Statement of Financial Position Coursework

Table of Contents

1. Introduction
2. Background of the company
3. Valuation of shareholder value
4. The effect of Different Growth rates on the share price
5. The weighted average cost of capital
6. Measurement of risk to shareholders
7. Is the share over valued or Undervalued

Introduction
Financial analysis of a particular company analysis its past and future growth. Financial performance of the company is
analyzed for the past five years in order to understand the situation of the company in the market. As per the financial report,
the company has been going in loss from the past five years. The net loss as per the financial performance report is increasing
every year. Statement of financial position can also be defined as situation of the company’s assets, its liabilities, and owner’s
equity. In order to calculate the owners Equity as per the formula, the total number of assets minus total liabilities results in the
owner’s equity.

The main aim of the project is to calculate intrinsic value of a share, compare it, and know whether it is overvalue or undervalue.

Background of the company

Mobily is one of the largest communication services company in Saudi Arabia and it is popular for its exceptional
telecommunications services. They have a mission of exceeding the customers’ expectation. They offers internet and telephone
services both fixed and mobile. Mobily’s wireless service provision is one of the fastest in terms of growth in the Saudi Arabia.
Nonetheless, other products and services of the company encompass network business, supply business, vending shops,
Internet services, Short Message Service (SMS), multi-media services, cellular and personal computer operations and satellite
operations. They have cellular devices approaches more than the number of computer; carriers are increasing assuming the role
of major Internet access companies, especially in upcoming markets.

Valuation of shareholder value

When calculating intrinsic value of a share, the future cash flows are estimated using the seven drivers of shareholders value
model. These values have been estimated using historical data as provided below:

Year 2011 2010 2009 2008 2007 Average

Revenues 19,000,845 16,013,138 13,058,256 10,794,539 8,440,432

Growth 18.7% 22.6% 21.0% 27.9% 22.5%

Operating Profit 4,614,147 4,278,770 3,044,628 2,098,970 1,403,750

OP% 24.3% 26.7% 23.3% 19.4% 23.4%

SAKAT 86,267 67,288 30,756 7,187 24,202

 as % of EBIT 1.9% 1.6% 1.0% 0.3% 1.2%

Tangible fixed 32,298,681 31,900,561 29,291,909 25,661,663 19,880,559

assets

Increase as a % 0.2% 2.0% 3.0% 8.1% 3.3%

of increase in
sales

as a % of sales 170.0% 199.2% 224.3% 237.7% 207.8%

net income 4,514,761 4,211,482 3,013,872 2,091,783 1,379,548

equity 17,819,425 15,579,664 12,243,182 9,754,310 5,912,527

ROE 25% 27% 25% 21% 24.6%

EPS 6.45 6.02 4.31 4.00 2.64

Growth 7% 40% 8% 52% 26.5%

Stockholders are mainly concerned about the earnings that will eventually pay them back as dividends from the company or on
the other hand retains in the company to expand shareholders interest in the company since the firm retains the earnings.
Earnings per share (EPS) are expressed on a per share basis.

The effect of Different Growth rates on the share price

Growth rate of any particular company analyzes the assets, earnings and the growing dividends in the particular financial year.
Dividend discount model initiates a clear understanding of different growth rates and the relationship between share price, rate
of return and dividend is analyzed. Any particular company may have no growth, constant growth or non-constant growth.

The weighted average cost of capital

Cost of equity: Discount rate is used to calculate present value of future cash flows. In order to calculate the Discount rate one
can use the Capital Asset Pricing Model (CAPM) equation. This is because CAPM is a model that is widely accepted and used
as a way of assessing the levels of risks associated with a particular asset that is being considered for investment. Although
this model is not perfect however its use has allowed investors to somewhat predict the level of the investment risk that is
associated. The main message, which CAPM model gives to its users, is that how much return premium they can expect from
their investment in any security keeping in view the riskiness relative to the market benchmark. This means that the expected
return on investment in an asset depends upon the risk assessment of the stock in relation to the volatilities that can be
observed in the comparable set of securities or market. This also implies that it allows investors to determine the expected
return on their investments in a stock, which allows them to eliminate the unsystematic risk. Thus, based on this model risk
associated with the investment can be ascertained based on the assumptions that this model uses. The equation is

re = rf + β (rm – rf)

According to gulfbase.com of 3rd January, 2012; the companies Beta is 0.72. Risk free market is considered 3% and market to
be 17%.

Therefore:

re = 0.03 + 0.72 (0.17 – 0.03)

re = 0.01308

re = 13.08%

This figure will not be used as cost of equity in the analysis as we are using book values not market values, Thus ROE is used.

