Suggested Answers

Case Study
Nov-Dec 2018

Answer to the Question No. 1:

Terms of reference
This report has been prepared based on the information provided by the management of Evergreen
Paribahan Ltd. and no attempt has been made in order to ensure its authenticity.
This report covers the following aspects:

1) Evaluation of the performances of Evergreen and assessment of feasibility suggesting the best
alternative to finance.
2) Critical assessment of the strategic planning and SWOT analysis.
3) Suggestion regarding the appointment of ABC & Co. Chartered Accountants as joint auditor.
4) Review & comment on remittance of dividend objections.
5) Economic, social and ethical aspects of Evergreen including the proposed acquisition.
This report has been prepared solely for the internal use of Board of Directors of Evergreen and should not
be disclosed to the third party without any prior written consent.

Executive Summery
Evergreen is a leading public transportation group, which offers both local and long-distance sevices.
Evergreen managed its operations from two geographic zones, Eastern site and Northern site. Evergreen
has appointed Ainul Alam Ahmed & Co. as an advisor to carry out the approval process and negotiation
where necessary on behalf of the company with the government agencies so that the company can raise
fund through initial public offering (IPO) at desired price or arrange financing at attractive rate of interest
so that it can initiate business expansion to generate higher employment and reduce the public transport
hassle.

1.1 Financial performance of Evergreen and feasibility of the business expansion plan:
Performance analysis:
Revenue growth:
Revenue of Evergreen for 2017-2018 has decreased by 54 % (Tk. 49m). Evergreen cut the prices in 2017-
18 in order to be competitive in the market. As a result, the revenue from ticket sales for the year 2017-18
declined compared to 2016-17. Moreover, passengers travelling in bus reduced because of the highway road
conditions and the probability of accident happen on the road.
Profitability ratio:
GP margin for 2017-18 decreased from 22.4% to 19.4% whereas net profit percentage showed positive
0.65% from the negative figure in past year. It was because of capital gain made from the sale of fixed
asset during the year.
Liquidity ratio:
The company's current ratio for 2017-18 was 0.94 from 1.1 and acid-test ratio was 0.58:1 from 0.91:1. It
was mainly because of increased liabilities by 773% to manage the acute working capital problem.
Solvency ratio:
The company's solvency is not as good as it has no operating profit to cover its interest.
Conclusion and Recommendation:
The overall performances of the company in terms of profitability was not attractive but the company could
be sustainable based on its potential and future economic growth of the country. We think company should
focus on the efficiency, governance and ethics.

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Feasibility of expansion plan and Best alternative to finance:
We have reviewed the expansion plan of the company and evaluated the options using discounted cash
flow techniques. We used CAPM approach to determine the expected rate of return, which we used to
discount the future cash inflows and evaluate the options. For detail, please see the appendix 2. The
following features of the investment options:
• Mercedes Benz in Dhaka- Kolkata has positive NPV Tk. 77m
• Volvo in Dhaka city services has positive NPV Tk. 2854m
• Rocket service has NPV of Tk. 434m.
The overall expansion strategy is feasible as it has positive NPV.

