STCBL Financial Analysis

1
Introduction
ASSIGNMENT COVER PAGE

Unit code
6224
Submitted to
Mr. Chonga Zangpo
Assignment title
Business Finance PG
CHECKLIST
I have:
Followed the referencing rules set out in the unit outline.
Declaration
I acknowledge that:
this assignment is my own work
this assignment is expressed predominantly in my own words
the words and ideas of others, where used, are properly used and acknowledged
no part of this assignment has been previously submitted for assessment.
Group Members
1. Sonam Gyamtsho (u3147014)

2. Sonam Wangda (u3146790)
3. Ugyen Chada (u3146802)
4. Ugyen Samdrup (u3090677)
Date:
27/11/2015
Time: 3:0 PM
Introduction
Table of Contents
1.
Introduction ............................................................................................................................. 3
2.
Cost of capital .......................................................................................................................... 3
3.
2.1
Cost of Common Stock Equity ........................................................................................ 5
2.2
Cost of Retained Earnings ................................................................................................ 7
2.3
Finding and recommendation ........................................................................................... 8
Leverage and capital structure ................................................................................................. 9

3.1
Leverage ........................................................................................................................... 9
3.1.1 Operating Leverage ........................................................................................................ 9

3.1.2 Financial Leverage ....................................................................................................... 11
3.1.3 Total Leverage .............................................................................................................. 12
3.2
Capital Structure............................................................................................................. 14
3.2.1 Return on Assets ........................................................................................................... 14

3.2.2 Return on Capital Employed ........................................................................................ 15
4.
5.
Dividend Policy ..................................................................................................................... 16

4.1
Theories of Dividend Policy .......................................................................................... 18
4.2
Dividend Policy of STCBL ............................................................................................ 19
Working Capital Management (WCM) ................................................................................. 20

5.1
Current Assets ................................................................................................................ 21
5.1.1 STCBLs Inventories .................................................................................................... 22

5.1.2 Inventory Turnover Days.............................................................................................. 24
5.2
Trade Receivable ............................................................................................................ 25
5.2.1 Accounts Receivable days ............................................................................................ 25

5.3
Current Liabilities .......................................................................................................... 26
5.3.1 Accounts Payable Days ................................................................................................ 27

5.4
Cash Conversion Cycle (CCC) ...................................................................................... 28
5.5
Net Working Capital ...................................................................................................... 29
5.6
Findings and Recommendations .................................................................................... 30
6.
Conclusion ............................................................................................................................. 32
7.
References ............................................................................................................................. 33
Introduction
Financial Analysis of State Trading Corporation of Bhutan Limited

