What Does Weighted Average Cost Of Capital - WACC Mean?

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Where: Re =

HEERA GROUP 1 | P a g e HEERA GROUP 2 | P a g e

History & Introduction
From the humble beginnings of Posts & Telegraph Department in 1947 and establishment of Pakistan Telephone & Telegraph Department in 1962, PTCL has been a major player in telecommunication in Pakistan. In 1996, Pakistan Telecommunication (Reorganization) Ordinance formed the basis for PTCL monopoly over basic telephony in the country. PTCL launched its mobile and data services subsidiaries in 2001 by the name of Ufone s and Paknet respectively. In the middle of 2005 Government of Pakistan had decided to sell at least 26 percent of this company to some private agency.

Ratio analysis is a useful way of gaining a "snapshot" picture of a company. These ratios can be
analyzed to identify the company's strengths and weaknesses and useful insights can be gained through the process. Financial ratios are generally grouped together by their purpose. Although there are many of these classifications with some of the key users for the different types of ratios: Liquidity (Short-term creditors) Debt (Potential lenders or bondholders) Activity (Top management of the company) Profitability (Both existing and potential investors in the company's common stock) HEERA GROUP 3 | P a g e

Current Ratio
The current ratio is another test of a company's financial strength. It calculates how many PKR in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year. Current Ratio = Current Assets Current Liabilities

2009 2008
54220241 ----------------- = 1.50 36086322 42611233 ----------------- = 1.73 24569795 Analysis 2008: The ratio of 1.73 shows that the firm is not in a better position to meet its short term debt. 2009: 1.50 also shows that firm s liquidity position is relatively weak.

Day sale out Standing (DSO)

Day sale outstanding is used to appraise accounts receivable. So, DSO represents an average length of time that a firm must wait after making a sale before receiving cash, which is average collection period. DSO= Receivables

Average sales per days Analysis 2008: It shows that company receivables are converting more quickly in cash as compared to 2007. 2009: In 2009 receivables with respect to sales are converting more quickly.

2009 2008
2862342 ----------------- = 18days 59239001/360 3805689 ------------------- = 13days 61085610/360

HEERA GROUP 4 | P a g e Fixed Asset turnover

Fixed Asset turnover ratio measures how effectively the firm uses its plant and equipment in production. Net Fixed Asset turnover = Sales Net Fixed Asset Analysis: 2008: In this year PTCL used their assets effectively and gain more sales than industry average. 2009: PTCL is not using their fixed assets effectively and could have better sales by using assets effectively and efficiently.

Total Asset turnover Ratio (TATO)

Where asset turnover tells an investor the total sales for each $1 of assets, return on assets, or ROA for short, tells an investor how much profit a company generated for each $1 in assets. TATO = Sales Total assets Analysis: 2008: It shows that its total assets were actively participating in business. 2009: Currently company is facing worst conditions of assets turnover many of its assets are not participating and should be disposed of immediately. Or this might be due to company s current high receivable.

2009 2008
59239001 ----------------- = 0.762 77730763 61085610 ----------------- = 0.96 63437437

2009 2008
59239001 ----------------- = 0.38 154048029 61085610 ----------------- = 0.77 140103688

HEERA GROUP 5 | P a g e Total Debts to total assets

Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors losses in the event of Liquidation. Stockholders, on the other hand, may want more leverage because it magnifies expected earnings. Total Debts to total assets = Total debts Total assets

2009 2008
54658520 ----------------- = 35% 154048079 42215314 ----------------- = 30% 140103688 Analysis: 2008: Company is dealing well with its debts and should continue to improve their policies about debts. 2009: Due to less concentration on fulfilling their debts company is now going above the industry average and finding it hard to pay debts in future.

Time Interest earned ratio (TIE)

A measure of the firm s ability to meet annual interest payments TIE= EBIT Interest charges Analysis: 2008: It Represents Company is not in a condition to pay its interest costs and can result in some legal action like bankruptcy. 2009: Low ratio shows that the company will face difficulty and when it attempts to borrow an additional fund.

2009 2008
4267172 ----------------- = 4.6 Times 908524 3957539 ----------------- = 4.66 Times

847972

HEERA GROUP 6 | P a g e Profit Margin on sales

PTCL posted a net profit of Rs 15.64 billion (EPS Rs 3.07) in FY07 against last year's figure of Rs 20.78 billion. The declining trend in profitability continued during the financial year ended June 30, 2007 due to structural adjustments brought about in the telecom sector by competition Profit margin on sales= NI Sales

2009 2008
9151185 ----------------- = 15.4% 59239001 (2824890) ----------------- = (4.6%) 61085610 Analysis: 2008: Due to recession, there was hyper decrease in debt equity ratio 2009: After suffering recession company is recovering and lowering its costs and started getting normal profits.

Basic Earning Power (BEP)

This ratio determines the raw earning power of the firm s assets before the taxes and leverage. BEP= EBIT Total Assets Analysis: 2008: Due to the stock crisis many companies BEP decreased rapidly. PTCL also suffered the decrease in BEP but still getting higher than industry. 2009: Company is on a decline trend of BEP and their management is not taking steps to solve the problems as compared to the industry.

