INTERNATIONAL ISLAMIC UNIVERSITY, ISLAMABAD

FACULTY OF MANAGEMENT

Project
Muslim commercial bank Ltd

Course
Managerial Finance
Submitted to:
Sir. Ch. Mazhar Hussain
Submitted by:
Asad Rehman Khan 3311/FMS/BBA/F11
Haroon Islam 3334/FMS/BBA/F11
Usman Ali Abid 3312/FMS/BBA/F11
Muhammad Nauman 3333/FMS/BBA/F11



ACKNOWLEDGEMENT

I thank Almighty Allah who blessed us and made it possible for us to
complete this report. I am also very grateful to our parents who supported us.
I wish to express profound gratitude to my teacher Mr. Chaudry Mazhar
Hussain for his guidance.




















TABLE OF CONTENTS


CHAPTER I: INTRODUCTION
1.1 Objective
1.2 Purpose
1.3 Company profile
CHAPTER 2 CAPITAL BUDGETING, CASH FLOWS ESTIMATION
2.1 Theoretical background
2.2 Initial investment
2.3 Operational cash flows
2.4 Terminal cash flows
CHAPTER 3: CAPITAL BUDGETING TECHNIQUES
3.1 Payback period
3.2 NPV (Net present value)
3.3 IRR (Internal rate of return)
CHAPTER 4: COST OF CAPITAL
4.1 Cost of preferred stock
4.2 Cost of common stock
4.3 Cost of common stock equity
4.4 WACC (Weighted average cost of capital
CHAPTER 5: CONCLUSION AND RECOMMENDATION
REFERENCES




1

CHAPTER 1: INTRODUCTION


1.1 Objective of the project
We have been assigned the project regarding the key topics in financial
management which includes key topics like capital budgeting, capital budgeting
techniques, cost of capital. This project is very helpful for us to the application of
these concepts in the practical field.
1.2 Purpose of the project
The purpose of the project is to apply the concepts of the financial management
on banking sector and to give Suggestions and Recommendations.
1.3Company profile
MCB Bank Limited, with more than 60 years of experience as one of the leading
banks in Pakistan, was incorporated on July 9 in 1947. The bank has journeyed
remarkable tenure of more than half a century of competitively edged and well
positioned heights of success by deploying quality banking, heads on
technological developments, professionally leading management and prudent and
ethical work methodologies. MCB was nationalized along with other private banks
in 1974 as part of Government of Pakistan's economic reform movement and was
later privatized to Nish at Group lead consortium in 1991.
Since privatization, MCB's growth has been phenomenal. Today, MCB in one of
the largest foreign banks in Sri Lanka, the first bank in Pakistan to launch Global
Depository Receipts (GDR) in 2006, has strategic foreign partnership with Mabank
of Malaysia which holds 20% shares in MCB through its wholly owned subsidiary


2
Mayban International Trust (Labuan) Berhad since 2008, has international indirect
regional presence in Dubai (UAE), Bahrain, Azerbaijan, Hong Kong and Sri Lanka
and serving through a domestic network of over 1,150 branches and over 690
ATMs across Pakistan with a customer base of 4.96 million (apprx.)
MCB is reputed as one of the soundest financial institution and as one of the
leading banks in Pakistan with a deposit base of PKR. 545 bln (apprx.) and total
assets of PKR 766 bln (apprx.). The bank is versed as one of the oldest and most
responsible banks in Pakistan and has played pivotal role in representing the
country on global platforms while being one of the few institutions that are
recognized and traded in the international market.
The bank has also been acknowledged though prestigious recognition and awards
by Euro money, MMT, Asia Money, SAFA (SAARC), The Asset and The Asian
Banker.
Vision Statement

Challenging and Changing the Way you Bank.

Mission Statement

MCB Banks team of committed professionals is
dedicated to maintaining long term customer
relationships through outstanding service and
convenience.