(STCBL)
1. INTRODUCTION
State Trading Corporation of Bhutan Limited, established in 1968 by the Royal Government of
Bhutan (RGOB), under the administrative control of the then Ministry of Trade and Industry, is
today a leading autonomous trading organization in the country. Primarily established to assist
various government departments to procure essential commodities from India and a few special
commodities abroad, today it caters a wide range of commodities and products mainly of
automobile goods and construction materials.
With its vision to be a Paragon of Trading House in the Region, STCBL today has its shares
divided between Government (DHI) and public with 50.98% and 49.02% respectively. In its four
and half decades of service to the nation and people, STCBL per se has seen it growth and
development in numerous fields.
This paper of ours is a humble attempt to study the business and finance analysis of the company.
In this paper of ours, we have looked at the Cost of capital, Leverage and Capital Structure,
Dividend Policy and Working Capital Management of the STCBL. We have dissected our work
into four parts. In the first part, we have looked at the Cost of Capital. In relation to STCBL,
common stock is the only cost of capital of the company. The second part looks at the use of fixed
cost assets or funds to maximize returns of the company along with the capital structure of the
company. In the third part, this paper presents the dividend policy that is being followed by the
company in its managing the affairs and shares. In the final part of this paper, we have looked at
the working capital management.
Based on our findings, we have provided recommendations to the organization. Our work is the
collective effort of all four of us.
2. COST OF CAPITAL
Fundamental to a multiplicity of corporate decisions is a firms cost of capital. From determining
the hurdle rate for investment projects to influencing the composition of the firms capital
structure, the cost of capital influences the operations of the firm and its subsequent profitability.
Cost of capital
The cost of capital is the rate of return that a firm must earn on the projects in which it invests to
maintain the market value of its stock (Gitman, 2013, p. 427) Firms usually raise long term capital
from four basic sources: long-term debt, preferred stock, common stock, and retained earnings.
STCBLs Annual Reports revealed that the company does not rely on all above sources for raising
its capital fund. It is evident that the company has neither issued any preference shares nor sold
bond to raise its capital fund. The company, besides overdraft (OD) provision with the Bank of
Bhutan, has not sought any long term borrowing or long term debt from external sources. It has
solely raised its fund from common stock as reflected in the table below.
Table 1: Capital Structure
Particulars
Authorized
180,001,600
102,919,454.16
1800016
9,00,008 bonus
shares (1:1)
180,001,600
94,950,554.52
2012
5,000,000
equity shares
of Nu.100
900,008
300,005 bonus
shares (2:1)
90,000,800
180,359,151.71
600,003
12,000,060.00
20% dividend paid
60,000,300
201,322,485.92
Retained
earnings (Nu.)
Debt (Nu.)
7,968,899.64
4,592,202.81
9,037,165.79
60,287,808.05
Capital
Mix
(Equity share:
Reserve: Debt)
Earnings per
share
Debt
Equity
Ratio
Return
on
Equity
Market price
0.64:0.36:0.00
25,287,368.52
(OD with BoB)
0.65:0.35:0.00 0.30:0.61:0.09
76,969,704.24
(OD with BoB)
0.18:0.30:0.22
No of shares
Issue of bonus
share/Dividend
Equity
Reserve (Nu.)
2014
50,000,000
equity shares of
Nu.10
18000160
Share Bifurcated
2013
5,000,000 equity
shares of Nu.100
2011
1,000,000 equity
shares of Nu.100
0.44
0.26
1.00
12.00
0.28
1.28
0.03
0.02
0.03
0.28
20
200
190
190
Cost of capital
Graph 1: Capital Composition
Capital Composition
(In Percentage )
Equity
70.00
Reserve
Debt
65.47
63.62
61.00
59.51
60.00
50.00
40.00
36.38
34.53
30.44
30.00
22.75
17.74
20.00
8.55
10.00
-
2014
2013
2012
2011
The capital composition of STCBL for four consecutive years (2011-2014) is reflected in the
graph-1 given above. The graph reveals that in 2011 and 2012, reserve was the major source of
capital comprising approximately 60% of the capital source. However, from 2013 onward, equity
share became the major source of capital comprising almost 65 % of the capital. The reason for
the change in capital structure and the cost of equity is discussed below.
2.1 Cost of Common Stock Equity
Equity share is a common share issued by a firm to the investors for capital. It is the most common
source of capital for the firms. Equity share is the main source of capital for STCBL. Reports
revealed that the company as of now has authorized equity shares of 50,000,000 at the rate Nu.10
each of which 18000160 have been already issued. In 2012, 300,005 equity shares were allotted
as bonus shares with 2:1 ratio by capitalization of profit in year 2012. Similarly, in 2013, bonus
share of 9,00,008 equity shares in 1:1 ratio by capitalization of Reserve in the year 2013. The
dividends were not paid till date after paying 20% in 2011.
Finding the Cost of Common Stock Equity
The cost of common stock is the return required on the stock by investors in the marketplace. The
cost of common stock equity (rs) is the rate at which investors discount the expected common
Cost of capital
stock dividends of the firm to determine its share value. It is vital to calculate the cost of equity so
as to ascertain the rate of return a company must strive for because the rate of return below the
cost of capital will decrease the value of the and vice versa. The cost of common stock equity can
be measured by using two techniques. One relies on the constant- growth valuation model, the
other on the capital asset pricing model (CAPM). However, the cost of common stock equity is
being calculated using constant-growth valuation (Gorden Growth) model. Since, there are no
dividends paid in three consecutive years (2012-2014), the cost of equity is calculated only for
2012 as the dividend was paid in 2011. The cost of capital is calculated as below:
Calculation of Cost of common stock equity (rs)
D1
rs = ----------- + g
Po
Where,
D1 (per-share dividend expected at the end of year 1) =20
P0 (value of common stock) = 190
g (constant rate of growth in dividends) =?
Calculation of growth rate (g)=ROE*(1-p)
Where,
ROE (Return on equity) = 28%
P (pay out rate) = 20%
Therefore,
G=28%*(1-.20)
=28*0.8)
=22%
Cost of common stock equity (rs)
D1
rs = ----------- + g
Po
= (20/190) + 22%
=0.105+22%
=22.11%
Cost of capital
The calculation reveals that the cost of equity for 2012 is 22.11%. This means the company must
earn a rate of return above 22.11% i.e. the cost of capital so as to increase the value of the firm.
Otherwise the investors will either invest or start selling the shares. Although, no dividend was
declared in 2012, instead a bonus shares of 2:1 ratio was allotted to the existing shareholders by
capitalizing the past reserves. This has positively benefited the shareholders as the rate of return
earned is more 50% which is double the cost of capital. In 2013, a bonus shares of 1:1 ratio was
allotted in lieu of dividend receiving 100% rate of return. The value of the firm must have increased
in these two years. However, neither dividend nor bonus shares were issued in 2014. This might
have negatively affected the value of the company.
2.2 Cost of Retained Earnings
Retained earnings are that part of the earnings available to common shareholders not paid out as
dividend or the earnings ploughed back into the firm for growth. A firm requiring common stock
equity financing of a certain amount may either issue additional common stock in that amount and
still pay dividends to stockholders out of retained earnings, or increase common stock equity by
retaining the earnings in the needed amount (Gitman, 2013). Cost of retained earnings refers to
the return that common stockholders require the firm to earn on the funds that have been retained,
thus reinvested in the firm, rather than paid out as dividends. In this case, what we are saying is
that the firm must earn a return on reinvested earnings that is sufficient to satisfy existing common
stockholders investment demands. If this required return is not earned, then the stockholders will
demand that the firm pay them the earnings in the form of dividends so that they can invest the
funds outside the firm at a better rate. In essence, then, the common stockholders are telling the
firm that if it cannot invest at some minimum rate of return, then the earnings should be paid out
as dividends so that the investors can invest in alternatives of their choice.
STCBL, as mentioned earlier, maintains significant portion of its capital in reserve. Table-1 cited
above shows that in 2011 and 2012, more than 60% percent of its capital was maintained in the
form of reserve. However, its percentage dropped to below 37 % subsequent to issue of bonus
shares in two consecutive years (2012 and 2013).
Retained earnings are the cash that company has. While this seems like free financing because
it doesnt have to be raised in the market, it does have an opportunity cost. If the firm did not use
this money for financing it could return it to the shareholders. In other words, using retained
Cost of capital
earnings is a form of equity finance because it takes money from shareholders. Since it equity
finance, it should be priced at the cost of equity. Firms seem to have a preference for retained
earnings to fund investments, for a variety of reasons. Retained earnings are actually a little bit
cheaper than new equity financing since the firm does not have to pay the cost of issuing shares.
In addition, outside investors may not have good information about the prospects of the firm, which
would make them hesitant to invest in newly-issued equity The downside of using retained
earnings is that it allows the firm to invest shareholders money without having to convince
investors that it is a good idea. If the returns to the project do not exceed the cost of capital, it will
be hard to sell shares or bonds to skeptical investors. However, if firms can use cash they have on
hand, they escape the discipline imposed by the market.
2.3 Finding and recommendation
Based on the above analysis, following observations and recommendations are made as discussed
below:
i.
Analysis of financial reports of past four years (2011-2014) reveals that STCBL solely relied
on common stock as a source its capital fund. It has neither issued preference share nor
obtained any long term debt from external sources. As discussed above, the general reserves
and equity share were the main composition of capital fund which is very good for the company
as the company need not pay out the cash and moreover it need not resort to external debt
which is quite expensive.
ii.
It is also evident that the company has issued bonus shares as a right issue in 2012 and 2013 to
raise its capital fund. A rights issue provides a way of raising new share capital by means of
an offer to existing shareholders, inviting them to subscribe cash for new shares in proportion
to their existing holdings. STCBL has rightly resorted on equity shares to raise its capital fund.
In doing so, the company has firstly retained outflow of cash. Secondly, investment projects
can be executed without involving either the shareholders or any outsiders. Finally, the cost of
underwriting and administrative costs have been avoided. Thus, it is commendable to use
common stock as the source of capital fund for the company.
iii.
The company has excessively issued bonus shares for two consecutive years (2012 and 2013)
by capitalizing the reserve fund. This has significantly reduced the reserve portion of the
company. The company would have issued dividends in increasing trend instead of bonus
Leverage and capital structure

shares. The company would have saved at least certain portion of reserves which would have
granted leverage to the company in providing dividend at the times of business downturn. For,
instance, STCBL could have comfortably paid the dividend in 2014 from the reserves. By
doing this, the company would have met the expectation of the shareholders and also promoted
the companys value.
Although it is always cheaper to raise capital fund from the issue of bonus share and retained
earnings, the company must be cautious in maintaining certain ratios between the equity,
reserve and dividend to meet investors expectation and improve companys value.
3. LEVERAGE AND CAPITAL STRUCTURE
3.1 Leverage
Leverage can be defined as the ability of a firm to use its fixed cost assets or funds to magnify the
returns to shareholders. According to Weston, et al., (1996) Leverage is created when a firm has
fixed cost associated either with its sales and production operation or with its financing
characteristics.
In business terminology, a high degree of operating leverage, other factors held constant, implies
that a relatively small change in sales results in a large change in Return on Equity (ROE).
Leverage is the use of a relatively small investment or a small amount of debt to achieve greater
profits. That is, leverage is the use of assets and liabilities to boost profits while balancing the risks
involved.
The objective of Financial Management is to maximize the wealth of organization and to magnify
the returns to shareholders. Financing and investment decisions are very important in maximizing
shareholders returns. The fixed cost assets or funds of a company play important role in
maximizing Earning per share (EPS), ROE etc.
Basically, leverages are classified into two types. But, it can be ultimately three types namely
Operating Leverage, Financial Leverage and Total/Combined Leverage.
3.1.1 Operating Leverage
Operating leverage may be defined as the firms ability to use fixed operating cost to magnify the
effects of changes in sales on its operating profit or earnings before interest and taxes (EBIT).
10