Raising Funds
The company will go for IPO for raising funds. The company can also obtain permission for selling shares
on premium.
The Market price is Tk. 7.29 calculation is attached in Appendix-1 but management is intending to go for
Tk. 12.5. The management should be consider the following:
• Underwriting fees
• The audited financial statement must show profit for last 3 years
• More stringent accounting and SEC rules must be followed
• Credit report submission
• Any non-compliance of VAT and Tax issue
• No objection certificate from lenders.
Issuance of Bond
The company Interest paid at 7% per annum
• It entitled to dividend participation of line 1% if dividend paid is 8% and 7% for bond holders,
differential amount paid to bond holders.
• Might not be liked by equity holders
• Repayment in 20 years payments
• Interest rate is defaulting paid at higher riles of 12%
Taking Bank loan
• Interest charged at 9%
• Can avail the benefits of loan in the form of tax shield. However, since it is highly geared this benefit
may not be available to accept.
• Lease payments have lease liabilities while have some tax savings.
Conclusion and recommendation:
The company's financial performance needs to be improved as its market strategy is not good. Also the
aggressive marketing policies should be undertaken.
2.2 Strategic Planning and SWOT analysis:
The company opts for organic growth and it has market penetration strategy. The greatest strength of the
company is its computer orientation,
Its weaknesses is that it has low growth.
It has an opportunity to expand business.
Conclusion & recommendation: The Company may need to revisit the market.
2.3 Suggestion regarding appointment: The company should not appoint joint auditor.
2.4: Dividend remittance:
Dividend will be remitted after making tax payments on time. Moreover, company
2.5 Ethical, social and others:
The company should be more green-Bangladesh oriented. It must not impact the society by environment
pollution.
Conclusion and recommendation: The Company must be green-oriented.

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 Evaluation of performances and viability analysis
d cash 3.1 Adjustments, revised financial statements and Performance analysis:
sed to The financial statements of Evergreen Ltd. was not prepared in accordance with the applicable IFRS
2. The and generally accepted accounting principles. The Finance Division of Evergreen could not scrutinize the
accounting issues and accounted for those in the company financial statements. The following adjustments
need to be made:
• WPPF were not made of and the related provision's need to be cognigence. for legal opinion.
• Deferred expenses charge to P & L
• Insurance claim receivable are recognized
• Provision for registration is recognized
shares All the details are attached in Appendix-1
Revenue growth:
go for The revenue of Evergreen growth for 2017-18 has decreased by 54.2% (Tk. 49m). It was happen because of
the slow growth of Evergreen and the entity has faced some tough competition from its substitutes (Water
Transport) and competitors (Shohag). There was immense competition. Evergreen pricing is sufficiently
low to force many competitors out of business. May be it cannot attract more customers by this market
penetration.
Net profit has improved sparingly from the negative percentage to slightly positive percentage of 0.65%.
This mainly because of better management of operating expenses. Similarly ROCF is 2.5% barely on
positive note.
Profitability ratio:
GP margin of Evergreen in 2018 is 19.4% and in 2017 was 22.4%. GP margin has decreased during 2018.
This may be because of market penetration sl:dtegy undertaken by Evergreen which causes decreased to
'ciders, the GP margin.
Operating profit margin of Evergreen is negative in both years. During 2017-18 it has a negative operating
margin ratio of 47.68% coherent in 2016-17 it was 26.8%. Evergreen has gross profit positive balance,
but its operating profit margin is negative because of its higher operating expense. It cannot put its cost
pressure on its customers because of its business policy. As it has to keep its price low, it cannot cover its
all operating expenditure on the receivable.
Net profit margin of Evergreen for 2017-18 is 189.6% and for 2016-17 (147.74%). Its net profit for 2017-18
benefit has shown a positive balance through its operating profit margin is negative. This is because of selling fixed
assets during 2017-18 at a profit. For this reason, net profit margin is positive.
Liquidity ratio:
We have measured the liquidity ratio in order to see whether the company has enough current asset to
kis() the meet up its short term obligations.
Current ratio of Evergreen in 2018 has increased from 1.31 to 1.54. Acid-test ratio has fallen to 0.58:1 from
0.9:1. This is mainly because the entity has operating loss Tk. 82m, thus it need to finance its working
n of the capital items by delaying payments to payables. But the major increase in current liabilities is because of
liabilities for other finance which has grown by 773%. Unsound working capital management. Inventory
days 2267, receivable days 1914, payable days 22.
Solvency ratio:
Return on asset or equity measures the solvency of a company. Solvency ratio measures whether a company
has overreached itself in meeting its long-term obligations.
Return on asset for 2017-18 is 3.56%. But on 2016-17, it was negative (5.89%). So we can see that the
company is growing better day by day.
The company has no operating income in order to cover its interest which is a problem for the company.
-onment Efficiency ratio:
Efficiency ratio is measured in order to see whether the company is operating its business efficiently.
Asset turnover for Evergreen is 0.19 times for 2017-18 and for 2016-17, 0.039 time. So, the company is
generating more profit on asset invested during this year rather than prior year.