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4

CHAPTER 2: CAPITAL BUDGETING,CASH FLOWS ESTIMATION

2.1 Theoretical background
Capital budgeting is the process of evaluating and selection of long term
investments that are consistent with the firm goal of maximizing the owners
wealth. Firms typically makes a verity of long term investments, but the most
common for the manufacturing firm is in fixed assets, which include
property(land), plant, and equipments. These assets often referred to as earning
assets; generally provide the basis for the firms earning power and value.
2.2 Initial investment
(+)Installed Cost:
Cost of New ATM (2 pieces) 11,000,000
(+) Installation Cost 450,000 11,450,000
(-)After Tax Sale Proceed From Old Asset:
Sale proceed from old asset -
(-)Tax (35%) - -
(+) Net Working Capital
Initial Investment 11,450,000



5

2.3 OPERATIONAL CASH FLOWS

Year Year Year Year Year Year
1 2 3 4 5 6
Revenues 5,050,000 6,400,000 6,000,000 6,900000 7,100,000 -
(-)Expenses 20,000 18,000 12,000 11,000 10,000 -
Earnings Before
Depreciation and Tax
5,030,000 6,382,000 5,988,000 6,889,000 7,090,000 -
(-)Depreciation 2,500,000 4,000,000 2,300,000 1,600,000 1,500,000 520,000
Earnings before Tax 2,530,000 2,382,000 3,688,000 5,289,000 5,590,000 (520,000)
(-)Tax (35%) 885,500 1,043,700 1,290,800 1,851,150 1,956,500 182,000
Net Operating Profit After
Tax
1,664,500 1,338,300 2,397,200 3,437,850 3,633,500 (338,000)
(+)Depreciation 2,500,000 4,000,000 2,300,000 1,600,000 1,500,000 520,000

OPERATING CASH FLOW

4,144,500

5,338,300

4,697,200

5,037,850

5,133,500

182,000


2.4 Terminal cash flows
After Tax Sale Proceed From Sale of New Assets (ATM)
Sale proceed from new assets (ATM) 3,800,000
-Tax 1,137,500 (W#1)2,662,500
-After Tax Sale Proceed From Old Assets (ATM)
Sale proceed from old assets (ATM) -


6
-Tax - -
Change in net working capital 0
Terminal Cash Flow 2,662,500

(Working #1) Cost Price of new machine = 11,000,000
Accumulated Depreciation:
(20%+32%+19%+12%+12%) 11,000,000 = 10,450,000
Book Value = Initial Purchase Price- Accumulated Depreciation
Book Value = 11,000,000 - 10,450,000
Book Value = 550,000
Recaptured Depreciation = Sale Price - Book Value
Recaptured Depreciation = 3,800,000 550,000
Recaptured Depreciation = 3,250,000
Tax = Recaptured Depreciation 35%

Tax = 3,250,000 35%
Tax = 1,137,500





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CHAPTER 3: CAPITAL BUDGETING TECHNIQUES

3.1 Payback period (PBP)
Pay back periods is commonly used to evaluate proposed investments. The
payback period is the amount of time required for the firm to recover its initial
investment in a project as calculated from the following formula in case of
unequal installments in case of an annuity we simply divide the cash flow on the
initial investment. So our selected project cash flows are unequal so we use the
following formula to find the payback period of the project.

Formula
Payback period of the project = a+ (b-c/d)
Payback period of the project=2+ (6400000-6000000) =2.03 years
11450000

So the payback period of the project is 2.03 years is the in which the project
return the initial investment to the company.

3.2 NPV (Net present value)
In net present value we less the initial investment from the present value of the
cash flows of the project. This technique is also called sophisticated technique.
Formula
Net present value (NPV) =PV cash flows- initial investment

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DISCOUNT FACTOR @ 11%

YEARS CASH INFLOWS PRESENT VALUE
1 5050000 4549550
2 6400000 5194384
3 6000000 4387148
4 6900000 4545243
5 7100000 4213504

Sum of present value of cash inflows =22889829

Now putting values into the formula
NPV= 22889829-11,450,000= 11439829
The NPV value of the project is positive so it represent that the return of the
project is more than the cost of the capital.