Operating leverage is the extent to which a firm uses fixed costs in producing its goods or offering
its services. Fixed costs include advertising expenses, administrative costs, equipment and
technology, depreciation, and taxes, but not interest on debt, which is part of financial leverage.
By using fixed production costs, a company can increase its profits. If a company has a large
percentage of fixed costs, it has a high degree of operating leverage. Automated and high-tech
companies, utility companies, and airlines generally have high degrees of operating leverage.
Operating Leverage
Sales revenue
Less: cost of goods sold
Gross profit
Less: Operating Expense
Table 2: Operating Leverage
Sales revenue
Less: cost of goods
sold
Gross profit
Less: Operating
Expense
Operating Leverage
2012
2013
2014
1,009,714,737.89
550,678,878.09
716,185,830.00
886,103,373.73
459,889,968.65
608,068,632.64
123,611,364.16
90,788,909.44
108,117,197.36
89,589,790.48
74,309,758.60
74,309,758.60
34,021,573.68
16,479,150.84
33,807,438.76
Degree of Operating Leverage (DOL): The degree of operating leverage (DOL) measures the
effect of a change in sales volume on earnings before interest and taxes (EBIT). It is defined as the
percentage change in EBIT associated with a given percentage change in sales:
%Change in operating profit (EBIT)
DOL =----------------------------------------------%Change in Sales
Calculation of DOL for STCB for the year 2014,
Percentage change in operating profit (EBIT) = 42 % (Since EBIT of Y2014 is 11398923.06 and
Y2013 is 8042089.47)
Percentage change in sales = 30.06% (Sales Y2014 is 716,185,830.00 and Y2013 is
550,678,878.09)
Therefore, DOL =42/30.06 =1.4

So, according to STCBs operating leverage, the degree of effect in change in sales on EBIT is 1.4
times for Y2014 and Y2013 compared.
Operating Breakeven: The breakeven quantity can be calculated by recognizing that operating
breakeven occurs when ROE is 0, hence when earnings before interest and taxes (EBIT) is 0.
EBIT = PQ VQ F = 0.
DOL and Business Risk: Business risk depends in part on the extent to which a firm builds fixed
costs into its operations if fixed costs are high, even a small decline in sales can lead to a large
decline in ROE. So, other things held constant, the higher a firms fixed costs, the greater its
business risk. Higher fixed costs are generally associated with more highly automated, capital
intensive firms and industries. However, businesses that employ highly skilled workers who must
be retained and paid even during recessions also have relatively high fixed costs, as do firms with
high product development costs, because the amortization of development costs is an element of
fixed costs.
STCB has a DOL of 1.4 for Y2014 compared with Y2013, thus it has a positive change and its
effect is just 1.4%.
3.1.2 Financial Leverage
According to (Gitman, 2013)Financial leverage is defined as the potential use of financial costs to
magnify the effects in EBIT on the firms Earning per share (EPS). So, the extent to which fixedincome securities (debt and preferred stock) are used in a firms capital structure is called as
financial leverage.
Financial
Leverage
Earnings before interest and taxes (EBIT)

Less: Interest
Net Profit before taxes
Less: Taxes
Net Profit after taxes
Less: Preferred Stock Dividends
Earnings available for common stock holders
Earnings per share (EPS)
11
12

Table 3: Financial Leverage
Particulars
Earnings before interest and taxes (EBIT)
Less: Interest
Net Profit before taxes
2014
2013
11,398,923.06
122,053.35
11,276,869.71
2012
8,042,089.47 22,095,972.06
864,119.00
7,518,480.29
7,177,970.47 14,577,491.77
Less: Taxes
3,383,060.91
4,314,005.66
5,540,325.98
Net Profit after taxes
7,893,808.80
2,863,964.81
9,037,165.79
Earnings available for common stock holders
0.44
2.55
10.04
0.44
2.55
10.04
Less: Preferred Stock Dividends
Degree of Financial Leverage (DFL): The degree of financial leverage (DFL) is defined as the
percent change in EPS that results from a given percent change in EBIT, and it is calculated as:
%Change in EPS
DFL =-------------------------------%Change in EBIT
= 72.55/42
=1.73
The DFL of STCB for Y2014 compare with Y2013 is 1.73, which means the effect of change on
EBIT on EPS is 1.73 times.
3.1.3 Total Leverage
The Operating and financial combined into an overall measure of leverage called total leverage.
Total leverage is concerned with the relationship between sales and earnings per share.
Specifically, it is concerned with the sensitivity of earnings to a given change in sales.
Degree of Total Leverage (DTL): The degree of total leverage is defined as the percentage change
in stockholder earnings for a given change in sales, and it can be calculated by multiplying a
companys degree of operating leverage by its degree of financial leverage. Company with little
operating leverage can attain a high degree of total leverage by using a relatively high amount of
debt.
13
DTL = 72.55/30.06 =2.41

(EPS y2014 is 0.44 (at Face Value of share @10) and EPS of Y2013 is 2.55(at FV @100))
Table 4 : Application of Leverage
Particulars
Sales in unit
Sales (per unit)
Variable cost (per unit)
Total contribution margin
Fixed operating cost
EBIT
(interest)
EBT
(tax 40%)
Earnings after tax (EAT)
(preferred dividend)
Earnings available for common stock
holders
No. of common shares
Percentage change in EBIT

DOL= -------------------------------------Percentage change in sales
=0.69/.30
=1.2 times
Percentage change in EPS
DFL= ----------------------------------Percentage change in EBIT
= 0.30/.6o
=5 times
DTL= DOL * DFL
= 1.2 *5
= 6 times
Current
20,000.00
100,000.00
40,000.00
60,000.00
10,000.00
50,000.00
20,000.00
30,000.00
12,000.00
18,000.00
12,000.00
50% increase
30,000.00
150,000.00
60,000.00
90,000.00
10,000.00
80,000.00
20,000.00
60,000.00
24,000.00
36,000.00
12,000.00
6,000.00
24,000.00
5,000.00
1.20
5,000.00
4.80
14
Effects of Operating leverage: Since the DOL is 1.2 times, so 50% increase in sales will result in
50% X 1.2 times = 60% increase in EBIT.
Effects of Financial leverage: Since the DFL is 5 times, so 60% increase in EBIT will result in
60% X 5 times = 300% increase in EPS.
Effects of Total leverage: Since the DTL is 6 times, so 50% increase in sales will result in 50% X
6 times = 300% increase in EPS.
3.2 Capital Structure
The assets of a company can be financed either by increasing the owners claim or the creditors
claim. The owners claims increase when the form raises funds by issuing ordinary shares or by
retaining the earnings, the creditors claims increase by borrowing. The various means of financing
represents the financial structure of an enterprise. The financial structure of an enterprise is
shown by the left hand side (liabilities plus equity) of the balance sheet. Traditionally, short-term
borrowings are excluded from the list of methods of financing the firms capital expenditure, and
therefore, the long term claims are said to form the capital structure of the enterprise. The capital
structure is used to represent the proportionate relationship between debt and equity. Equity
includes paid-up share capital, share premium and reserves and surplus.
3.2.1 Return on Assets
In this case profits are related to assets as follows
Net profit after tax
Return on assets =
Total assets
Table 5: Return on Asset
Particulars
2014
2013
2012
PAT
7,893,808.80
2,863,964.81
9,037,165.79
Total Asset
581,217,634.63
440,109,930.40
486,351,508.80
ROA= (PAT/Total Asset) X100
1.36
0.65
1.86
15