2009 2008
4267172 ----------------- = 2% 154048079 3957539 --------------- = 2.8% 140103688

HEERA GROUP 7 | P a g e Return on Assets

It represents how much the income after taxation and depreciation is backed by total assets. This also shows that company is using above average debts and company s BEP is low. Return on Assets= NI Total Assets

2009 2008
9151185 ----------------- = 5.9% 154048079 (2824890) ----------------- = (2.01%) 140103688 Analysis: 2008: This low results shows that the company s low basic earning power and high interest cost resulting from its above average use of debt, both of which cause its net income to be relative low. 2009: In this year company have paid their some remaining debts and resulting in improved return than previous year.

Return on Equity (ROE)

ROE measures how well stock holder get return on their invested money. ROE= NI Common Equity

2009 2008
9151185 ----------------- = 9.2% 99389559 (2824890) ----------------- = (28.8%) 97888374 Analysis: 2008: Company faced worst effects of recession due to high debts and high finance costs. This resulted in decrease in investments. 2009: After the worst recession period company is gradually stabilizing itself in the stock market and getting the interest of the factors. HEERA GROUP 8 | P a g e

Price/Earnings (P/E)
This ratio shows the dollar amount investor pay for 1dollar of current earnings. P/E= Price per share Earning per share

2009 2008
10 -------- = 5.58 Times 1.79 10 -------- = (1.80) Times (5.53)

Analysis: 2008: The stock exchange crisis did not left the big giants of the industry and PTCL is one of them. 2009: This shows that the company is growing well and again getting the confidence of investors.

Price/cash flow
It measures how many times cash inflow or outflow per share. Price/cash flow= Price per share Cash flow per share

2009 2008
10 -------- = 2.32 Times 4.302 10 ------ = (5.55) Times (1.80) Analysis: 2008: In this year the company s cash flows were in negative and they were not satisfying their investors. 2009: PTCL revised its policy about shareholders and cash flows per share and got good response from investors and regained their position. HEERA GROUP 9 | P a g e

Market/Book value
It measures how many times the price of share is increased over its book value
Market/book (M/B) = Market price per share Book Value per share

2009 2008
17.24 ----------- = 0.884 Times 19.488 38.64 -------- = 2.01 Times 19.193 Analysis: 2008: It shows that investors are willing to pay more than its book value than industry average and it is due past records. 2009: Company did not respond well to its investors and as a result now investors are paying them high but not as much as they can.

Overall Analysis
Summarizing the above financial analysis will lead us to some facts that Ptcl is not in a better

position in terms of liquidity and might face some problems in meeting its short-term debt. However EPS of 1.79 shows that company is in better position relative to previous year and gaining the confidence of investor back. Above analysis indicates that company is now going above the industry average and finding it hard to pay debts in future as their debt-asset ratio is 35% in year 2009 which was 30% in previous year. In 2005, the company gets maximum profit while later on till 2009 there is decrease in the value of profit as compared to 2005. The reason behind this is the uncertainty in the process of privatization scenario, increase in the operating cost, decrease in inappropriate profit, increase in payables, increase in capital work in progress, less new investment and loans etc.

HEERA GROUP 10 | P a g e

SWOT Analysis
Strengths yLargest operational network and infrastructure within ICT segment. yAn integrated Monopoly yMarket leadership in Local loop, Wireless local loop (WLL) and fixed telephony. yPTCL (Ufone s) is market challenger in GSM segment. yCompetitors still depend on PTCL network either directly or indirectly yExperienced Telecom Resources Weakness yNot been able to nurture its growth around customer services oriented strategy yInternal organizational and business processes issues yMonopolistic culture has further added to its complexities yPtcl-v, the fixed wireless phone service is poor yOver employment & low productivity. yCorporate culture akin to government departments. Opportunities yLow teledensity of Pakistan. yHave vast infrastructure and real estate assets which can be leveraged further. yGlobal connectivity reliability has been improved. PTCL is expanding the long distance and Infrastructure side through spreading out two sea-me-we submarine cables yPartnership with new entrants in a deregulated environment. Threats yIncreased competition in long distance continues to exert pressure. yVOIP use is increasing despite ambiguous and discriminatory policies yExposure to market competition yMigration to Cellular Networks yAbility to Attract & Retain Quality Professionals HEERA GROUP 11 | P a g e

Recommendations
yThe promotion system in the Finance & Revenue wing should be revived in true manner all promotion must be made strictly on merit. yThe system of E-PAYMENT which although exist in PTCL finance system but there is need of improvement this facility. yPTCL management should give concentration towards the Securities of deposit and it should be

on maximum level. yEach Region should maintain Profit & Loss and Balance sheet and the statement of Cash inflow and outflow. yPTCL is not utilizing its surplus profit in long-term investment projects which be done. yLatest financial techniques and modules should use in these departments yThe cash generated from the operation must be utilized accordingly. yPTCL should take the services of highly qualified financial analysts. yAll the finance offices should use the same format of transaction yEach Region should allocate the funds at its own level. yThe return on deposit should be checked accordingly.

Conclusion
Ptcl for the time is performing satisfactorily in the market and its profit margins are not that much high as before. However its long term debt is slightly higher than last year. The company should try to lessen employment rate as it is suffering from inefficient work force, so that they would have optimal level of performance. Overall PTCL still behaves as a monopoly it has to change its attitude. At a minimum, avoiding billing errors and providing competent and courteous service to its customers is essential if PTCL wants to show that it is transforming itself to a competitive company which cares for its customers. HEERA GROUP 12 | P a g e

www.ptcl.com.pk/ www.wikipedia.com/ www.brecorder.com/

References
cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V=E+D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula: Read more: http://www.investopedia.com/terms/w/wacc.asp#ixzz1Vyz64TfE