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Conclusion: Evergreen's financial performance is growing better day by day. It has a sound strategy and
technique to grow organically.
Recommendation:
1) The company needs to revisit its selling price for the service it provides.
2) The company needs to minimize its operating cost.
3) Charge different prices at peak and off-peak, business class and economic class.
4) The company needs to revisit its market strategy for product marketing.
3.2 Feasibility of the business expansion plan.
Evergreen has created good impact in public transport. The company wants to expand its business by
adding 50 new-air conditions buses to cover Dhaka city services in different routes. The NPV for the
expansion project is given in Annexure-01.
Volvo Services : It has a negative net present value 11,222,000
Mercedes Benz : It has a positive NPV of 2,138,889,000
Rocket Services : It has a positive NPV of 2,213,812,000
In total, the project gives a positive NPV for Evergreen Limited. The company may go for expansion as it
has positive NPV.
Conclusion: Since the passengers have confidence on the service of Evergreen Paribahan Ltd., the
company should go for the expansion plan.
Recommendation:
1) The company may need to revisit the business strategy.
2) Average fare of Tk. 8300 used for Dhaka to Kolkata should perform comparative analysis with
competitor like Shohsg to justify the revenue.
3) Tax impact of the company needs to be incorporated.
3.3 Best alternative to finance
Evergreen Paribahan Ltd. has three financial options. Those are;
• Initial Public Offering (IPO)
• Issue of subordinated bond.
• Loan / lease.
Issues regarding IPO:
Evergreen is need to go for IPO of shares for Tk. 100 Crore at an expected premium of 25%. We have
concluded on the basis of price-earning measure, the value of shares. If we use price earnings ratio and,
the value per share will be 125.31 after adjusting the unquoted company. So we can see that, Evergreen
may issue its share on a premium of 25%.
Advantages of IPO:
• Wider pool of finance
• Lesser burden on capital structure
• The companies have grown confidence and shareholders will think that their information is credible.
Disadvantages of IPO:
• Its issue cost is high
• There will be more burden to put disclosure on requirement of BSEC.
• It is time consuming.
Issues regarding bank loan and sub oriented loan: Advantages:
• The company's issue cost will be low,
• No dilution in share.
Disadvantages:
• The company's interest coverage ratio L. negative.
• Fixed debt servicing.
Conclusion: Evergreen may use Initial Public Offering as its loan condition is not better.
Recommendation:
• Evergreen needs to revisit or rethink whether it wants to go for IPO.
• Evergreen needs to revisit the whole expansion strategy.

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 Strategic Planning and Evaluation of SWOT
.gy and
4.1 Strategic planning of Evergreen:
• Evergreen is in the process of introducing new lines of transport services.
• The company is growing slowly and steadily because of its market strategy.
• The company strived aggressively through cutting fares. Its pricing is lower than the others,
• It bids for selecting government contracts for education or health transport.
Conclusion: Evergreen has a sound business strategy.