According to Return on asset for STCB, it has 1.36 percent in Y2014 over total assets, 0.65
percent for Y2013 and 1.86 percent for Y2012.
3.2.2 Return on Capital Employed
Here return is compared to the total capital employed. A comparison of this ratio with that of
other units in the industry will indicate how efficiently the funds of the business have been
employed. The higher the ratio the more efficient is the use of capital employed.
Net profit after taxes & Interest
Return on capital employed
=
Total capital employed
Where, Total capital employed = Fixed assets + Current assetsCurrent liabilities

Table 6 : Return on Capital
Particulars
2014
2013
2012
PAT
7,893,808.80
2,863,964.81
9,037,165.79
Total Capital Employed
282,921,054.16
165,157,775.88
215,991,557.09
ROC
2.79
1.73
4.18
Considering Return on capital employed for STCB, 2.79 percent for Y2014, 1.73 for Y2013 and
4.18 for Y2012.
Table 7 : EBIT Levels
Particulars
Earnings Before Interest & Tax
Change
2014
2013
2012
11,398,923.06
8,042,089.47
22,095,972.06
3,356,833.59
(14,053,882.59)
(83,316,932.57)
3.40
(0.57)
(0.27)
% Change
The higher the quotient, the greater the leverage. In STCBs case it is increasing because of
decrease in EBIT levels to 2013-2014.
Table 8 : EPS Analysis
Particulars
Profit After Tax
Less: Preference Dividend
2014
2013
2012
7893808.8
2863964.81
9037165.79
16
Dividend Policy
Amount of Equity share holder
No. OF equity share of Rs.10/each
180,001,600.00
180,001,600.00
90,000,800.00
18,000,160.00
1,800,016.00
900,008.00
0.44
2.55
10.04
EPS
Table 9 : Funding Mix
Particulars
2014
2013
2012
Source of funds
a) Share capital
180,001,600.00
180,001,600.00
90,000,800.00
b) Reserves and surplus
102,919,454.16
94,950,554.52
180,359,151.71
282,921,054.16
274,952,154.52
270,359,951.71
a) Secured Loans
b) Unsecured Loans
TOTAL (B)
282,921,054.16
274,952,154.52
270,359,951.71
c)Deferred tax
TOTAL (A)
Loan Funds
TOTAL (A+B)
The STCB does not have any funds from long term loans and it has sufficient fund being generated
from share capital and reserves surplus. The total fund as on Y2014 is 282,921,054.16 up from
Y2013 with 274,952,154.52.
4. DIVIDEND POLICY
What is dividend policy? According to Livia (2006), Dividend policy is the division of earnings
between: payments to shareholders and reinvestment in the firm.
Everywhere in the world, dividend policy has long been a subject of research and debate. There
are many theoretical and empirical results describing the decisions companies make in this area.
At the same time, however, there is no generally accepted model describing payout policy.
Dividend Policy
Moreover, empirical findings are often contradictory or difficult to interpret in light of all
persisting theories.
In their seminal paper, Miller & Modigliani (1961) showed that under certain assumptions
dividends are irrelevant; all that matters are the firm's investment opportunities. Miller and
Modigliani considered the case of perfect capital markets, rational behaviour (more wealth being
preferred to less, indifference between cash payments and share value increases) and perfect
certainty (future investments and prospects are given).
In the environment described above, Miller and Modigliani show that dividend policy does not
affect the value of the firm. This is true whether one considers the value of the firm to be given by
the discounted cash flow method, by the stream of future dividends or earnings or as a sum of
current earnings and future investment opportunities. Given perfect capital markets, the firm will
always be able to compensate the cash out flow by attracting new money (via new shares or debt)
if this is required by its investment programme (Stacescu, 2006).
In real life however, people seem to care about dividends. Lintners (1964) classical study on
dividend policy suggests that dividends represent the primary and active decision variable in most
situations. Dividend policy seemed characterized by inertia and conservatism; managers seemed
to think that investors reward stability and avoided making unsustainable changes in payout ratios
(Lintner, 1964). Lintner suggests a model of partial adjustment to a given payout rate.
In a recent study, Brava, et al.( 2005) found that maintaining the dividend level is a priority on
par with investment decisions and that less than half of the executives they interviewed agree that
the availability of good investment opportunities is an important or very important factor affecting
dividend decisions.
Researchers have tried to explain the importance of dividends by looking for imperfections that
can undermine the irrelevance proposition. Modigliani and Miller (1961) suggested that taxes can
be a factor: dividends are taxed in a different way from capital gains. Information asymmetries
between the management of a company and its (prospective) shareholders can lead to dividends
being used as costly signals. Agency problems between shareholders and management or
shareholders and debt holders in a world of imperfect contracting - mean that dividends can be
used as a way to control the behaviour of the other party. Incomplete markets could reduce the
investors' ability to substitute between cash and capital gains depending on their liquidity needs.
17
Dividend Policy
Companies in the world often consider dividend policy an important decision because based on it
the company decides what funds will go to shareholders and what funds are reinvested in the
company (Livia, 2006).
In across the world, companies practice different types of dividend policy. These policies are of
four types. According to Gitman (2013) these policies are:
1. Stable Dividend Policy: When the company maintains more or less the stable rate of dividend,
it is known as stable dividend policy. If the company has to maintain and follow stable dividend
policy, the market price of its share will be of permanently higher value.
2. Policy of Regular Stock Dividend: It is the policy followed by the company to pay dividend in
the form of shares instead of cash. Some companies follow this as a regular practice. Whenever
the stock dividends are declared by the company, it does not affect the liquidity but increases
the shareholdings of the shareholder.
3. Policy to Pay Irregular Dividend: Generally, this policy of dividend is followed by the
companies having irregular earnings or inadequate profits. Based on this policy, the company
earns a higher amount of profit to pay higher dividend. If there is no profit in any particular
year, the company does not declare the dividend to its shareholders.
4. Policy of no Immediate Dividend: It is the policy followed by the company which decides to
pay no dividend even when it earns large amount of profits. Because, either it may be a new
company or the firms access to capital market is difficult.
4.1 Theories of Dividend Policy
There are a lot of research and studies regarding the company's dividend policy, but there is not a
consensus in this area. There are pros and cons of distributing dividends. There are mainly three
different points of view:
The conservatives consider that an increase in dividend will be followed by an increase in the
value of the firm.
The radicals consider that an increase in dividend will be followed by a decrease in the value of
the firm
The middle-of-the-road consider that the dividend policy is irrelevant
18
Dividend Policy
To understand the company's dividend policy and its implications on firm value, it is of utmost
importance to address first the theories.
Dividend Irrelevance Theory suggests that under ideal market conditions, dividend policy is
irrelevant and it does not influence the value of the firm, or the cost of equity (Miller & Modigliani,
1961). Many researchers believe that the findings of Modigliani and Miller are a correct view in
the efficient markets hypothesis. However, the real environment has imperfections that make
dividend policy an important decision to the company affecting the company's value.
Bird-In-The-Hand Hypothesis: Dividend policy has been one of the most significant topics in
financial literature, which give it a considerable attention to solve the dividends vagueness. BirdIn-The-Hand Hypothesis describes that in a world of uncertainty and imperfect information,
dividends are valued differently to retained earnings (or capital gains). It is of the view that
investors prefer the bird in the hand of cash dividends rather than the two in the bush of future
capital gains. Increasing dividend payments may then be associated with increases in firm value.
As a higher current dividend reduces uncertainty about future cash flows, a high payout ratio will
reduce the cost of capital ( Al-Malkawi , et al., 2010)
Agency theory suggests that dividends can be used as a means to control a firm's management.
Distributing dividends reduces the free cash flow problem and increases the management's equity
stake. The question remains why the shareholders would not use debt or share repurchases instead.
Porta et al. (1999) found that in countries with better shareholder rights firms pay proportionally
more dividends. Therefore, Allen & Michaely(2002) state there is no evidence that in countries
with low investor protection, management will voluntarily commit itself to pay out higher
dividends and to be monitored more frequently by the market.
4.2 Dividend Policy of STCBL
The study observed that STCBL does not have established dividend policy in place. Normally the
rate of dividend is decided by the Board of Directors in Annual General Meeting. From the
financial statements, it is evident that STCBL does not pay fixed dividend to shareholders.
However, STCBL does pay dividends when the actual profit is high in that particular year.
But over all, of the four dividend policies discussed above, STCBL recently in 2012 & 2013
practiced Policy of Regular Stock Dividend and Policy to Pay Irregular Dividend. In the line of
19
Working Capital Management (WCM)

