firms cost of capital.
Data:
Initial investment= 4160000
Years
1

Cash Inflows
932000
21

1143200

1074400

1111200

1171200

38000

We will discount our Future cash inflow at the rate of 16%.

NPV= PV of Future cash inflows initial Investment
=FVn / (1+k) n initial investment
=932000/ (1.16)1 + 1143200/ (1.16)2 + 1074400/ (1.16)3 + 1111200/ (1.16)4
+1171200/ (1.16)5 +

38000/ (1.16)6 - 4,160,000

NPV = 903,448+ 994,584+ 888,323+ 813,706+ 658,624+ 15,597 4,160,000

NPV= 4,274,282 4,160,000 = 114,282
Our Net Present Value is positive its mean it fulfill our project requirement and it will increase
our Shareholder wealth.

14.0 CHAPTER NO: 4

14.1 Cost of Capital:

Cost of Capital
The rate of return that a firm must earn on a projects in which it invests to maintain its market
value and attract funds. It is an extremely important rate of return used by firm in the long-term
decision process, particularly in capital budgeting.

22

14.2 Cost of Debt:

MCB can sell 10 year, 1200 par value bonds paying annual interest of 9%. And the bond can be
sold at 1500 each; floatation cost of 400.
Net Proceeds= Sales-Flotation Cost
=1500-400
=1100
Approximation before cost of debt
Kd=I+ par value Nd/n /Nd+Par Value/2
=108+ 1200-1100/10 /1100+1200/2
Beforetax cost of debt=10.26%
After-tax cost of debt= 10.26*(1-T)
=10.26*(1-.40)
=6.16%

14.3 Cost of Preferred Stock:

Par value =1200

Coupon Rate=9
Sales Price = 1500
Flotation Cost = 400
Calculation of Preference Stock = Dp/Np
Np=1500-400
=1100
Kp= Dp/Np
=108/1100

=9.82%

23

14.4 Cost of Common Stock:

Ks= D1/Po +g
Po=1200, g=5%, D1=80
Ks= 80/1200 +0.05
=11.67%

14.5 WACC Calculation:

Source of Capital

Book Value

Cost

Weight

Debt

700,000

6.16%

0.5

P/S

50,000

9.82%

0.035

C/S

650,000

11.67%

0.465

= (Wd *Kd) + (Wp *Kp) + (Ws *Ks)

= (0.5 *0.0616) + (0.035 *0.0982) + (0.465 *0.1167)
=0.0308+0.00344+0.0543
WACC

=8.85%

15.0 CHAPTR NO: 5

15.1 Leverage and Capital Structure:
Leverage:
Leverage results from the use of fixed-cost assets or funds to magnify returns to the firms
Owners. Generally, increases in leverage result in increased return and risk, whereas decreases
in leverage result in decreased return and risk.

Operating Leverage:
It is concerned with the relationship between the firms sales revenue and its earnings before
interest and taxes, or EBIT. (EBIT is a descriptive label for operating profits.)

24

Financial Leverage:
It is concerned with the relationship between the firms EBIT and its common stock earnings per
share (EPS).

Total Leverage:
Its concerned with the relationship between the firms sales revenue and EPS.
Data:
Total No of Share= 10,000
2011

2012

2013
5000,000

Sales

4,000,000

4,500,000

F.C

1,000,000

1000,000

1000,000

V.C

2,000,000

2300,000

3000,000

Interest

150,000

100,000

95,000

P/S Div

100,000

100,000

100,000

Tax

40%

40%

40%

15.2 Leverage Calculation:

2011

2012
4,500,000

2013

Sales Revenue

4,000,000

F.C

(1,000,000)

(1,000,000)

V.C

(2,000,000)

(2,300,000)

(3,500,000)

EBIT

1,000,000

1,200,000

1500,000

Interest

(150,000)

(200,000)

(220,000)

EBT

850,000

1,000,000

1280,000

Tax

(340,000)

(400,000)

(512,000)

Net Income

510,000

600,000

768,000

25

6000,000
(1,000,000)

P.S.Div

(200,000)

Earning for C.S

310,000

EPS

31

(220,000)
380,000
38

15.3 Degree of Operating Leverage:

For Decrease
DOL=%change in EBIT/%change in Sales
%change in EBIT=1,000,000-1,200,000/1,200,000
= -0.17
%change in Sales =4,000,000-4,500,000/4,500,000
= -0.11
DOL= -0.17/-0.11

=1.55 Ans

If DOL is greater than 1 it means that leverage is exist.

For Increase
DOL= %change in EBIT%/%change in sales
% Change in EBIT =15,00,000-12,00,000/1200,000 =0.25
% change in sales= 6,000,000-4,500,000/4,500,000 = 0.33
DOL= 0.25/0.33= 0.75
Leverage is not exsist

15.4 Degree of Financial Leverage:

For Decrease
DFL=%change in EPS/%change in EBIT
%change in EPS =31 38/38
=

-0.184

26

(240,000)
528,000
53

%change in EBIT=
DFL= -0.184/-0.17

-0.17
=

1.08 Ans

For Increase
DFL= % change in EPS/%change in EBIT
% change in EPS= 53-38/38= 0.39
% change in EBIT= 0.25
DFL= 0.39/0.25= 1.56 Leverage exsist

15.5 Degree of Total Leverage:

For Decrease
DTL= DOL*DFL
DOL= 1.55
DFL= 1.08
DTL= (1.55) (1.08) =

1.674 ANS

For Increase
DOL=0.75
DFL= 1.56

DTL= (0.75) (1.56)= 1.17 ANS

16.0 CHAPTER NO: 6

16.1 Conclusion and Recommendation:
After analyzing the entire landscape of company, we recommend to enhance their capital
structure with some amount of debt to minimize risk. Risk management tool should be applied,
the net present Value of this project shows right choice of management. But it also shows that
company willingness to work on low profit margin. As the amount of NPV is not large enough. It
is the responsibility of the management to look forward for the significant profit margin project
27

only. Low profit margins resulted in lack of quality. It is not in the favor of company in the
longer terms. Company doesnt have significant contact with the market. So some effort in this
regard also needed to be done.

References:
Person:
Interview from Malik Umair Operational Manager of MCB Lalkurti Branch
Contact no: 03341104031
Websites
1) Welcome to MCB Bank Limited
2) http://blogs.reuters.com/pakistan/2008/05/05/maybank-buys-into-pakistan
28

3) http://www.obizpakistan.com
4) http://www.linkedin.com
5) http://finance.google.com
6) http://finance.yahoo.com

29