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3.3 IRR (Internal rate of return)
DISCOUNT FACTOR @ 30%
YEARS CASH INFLOWS PRESENT VALUE
1 5050000 3884615
2 6400000 3786982
3 6000000 2730996
4 6900000 2415881
5 7100000 1912236
Sum of present value of cash inflows = 14730170

DISCOUNT FACTOR @ 35%
YEARS CASH INFLOWS PRESENT VALUE
1 5050000 3740741
2 6400000 3511659
3 6000000 2438655
4 6900000 2077371
5 7100000 1583395

Sum of present value of cash inflows = 13351821


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IRR =
()()
()

IRR = 30%+
()()
()

IRR = 30%+

IRR = 30%+ 1.21%
IRR = 31.21%
So we accept the project because the internal rate of return is greater than the
opportunity cost or the cost of capital.














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CHAPTER 4: COST OF CAPITAL

4.1 Cost of preferred stock
The ratio of the preferred stock dividend to the firms net proceeds from the sale
of preferred stock; calculated by dividing the annual dividend Dp , by the net
proceeds from the sale of the preferred stock Np.
Formula
Kp = Dp/Np
Np = S.P F.C
Dp= 10 Np=86
Now Kp = 10/86
Kp = 11.6%
4.2 Cost of common stock
The rate at which investors discount the expected dividends of the firm to
determine its share value.
Formula
As Ks = Kv
Ks = D1/P +g
Now cost of common stock


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Kn = D1/Nn + g
Nn = S.P (F.C + under pricing)
4.3 Cost of common stock equity

i. Growth rate( g):
In the following table Annual Dividends paid by MCB is given:

YEARS

1

2

3

4

5
Annual dividend
(per share in
rupees)

3.00

3.00

2.0

2.5

4.00



0
1
2
3
4
5
0 1 2 3 4 5 6
Annual Dividend
Annual dividend
(PER SHARE)


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Here we have available data 5 years; through this data we can calculate (g):

( )

From using the above written formula we calculate growth (g):

We take future value = 4, dividend paid by FFC in year 2010,
We take present value = 3, dividend paid by FFC in 2006,
Here we have n = 5,

Putting these values in the equation:

( )

4 = 3( )

=( )

1.333333 = ( )

()

( )

1.0745699 = 1+ g
g =1.0745699- 1
g = 0.0745699
or
g = 7.45%
So we take MCB growth rate g = 7.45%


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ii.

( )

( )

( )

iii.

Now for getting value of

, we have following data:

1.

=4.00
2. g = 7.45699%
3. RRR or

=11.002204%

( )

Now putting value in the above formula,

=
( )

=

Now calculating

17
Putting values in the equation

= or Ks = 11.0%
Cost of retained earning
The same as the cost of an equivalent fully subscribed issue of additional
common stock, which is equal to the cost of common stock equity Kr.
Kr = Ks
=

Current market
price per share
Dividend growth
rate
Projected
dividend per
share
Under pricing
per share
Flotation cost per
share
60 7.45 % 3 2 2

Kr = 3/56 + 7. 45%
Kr = 0.0535 + 0.0745
Kr= 12.8 %
4.4 WACC (Weighted average cost of capital
The weighted average cost of capital associated with its next dollar of total new
financing.


18
Source of capital Weight Cost Weighted cost
Debt .60 6 % 3.6 %
Common .40 13 % 5.2 %

Weighted average cost of capital = 8.8 %















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CHAPTER 5: CONCLUSION AND REFERENCES
In chapter 2 we find the initial investment of our new project of ATM with zero
net working capital and tax. Then we find the operational cash flows for 6 years
and its operational cash flow is good then previous years.
In chapter 3 payback period of the project is 2.03 years in which the project
return the initial investment to the company. And the NPV value of the project is
positive so it represent that the return of the project is more than the cost of the
capital. And IRR is 31.21% So we accept the project because the internal rate of
return is greater than the opportunity cost or the cost of capital.
In chapter 4 we find out that MCB is gradually growing and growth rate g is 7.45%
it represents that MCB is improving its services. And its cost of preferred stock
and common stocks is improving. And it also gives considerable dividend to its
share holders. And weight average cost of capital is 8.8% this is good for MCB etc.

Finally we find out about the MCB bank that its quality of services and its working
is improving according to new requirements in banking sector.

REFERENCES.
www.mcb.com.
www.google.com.
Mcb bank manager.
Principles of managerial finance.