these two policies, STCBL has issued dividends in the form of bonus shares, not in cash. Further,
in 2013, the study found out that the company had also issued 100 percent bonus shares through
capitalisation of Companys Reserve.
Based on the theory of Bird in the Hand, STCBLs shareholders prefer to receive their dividends,
rather than investing back for higher returns in future.
Recommendation: STCBL does not have any policy documents in place. However, in practice, it
has based its distribution of dividends on the decision of the Board and also the profits for the
particular year. The practice is effective. However, it is highly recommended to have written policy
in place to avoid future complications.
5. WORKING CAPITAL MANAGEMENT (WCM)
Efficient management of working capital is a fundamental part of the overall corporate strategy in
creating the shareholders value (Nazir & Afza, 2009, p. 19). A proper management of working
capital has become a very essential component to Companys operational success. In practice,
WCM of the business is a reflection on the result of firms activities on managing its debts,
inventories, receivables, cash and other current assets and liabilities. In general, the term Working
Capital can be understood as difference between firms current assets and current liabilities.
Filbeck & Krueger (2005, p. 11) define working capital as the difference between resources in
cash or readily convertible into cash (Current Assets) and organizational commitments for which
cash will soon be required (Current Liabilities). However, simply knowing the difference between
current assets and liabilities at each point of time and trying to analysis working capital, one will
not accomplish much in figuring out what your organizational working capital needs are and how
to meet them. In order to determine the working capital needs firms has to understand the complete
operating cycle of inventories, accounts receivables, accounts payables in terms of days.
The importance of WCM is not new in finance literature. Many researchers have approached study
on working capital management in numerous ways to understand the companys performance.
Such study has resulted requirement of certain level of working capital within the company which
potentially can maximizes companys return. However, in State Trading Corporation of Bhutan
Limited (STCBL), it seems not much importance is provided in managing companys working
capital. Surprisingly, the company did survive so far. To STCBL, WCM is managing and making
20
21

funds available to run its business at times when company is faced with threads due to policy
change, tax revisions, foreign exchange fluctuation and managing liquidity constraints. However,
our study shall closely look at: Current Assets, Current Liabilities, Cash Conversion Cycle, and
Net Working Capital for three consecutive years (2012-2014) and provide recommendation to the
company where ever possible.
5.1 Current Assets
From the companys financial statement 2012-2014, it is observed that STCBLs current assets
consist of broadly 6 (six) components as shown in the table 10. In all the three consecutive years,
companys inventors meant for trading activities contributes major portion to total current assets
(Working Capital) followed by short term loans and advances in year 2014 and 2012. The
percentage contribution by inventories to the total current assets varies from 40% to 60% between
year 2012 to 2014 as shown below:
Table 10: : Statement of Current Assets and Percentage Contribution to Total Current Assets
Current assets
Notes
Year 2014
Year 2013
Year 2012
(a) Inventories
254,042,878.17
137,710,097.49
231,516,939.76
(b) Trade Receivables
77,807,359.88
67,310,273.80
55,916,208.19
(c) Cash and Bank Balance
10
37,549,665.23
70,222,635.03
16,739,329.66
(d) Short-Term Loans & Advances
11.1
100,429,072.00
51,008,937.13
64,587,328.56
(e) Adv. Corporate Tax net of Provisions
11.2
6,116,326.85
6,790,868.05
5,890,567.75
12
7,354,468.01
4,956,542.69
7,013,673.63
483,299,770.14
337,999,354.19
381,664,047.55
Inventories
52.56
40.74
60.66
Trade Receivables
16.10
19.91
14.65
7.77
20.78
4.39
20.78
15.09
16.92
(f) Other Current Assets

Total
Contribution to Working Capital in %
Cash and Bank Balances

Short Term Loans & Advances
Regarding the current asset, the study will focus on the companys inventories and trade
receivables as it has major impact on companys working capital. Although, the figure shown
under short-term loans and advances above looks alarming, by the same effect, the figure is
22