Weighted average cost of capital is the average cost of components of capital. The weighted average cost of capital is
computed as
 Cost of capital

short term loans 0.49% 1,199,919

Long term loans 1.71% 6,715,378

equity 24.6% 17,819,425

25,734,722

Market value debt ratio 16.09%

short term loans 0.48%

Cost of debt 1.69%

Cost of equity 24.61%

Sakati rate 1.2%

Weighted

Weights Costs

short term loans 0.48% 4.66% 0.02%

After-tax cost of debt 1.69% 26.09% 0.44%

Cost of equity 24.61% 69.24% 17.04%

WACC 100.00% 17.50%

There is a difference between the intrinsic value and the market value. It means the stock is undervalued by the market as
compared to intrinsic value. The main reason for the differences between the market value and intrinsic value is due to forces
operating in the market. The share of the company is performing better than the market and it has lower element of market risk
as compared to the market itself. The amount of systematic risk in the price of the share of the company is lowered by
unsystematic risk.

Measurement of risk to shareholders

A company’s shareholders risk can be measured by the changes in its assets and equity in comparison to its debts. Beta is the
measurement of fluctuation of a stock return for a particular period. Beta measures the risk of portfolio. Due to a lot of
fluctuation in the foreign exchange market and the fluctuations in the interest rates investors are exposed to a lot of risk since
the fluctuations affect their investment directly.

In order to measure the risk, a financial manager would consider building up a financial representation of the company and the
market, which it operates in. This will provide a clear view of the risk assessment to the shareholder. In addition, a shareholder
may consider a financial risk management for their investment. Diversifying investment is one of the ways, which are preferable
in today’s market scenario. Diversifying investments help the shareholder spread their investment over a number of other
investment opportunities.

Is the share over valued or Undervalued

A stock is undervalued when the intrinsic value is higher than the market value. Similarly, a stock is overvalued when intrinsic
value of the share is lower than the market value. The share value increases when it declares a financial year profit, its
disclosures about their future prospects and projects, this makes the investors invest in the organization when the organization
is ready to buy back its own shares in some cases. An undervalued share is of a high risk since if the book valued price is lower
than the market value there is a high risk to the investment made by the shareholders due to the loss already incurred due to
the lower book value and even a higher risk is involved if the book value decreases.

Year 0 1 2 3 4 5 6

2011 2012 2013 2014 2015 2016 2

Sales 19,000,845 23,283,070 28,530,380 34,960,278 42,839,284 52,493,983 6

Op profit 5,457,828 6,687,860 8,195,104 10,042,037 12,305,213 15

Tax 65,423 80,167 98,235 120,374 147,503 18

Fixed assets 775,627 950,431 1,164,629 1,427,102 1,748,728 2

cash flow 6,298,878 7,718,458 9,457,968 11,589,513 14,201,444 17

Discount 1.0000 0.8510 0.7243 0.6164 0.5246 0.4464

factor

Planning 5360620 5590288 5829795 6079564 6340034 0

horizon

Summary

Sum of planning horizon PVs 29,200,301

PV of perpetuity, discounted 5 years 44,386,568

Marketable securities (Assets held for sale) 250,000

Corporate value 73,836,869

Long-term debt 7,915,297

Shareholder value 65,921,572

No. of shares (000) 700,000

Share price based on calculation 94.17

Share price 02 January 2012 52.00

The price of the share currently is 52 and intrinsic value $ 94.17.

The share or market price of Mobily is 52.00 and thereby is lower than its intrinsic value and, therefore, the stock is undervalued
thus comprising a low risk to the investors and shareholders. The stock price is actually representing the company realistically
in terms of its actual worth. The return on investment from the company is steady and growing steadily as well with many
strong core competencies but not generating income in an explosive manner like well known technology companies do. The PE
multiple is also average as well. In short, the company is a solid business however, does not belong to the impressive category
either as a business or as an investment option. Solid and steady depict them perfectly.

Technically, they are the same but in the real world, the buy and sell strategy is inferior simply because there are broker’s fees
that deduct amounts from your stock account every time there is a transaction on your behalf. The type of returns you gain in
the end will be wiped out if ever there are any. In addition, any loss on your part would be exaggerated because of the added
burden of transaction fees. Therefore, in the end, the best choice is still the buy-and-hold strategy because it saves you from
transaction fees plus the flexibility of holding out much longer if the price is not favorable to you.
There is a difference between the intrinsic value and the market value. It means the stock is undervalued by the market as
compared to intrinsic value. The main reason for the differences between the market value and intrinsic value is due to forces
operating in the market. The share of the company is performing better than the market and it has lower element of market risk
as compared to the market itself. The amount of systematic risk in the price of the share of the company is lowered by
unsystematic risk.