Recommendation:
ness by • The company needs to revisit its market survey.
for the • The company must have sufficient expansion plan.
4.2 SWOT analysis:
Strengths:
• Evergreen's operation is country wide and it's the leading public transportation group.
• Both local and long-distance inter-city services.
• Systematic approach to ticket booking.
ion as it • The company provides a safe, reliable and customer-centered transport service,
• The company creates a culture to provide customer service first with their happiness.
td., the • It has taken empathy instead of sympathy PRINCIPLE.
Weaknesses:
• The company's growth is low,
• Inappropriate accounting policies,
s with • Still loss making,
• Manipulation of accounts,
• Seasonal demand,
• The company has market penetration strategy, which is not working out,
• The company is competing aggressively in order to survive in the market,
• It does not have diversified business.
Opportunities:
• Government has set out a policy to protect bus services and encourage public transport as well,
• Fiscal concession to import hybrid vehicle,
• Padma Bridge construction- more vehicle would be needed,
Ne have • GDP growth of 7.1% expected to grow more,
atio and, • Because of regulation, there is reduced competition,
/erg reen • Bus services are generally subsidies heavily by local governments.
• 85% of people have no transport facility, rather they use public transport which is a huge advantage.
Threats:
• The company has a huge competitor which has a greater market share.
• Safety of roads above all unsafe roads a threat to this business,
credible. • Bus drivers licenses inaccurate,
• There may be a change in public services. Electric vehicles may be used. The company than need
huge capital to inject.
• Strict regulation by the government, permission difficult to get,
• Hybrid vehicles are used which is a threat to inject more capital.
Conclusion: By analyzing, the SWOT, we can see that the company needs market expansion strategy and
it is a low growth company.
Recommendation:
• The company needs to revisit its expansion strategy,
• The company needs to revisit the business model of organic growth,
• The company needs to address the risk associated with weakness and threats,
• The vehicle need to be modernized in public demand,
• Liaso with government to mitigate political risk.

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Suggestion regarding appointment of ABC & Co. Chartered Accountants as Joint Auditor The
following issues need to be addressed:
1) The company's existing auditor MHC & Co. has already been appointed as statutory auditor and
accordingly necessary papers have been submitted to RJSC on time. Before appointing ABC & Co.
as joint auditor, the company must obtain permission from the existing auditor;
2) The cost of audit will rise because the fees cannot be shared here.
3) The EGM is necessary to appoint a second auditor RJSC as there is time constraints.
Conclusion: The joint auditors cannot be appointed without the written consent of existing auditors.
Recommendation: The Company must communicate it with existing auditor.
Comments on Bangladesh Bank's objection to the dividend remittance
Bangladesh Bank opposed to remit dividend to the foreign shareholders as the company has declared the
dividend out of capital and made inadequate tax provisions. The management of the company is under
pressure to remit their share of dividend.
Conclusion: The Company can pay the dividend & remit it to outside by complying with certain procedures.
Recommendation:
I. The company should declare the dividend as a regulation of capital,
IL The company must pay the tax required to deduct at source when remitted to outside the country.
Economic, Social and Ethical consideration
7.1 Social consideration
• Traffic jam impacts on human health, mental condition and air pollution.
• Traffic congestion wastes fuel and time and moves travel difficult,
• Need to safe transport at affordable price.
• It also cars air and noise pollution,
• It also impacts on productivity, reducing or degrading the socio-economic condition.
• Need for transport which covers the whole city and provides comfort.
Conclusion and Recommendation: The Company must implement strategy regarding green Dhaka or
Green Bangladesh strategy.
7.2 Economic consideration:
• This business causes the major loss in the economy of the country,
• This business requires huge fuel consumption.
• Due to traffic jam substantial portion of working hour has to be left on streets which has adverse
impact on the economy.
More than 250,000 vehicles in Bangladesh.
Conclusion and Recommendation: The Company must expand its business in a way which will reduce
the adverse impact on economy.
7.3 Ethical consideration:
• Contingent fee- fee depends on IPO approval at high rate and bank at cheaper rates.
• The company hampers the work-life balance of its employees for the sale of its own benefits.
• The company does not pay tax on dividend
• Independent Director is a close friend of the chairman of Shohag Group,
• Chairman of Shohag group is a politically exposed person who purchased 20% of shares.
• The company donates money in the place where it will get benefit.
• Donation made to NGO where a director is a trustee.
• Contribution to health program where a Director from.
• CC students getting employment at e, argreen after completion of article ship.
• Inappropriate accounting policy
• Manipulation of accounts as accounts received is increased to get the desire result
• Pricing sufficiently low to drive out competitors.
Conclusion and Recommendation: The Company must practice ethically. It must donate in a place
which will do welfare of the society.