mitigated by providing dual affect to liability for purchase account which is grouped under other
current liabilities in note no. 5.
5.1.1 STCBLs Inventories
While reviewing the companys financial statement under notes to account No. 8 and 15.1 the
group observed that the companys inventories is taken as sum total of closing stock at the yearend
plus the closing goods-in-transit by deducting provision on obsolete stock amount from the total
inventories as shown in the table below. The value of inventories as noted in the annual audit
report, is valued at actual cost and net realizable value.
Table 11: Statement of closing stock composition
Year 2014
Year 2013
Year 2012
Closing Stock
Closing Stock
Closing Stock
2,109,478.90
1,785,778.08
665,136.38
8,369.58
1,890,230.24
7,560.77
Explosives
24,527,146.14
23,831,291.91
26,300,339.52
Eicher Spare Parts
12,341,794.73
13,055,330.88
13,494,714.40
Indian Spare parts (Tata)
10,276,903.69
8,340,531.73
7,873,891.35
Imported Tyres & Tubes
3,547,180.80
4,437,136.35
6,180,378.70
Imported Spare Parts
47,679,687.64
44,991,979.01
45,370,848.50
Tata Vehicles
29,430,349.91
16,048,570.92
102,739,747.02
9,562,648.55
10,534,222.80
22,711,606.95
117,046,826.76
15,812,021.43
12,061,476.27
660,288.56
5,555,072.22
4,973,993.41
5,200,768.03
136,135.83
61,859.52
15,945.40
3,763,200.00
3,763,200.00
Toyota Service, Head Office
3,841.55
3,598.00
Tata Service
1,033.06
23,148.00
Apollo Tyres
2,734,299.14
3,025,878.74
Ford Vehicle
657,421.65
Items
G.C. Sheet
Bitumen
Eicher Vehicles
Imported Vehicles
Two Wheelers
Office Equipment, Machineries &
acc.
Service Centre, Thimphu
Luigong Machine
23

Kent Water Filter
529,114.72
Asian Paints
263,434.95
98,873.85
233,344.47
1,508,305.00
268,911,551.70
152,578,771.02
246,385,613.29
E- Bike Spare Parts

Ford Spare Parts
Tractors and Power Tillers
Total
STCBL currently deals with more than 20 products in the market. The products are grouped under
different business verticals. In general, it is observed that none of the business units have their
inventory management manual in place as of today. Thus, in absence of the procurement manual,
it is found that most of the companys procurement procedures are largely dominated by Suppliers
system of operations.
Closely looking at table 11 above, in year 2014, STCBLs inventories consist of largely imported
vehicle (Toyota Vehicles) followed by imported spare parts and Tata vehicle. However, in year
2013 and 2012 imported spare parts and Tata vehicle has dominated the inventory holding
respectively. The graph below presents a pattern of amount invested by STCBL on inventories
from year 2012 to 2014. However, the graph represents only those inventories that has a value
more than 10 million.
Graph 2: Inventory holding pattern
Graph showing the inventory holding pattern of STCBL for 3 years

Closing Stock value in million Nu.
117.05
120.00
102.74
100.00
80.00
60.00
40.00
20.00
44.99
47.68 45.37
23.83
24.53 26.30
13.06 13.49
12.34
8.34
10.28 7.87
29.43
16.05
10.53
9.56
22.71
15.81
12.06
Explosives Eicher Spare Indian Spare Imported

Parts
parts (Tata) Spare Parts
Tata
Vehicles
<--------- Items -------->

Year 2014
Year 2013
Year 2012
Eicher
Vehicles
Imported
Vehicles
24

From the flow chart above, apparently it is evident that STCBL has diverted maximum portion of
the working capital in vehicle segments followed by imported spare parts. Further to review on the
impact of inventories on the companys working capital, the group conducted analysis on days
inventory turnover ratio as below:
5.1.2 Inventory Turnover Days
Generally, inventory turnover measures number of times a company can sell of its inventory at a
specific period of time. High inventory turnover ratio indicates companys efficiency in managing
its inventories. Practically, STCBL currently takes approximately 5 months to import vehicles and
spares parts from Japan. Approximately imports from India takes 3 to 3 and half months on
average. But the study shall review on companys overall inventory turnover days for three
consecutive years by applying the formulae:
Average Inventory
Stock turnover days = ------------------------ X 365
Cost of Goods Sold
Table 12: Statement of Computation of Inventory Turnover Days (2012-2014)
Year 2014
Year 2013
Year 2012
Average Stock
Cost of Goods Sold
Closing Stock as on 31.12.2014
254,042,878.17
598,091,877.67
137,710,097.49
9,976,754.97
195,876,487.83
608,068,632.64
137,710,097.49
448,678,499.48
231,516,939.76
11,211,469.17
184,613,518.63
459,889,968.65
231,516,939.76
863,479,930.52
426,362,616.48
22,623,443.21
328,939,778.12
886,103,373.73
Findings (Days)
117.58
146.52
135.50
From the calculations as shown in the table 12 above, it is observed that STCBL currently takes
four to four and half month to completely liquidate its stock. Looking at the liquidity period the of
25

inventories, group observed that there are areas which company can improve its efficiency in
managing its working capital.
5.2 Trade Receivable
In the companys financial statement under notes No. 9, STCBL presents trade receivable figure
in three specific groups; Considered Good, Considered Doubtful and Other Debts Considered
Good. The amount under Considered Good represents the outstanding receivable from year 2011
until year 2014 and other debts considered good includes receivables that are only Six month old
as at reporting period. The debts that are receivable from year 2010 and prior are grouped under
Considered Doubtful as shown below:
Table 13: Statement of Trade Receivables from year 2012 to 2014
Year 2014
Year 2013
Year 2012
Considered Good
75,067,188.00
39,899,065.94
17,146,681.23
Considered Doubtful
20,086,165.91
32,966,076.75
32,577,586.93
95,153,353.91
72,865,142.69
49,724,268.16
20,079,549.70
16,837,205.70
32,577,586.93
16,128,871.05
6,616.21
344,127.00
75,067,188.00
39,554,938.94
17,146,681.23
Other debts, considered good
2,740,171.88
27,755,334.86
38,769,526.96
Total
77,807,359.88
67,310,273.80
55,916,208.19
Debts outstanding for a period exceeding six months:
Less: Provision for Doubtful Debts

: Bad Debts written off from Doubtful Debts
: Bad Debt written off from Debtors
As shown in the table 13, the figure under considered doubtful are being provisioned during the
year to be written off in the subsequent year for those debts that are not recoverable. As per the
current practice, write offs are accounted for only after obtaining prior approval from the Board.
5.2.1 Accounts Receivable days
The efficiency or the firms ability in collection of debts can be observed through Debtors
(Accounts Receivable) days calculation. A longer the accounts receivable days indicates firms
26

inefficiency in collecting debts which requires/demands pumping in of additional funds in meeting
the unpaid debts. According to STCBLs Credit and Collection Manual 2014 in todays market
without credit facility, cash sale alone cannot boost sales due to competition (STCBL, 2014, p.
1). In meeting this stiff competition from growing automobile and spare parts vendors in the
market, since July 2014, STCBL started offering credit sales to its customer under current credit
manual. However, as explained, prior to the approval of Companys Credit Manual, credit facilities
were also extended under Differed Installment Payment Policy (DIPP) adopted since 2013.
Looking at the Companys Credit and Collection Manual 2014, it is observed that STCBL offers
credit period ranging from one month for Spare parts and other products and 2 years for vehicle
segments. Further, projects under Hydro Power Construction enjoys a liberty in availing three
months credit facility form STCBL. Although, not much of product were sold so far under DIPP
and credit policy since year 2013, the impact to the extend can be observed as presented below:
Table 14: Statement of Computation of Trade Receivable Days (2012 - 2014)
Trade Receivable
Sales Revenue
Trade Receivable days
Year 2014
Year 2013
Year 2012
77,807,359.88
67,310,273.80
55,916,208.19
698,637,683.98
539,323,406.79
1,005,973,433.81
40.65
45.55
20.29
From the table no. 14 above, STCBL today has almost 41 days of average collection period which
was 20 days before implementing its DIPP and Credit policy in year 2012. It is observed that the
trade receivable days of STCBL is at an increasing trend in year 2013 and 2014. At this increasing
trend on trade receivable days, it is assumed the STCBL will working capital crises in days ahead.
5.3 Current Liabilities
The table below represents STCBLs current liabilities as shown in statement of financial position
of the company under notes to accounts No. 2, 3, 4 and 5.
27