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iitor The
Appendix
.1ditor and Appendix-1
'ABC & Co. Calculation of restated profit for 2017-18:
Date
Particulars
30-06-18(Amount-000) 30-06-17(Amount-000)
Gross Profit 8031 20337
Loss: Operating expenses (27,873) (44,667)
Profit from operations (19,842) (24,330)
Blared the Finance expense (41,927) (44,398)
y is under
Non-operating income 332,289 (64,249)
ocedures. Provisional expense (171,721) -
Profit before WPPF & tax 98,799 132,947
WPPF @ 5% (4,939.95) -
e country. 93,860 (132,947)
Tax expense (14,940) (1,200)
Net income 78920 (134,147)

Notes:
I. We have adjusted the WPPF @ 5% for 2017-18.
II. Operating expense does not indude finance expanse. So operating profit needs to be revised.
- Dhaka or Calculation of ratios: (Balance are stated in 000)

Particulars 2018 2017

Profitability ratios:
Revenue growth -54.17%
as adverse GP margin 19.30% 22.39%
Operation profit margin -47.68% -26.8%
Net profit margin 189.6% -147.74%
will reduce
Liquidity ratios:
Current ratio 1.54 1.31
Quick ratio 1.20 0.80
^efits. Solvency ratio:
Return on assets 3.56% (78920/2218013) -5.89% (-134147/2279277)
;S. Interest coverage ratio 0.47 (-19842/41927) 0.55 (-24330/44398)
Efficiency ratio:

Asset turnover 0.19 times 0.039 times

in a place

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 Appendix-2
Feasibility of the business expansion plan:
According to CAPM, Re = Rf + B(Rm — Rf)
= 6% + 1.25(10% - 6%)
= 11%

Calculation of NPV for Volvo:

Particulars Amount(000)
Revenue generate [6*9,500*52*6*] per vehicle 130,416
Running cost [700*25*6*52] (5,460)
Depreciation (102,000)
Net value 22,956
Less: Tax (8,035)
14,921
Add: Depreciation 102,000
116,921

NPV = 1-1/(1+11)6 4,000

0.11 + (1.11)6

(616,000)+116,921*
= (616,000)+494,639+2,139
= (119,222)

Calculation of NPV for Mercedes Benz:

Particulars Amount(000)
Revenue generate[32000*365*44] 529,980
Running cost [200*1200*365] (87,600)
442,380

1-1/(1+11)8 800
NPV = 0.11
+ (1.11)8

(138,000)+116,921*

= (138,000)+2,276542+347

= (2,138,889)

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pendix-2
Calculation of NPV for Rocket:

Particulars Amount(000)
Revenue generate[200,000*365*E] 438,000
Running cost [400*140*365] (20,440)
417,560

1-1/(1+11)th 2000
130,416 NPV =
0.11 (1.11)10
(5,460)
(246,000)+417,560*
(102,000)
= (246,000)+2,459,108+704
22,956
= (2,213,812)
(8,035)
14,921
102,000
Appendix-3
116,921
Calculation of share price (value):

■ EPS = 78,920/4,292,010 = 0.018

• Sector earnings ratio = 9.18*10

= 91.8

• Adjusted for unquoted co = 91.8* 0.7

= 64.05

00) ■ Value of share = 0.018*64.05

= 1.1529
529,980
(87,600) ■ EPS if not rested = 1.95
442,380 ■ Sector earnings ratio = 9.18*10
= 91.8
■ Adjusted for unquoted = 91.8*0.7
= 64.26

■ Value = 64.26*1.95
= 125.31

-: The End :-

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