Table 15: Statement Showing STCBL Current Liabilities for the year 2012 to 2014
Current Liabilities
Notes
Year 2014
Year 2013
Year 2012
(a) Short-Term Provisions
1,468,080.42
(b) Trade Payables
83,110,417.25
90,758,584.63
84,885,263.89
(c) Short-Term Borrowings
25,287,368.52
(d) Other Current Liabilities
215,186,163.22
74,399,191.25 104,350,844.26
298,296,580.47
165,157,775.88 215,991,557.09
Total
The group shall not dwell much on the current liabilities of the company as the focus of the study
is to find out the companys Operating Cycle and Cash Conversion Cycle.
5.3.1 Accounts Payable Days
The accounts payable days is measure as number of days the company takes to pay to its suppliers.
When the number of day increases, this indicates that the company is paying at a slower rate which
to an extend is favorable to the company. However, on the other hand longer the accounts payable
days this shall also indicate on the instability of companys financial position. As per the current
practice, STCBL operates its payment through letter of credit, demand draft and RTGS transfers
in advance or for credit payments. Since company do not maintain records on cash purchases, for
the current study companys annual purchases is considered as total credit purchase and carried
out analysis on accounts payables days as below:
Average Account Payable
Accounts payable period = ----------------------------------- X 365
Total Purchase
(Opening Accounts payable + Closing Accounts Payable)/2
= -------------------------------------------------------------------------------- X 365
Total Purchase
28

Table 16: Statement of Computation of Trade Payable days for the year 2012 to 2014
Year 2014
Year 2013
Year 2012
Average AR
Total Purchase
Closing AP as on 31.12.2014
83,110,417.25
714,424,658.35
90,758,584.63
86,934,500.94
714,424,658.35
90,758,584.63
354,871,657.21
84,885,263.89
87,821,924.26
354,871,657.21
84,885,263.89
669,036,642.00
111,755,560.62
98,320,412.26
669,036,642.00
Findings (days)
44.41
90.33
53.64
*AP: Accounts Payable
From the calculation, it is observed that STCBL has managed to release suppliers payment in not
less than 44 days in year 2014 and 90 and 53 days in year 2013 and 2012 respectively.
Comparatively, the average payment period of STCBL is observed to be much better than the
average collection period.
5.4 Cash Conversion Cycle (CCC)
So far, we have reviewed STCBLs average inventory days, accounts receivable days and accounts
payable days. Form the review, we observed that as compared with the accounts receivable days,
the average payment period of the company is much better. In other words, the group observed
that, STCBL takes longer period in debtor turnover days and shorter in creditors payable days
since year 2012 until the current period review (2014). Also the study has observed that average
age of inventory of STCBL is significantly high. Thus the study concluded that, STCBL over the
period has experienced acute shortage in meeting its working capital requirements. Further as an
explanation, the diagram showing time line of companys CCC for the year 2014 is presented
below as an example.
Cash Conversion Cycle = (Operating Cycle + Average Collection Period Average Payment
Period)

Operating Cycle (OC) = Average Age of Inventory + Average Collection Period
Figure 1: Operating Cycle & Cash Conversion
The review on the companys CCC and OC for the year 2014 observed that STCBLs operating
cycle is 158 days and CCC is 114 days. Thus, in order to free the Companys resources tied in
operations, STCBL must closely look at possibilities in reducing the average age of inventory and
average collection period. Delaying Suppliers payment to the extent possible without destroying
the Companys credit rating can also reduce the time line of CCC and OC which in turn will reduce
the resources tied up in operations.
5.5 Net Working Capital
While reviewing the Net Working Capital of the Company for the period 2012 to 2014, it is
observed that consecutively for three successive years, the difference between total current assets
to current liabilities of the company is positive. According to Gitman (2013, p. 543) when current
assets exceeds the current liabilities the firm has positive net working capital and vice versa.
STCBL over the period had positive working. As pointed out by Gitman (2013), the investment in
current assets shall not result to increase in profit earnings although it can reduce the risk of
technical insolvent. It is observed that over the year STCBLs profit had been drastically dropped
although the company had positive net working capital. Through the ratio calculate below, the
29
30

group concluded that at this increasing trend of Companys net working capital, STCBLs risk of
being technically insolvent is very minimum.
Table 17: Statement of Computation of Net Working Capital
Current Liabilities
Notes
Year 2014
Year 2013
Year 2012
(a) Short-Term Provisions
1,468,080.42
(b) Trade Payables
83,110,417.25
90,758,584.63
84,885,263.89
(c) Short-Term Borrowings
25,287,368.52
(d) Other Current Liabilities
215,186,163.22
74,399,191.25
104,350,844.26
298,296,580.47
165,157,775.88
215,991,557.09
Total
Current assets
(a) Inventories
254,042,878.17
137,710,097.49
231,516,939.76
(b) Trade Receivables
77,807,359.88
67,310,273.80
55,916,208.19
(c) Cash and Bank Balance
10
37,549,665.23
70,222,635.03
16,739,329.66
(d) Short-Term Loans &

Advances
11.1
100,429,072.00
51,008,937.13
64,587,328.56
(e) Adv. Corporate Tax net

of Provision
11.2
6,116,326.85
6,790,868.05
5,890,567.75
12
7,354,468.01
4,956,542.69
7,013,673.63
483,299,770.14
337,999,354.19
381,664,047.55
172,841,578.31
165,672,490.46
581,217,634.63
440,109,930.40
486,351,508.80
83.15
76.80
78.47
(f) Other Current Assets

Total
Difference CA-CL
Total Assets of STCBL
Percentage of CA to Total Assets
185,003,189.67
5.6 Findings and Recommendations
1. It is observed that STCBL do not have any inventory management manual put in place so far.
As per the current practice, most of the procurement of companys inventories depends on the

systems and practices of principal companies. Thus it is recommended to formulate companys
inventory management manual focusing on best practices.
2. STCBL currently follows the ABC system and Economic Oder Quantity (EOQ) model of
managing its inventories especially for vehicle spare parts through Enterprise Resource
Planning (ERP) system to the extent possible. It is observed that the ABC and EOQ model has
not been followed professionally and systematically according to the market behavior. The
current ABC and EOQ model that is placed in the company is observed to be replica of
suppliers model. The study recommends STCBL to implement ABC and EOQ model in ERP
system according to the market behavior.
3. In the review, the study observed that most cases the companys fund are blocked in the form
of vehicle inventories. The study recommends STCBL to carefully review on the need for
stocking such huge inventories in the form of vehicle so that company can free its resources to
other lucrative business.
4. The study on the inventory turnover day reveals that STCBL currently takes an average of
more than 4 to 4 and half months to liquidate its stock. Although there is no standard being
set towards maintaining fixed inventory turnover days for the companies, the study observed
that STCBLs inventory turnover days are quite long. Thus in order for the company to increase
its efficiency in managing inventories, STCBL is recommended to look for avenues to decrease
its inventory turnover days either through negotiations with suppliers on reduction of delivery
period, adopting EOQ model etc.
5. STCBL lack towards maintaining division wise trade receivable and accounts payables
records. Currently it is impossible for the company to review its divisional wise efficiency in
working capital management. Timely review on the division working capital management
would guide management to divert their focus of performing business unit and making
investment decision on nonperforming business units. Thus it is recommended STCBL to
maintain divisional wise trade payable and receivable records. It would enable company to
conduct timely review on operating cycle, cash conversion cycle and net working capital
management analysis and make adjustment accordingly to improve its efficiency.
6. The study on the companys working capital management reveal that time taken by the
company on average collection period is longer than average payment period. In order to
reduce blockage of fund by not having efficient collection process, STCBL is recommended
31
Conclusion
adopt vigorous collection procedures on outstanding receivables and delay the payment rate to
suppliers.
6. CONCLUSION
The study analyzed the Cost of capital, Leverage and Capital Structure, Dividend Policy and
Working Capital Management of the STCBL. From the above analysis, it can be concluded that
STCBL relies on common stock as a source of capital. It is also evident that the company has
issued bonus shares as a right issue in 2012 and 2013 to raise its capital fund. Although it is
cheaper to raise its capital through issue of bonus share and retained earnings, the company must
be cautious in maintaining certain ratios between the equity, reserve and dividend to meet investors
expectation and improve companys value.
Analysis also revealed that STCBL does not have any dividend policy documents in place.
Although the current practice is effective, it is highly recommended to have written policy in place
to avoid future complications. Further, it is observed that STCBL does not follow ABC and EOQ
model of inventory management professionally and systematically according to the market
behavior. Moreover, the time taken by the company on average collection period is longer than
average payment period and it is vital for the company to adopt vigorous collection procedures on
outstanding receivables and delay the payment rate to suppliers.
Though, the current practice is effective, should STCBL adopt the above recommendations
seriously, it would further lead to achieving the goal of maximizing the shareholders wealth.
32
References
7. REFERENCES
1. Allen, F. & Michaely, R., 2002. Payout Policy. Wharton, The Wharton Financial
Institutions Center.
2. Al-Malkawi , H.-A. N., Rafferty, M. & Pillai , R., 2010. Dividend Policy: A Review of
Theories and Empirical Evidence. International Bulletin of Business Administration ,
243(9), pp. 171 - 200.
3. Brava, A., Graham, J. R., Harvey, C. R. & Michaely, R., 2005. Payout policy in the 21st
century. Journal of Financial Economics, Volume 77, pp. 483 -527.
4. Filbeck, G. & Krueger, T. M., 2005. An Analysis of Working Capital Management Results
Across Industries. Mid - American Journal of Business, 20(2), pp. 1-69.
5. Gitman, L. J., 2013. Principles of Managerial Finance. 11th ed. New Delhi: Dorling
Kindersley (India) Pvt. Ltd.
6. Lintner, J., 1964. Optimal Dividends and Corporate Growth Under Uncertainty. Quarterly
Journal of Economics, Volume 78, pp. 49-95.
7. Livia, I., 2006. Dividend Controversy: A Thoeritical Approach. Studies in Business and
Economics, pp. 110-118.
8. Miller , M. . H. & Modigliani, . F., 1961. Dividend Policy, Growth and the valuation of
shares. The Journal of Business, Volume 34, pp. 411-433.
9. Nazir, M. S. & Afza, T., 2009. Impact of Aggressive Working Capital Management Policy
on Firms Profitability. The IUP Journal of Applied Finance, 15(8), pp. 19-30.
10. Porta, R. L., Shleife, A. & Lopez-de-Silanes, F., 1999. Agency Problems and Dividend
Policies Around the World. Journal of Finance, Volume 55, pp. 1-33.
11. Stacescu, B., 2006. Dividend Policy in Switzerland. Financial Markets and Portfolio
Management, pp. 1-42.
12. STCBL, 2014. Credit and Collection Manual 2014, Phuentsholing: s.n.
13. Weston, J., Besley, S. & Brigham, E., 1996. Essentials of managerial finance. 11 ed.
s.l.:The Dryden Press Series.
33

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1

ASSIGNMENT COVER PAGE

Mr. Chonga Zangpo

1. Sonam Gyamtsho (u3147014)

Cost of capital .......................................................................................................................... 3

Cost of Common Stock Equity ........................................................................................ 5

Cost of Retained Earnings ................................................................................................ 7

Finding and recommendation ........................................................................................... 8

Leverage and capital structure ................................................................................................. 9

3.1.1 Operating Leverage ........................................................................................................ 9

3.2.1 Return on Assets ........................................................................................................... 14

Dividend Policy ..................................................................................................................... 16

Theories of Dividend Policy .......................................................................................... 18

Dividend Policy of STCBL ............................................................................................ 19

Working Capital Management (WCM) ................................................................................. 20

Current Assets ................................................................................................................ 21

5.1.1 STCBLs Inventories .................................................................................................... 22

Trade Receivable ............................................................................................................ 25

5.2.1 Accounts Receivable days ............................................................................................ 25

Current Liabilities .......................................................................................................... 26

5.3.1 Accounts Payable Days ................................................................................................ 27

Cash Conversion Cycle (CCC) ...................................................................................... 28

Net Working Capital ...................................................................................................... 29

Findings and Recommendations .................................................................................... 30

Financial Analysis of State Trading Corporation of Bhutan Limited

Leverage and capital structure

Leverage and capital structure

Table 2: Operating Leverage

Leverage and capital structure

Earnings before interest and taxes (EBIT)

Leverage and capital structure

Net Profit after taxes

Earnings available for common stock holders

Earnings per share (EPS)

Less: Preferred Stock Dividends

Leverage and capital structure

DTL = 72.55/30.06 =2.41

Percentage change in EBIT

Leverage and capital structure

ROA= (PAT/Total Asset) X100

Leverage and capital structure

Where, Total capital employed = Fixed assets + Current assetsCurrent liabilities

Total Capital Employed

Table 9 : Funding Mix

b) Reserves and surplus

Working Capital Management (WCM)

Working Capital Management (WCM)

(b) Trade Receivables

(c) Cash and Bank Balance

(d) Short-Term Loans & Advances

(e) Adv. Corporate Tax net of Provisions

(f) Other Current Assets

Contribution to Working Capital in %

Cash and Bank Balances

Working Capital Management (WCM)

Eicher Spare Parts

Indian Spare parts (Tata)

Imported Tyres & Tubes

Imported Spare Parts