Corporate Finance Project On Descon in Pakistan

“With the name of Allah the most beneficial and the most merciful”
GROUP MEMBERS
Sana Ghayyur M-13366

Uzma Farrukh M-13395
Farah Ijaz M-13358
Zeeshan Khan M-13339
Suneel Younis M-13361
Qasim Chouhan M-13387
Sobdar Mazari M-13371
Corporate finance - 1 -
ACKNOWLEDGMENT
First and foremost, we are grateful to “Almighty Allah”, most beneficent and
most merciful who made us able to complete our given project successfully.
We would also like to pay tribute to the benefactor of humanity ”HOLY

PROPHET” (P.B.U.H), Who gave us complete knowledge of every aspect and
fields of life
In short of words to express our modest gratitude and recognition to cuddly and
loveable “Parents”, who at each and every moment prays for our success. We
are also deeply thankful to our “Teachers” who have taught us from childhood
to still.
Thank you all, without you this would have not been possible.
DEDICATION
To our “Parents” because of their sacrifices and continuous encouragement

throughout our life, that made this enormous task possible……
To our “Teacher” who endured us and all “Group Members” who assisted
each other at every step in the task of assembling this project.
“If you are not criticized, you may not be doing much”
By, Donald H.Rumsfeld
“Fight for your opinions, but do not believe that they contain the whole
truth, or the only truth”
By, Charles A. Dana
Table or contents
Page #
 Vision and Mission
 Introduction
 Corporate Governance Analysis
 Stockholder’s Analysis
 Risk and Return
 Measuring Investment Returns
 Capital Structure Choices
 Optimal Capital Structure
 Mechanics of Moving to the Optimal
 Dividend Policy
 Framework for Analyzing Dividends
 Valuation
Vision and Mission
DOL’s vision is their destiny and long term corporate Goals. It outlines their capabilities,
strengths and drives the strategic direction of organizational future. They have narrated the
vision in such a way that it resonates through all members of the organization and helped
them feel proud, excited and part of something much bigger than themselves.
DOL’s mission is target oriented and goes hand in hand with the Vision. It is a very clear and
progressive statement that serves as beacon for all our staff members at various levels.
Their values are very clear to them and they represent an individual’s highest priorities and
driving forces.
Vision:
To become a leading chemical solution provider to industry worldwide.
Mission
To provide competitive solutions through technological innovation to form the basis of better
life.
Core Values
Honesty, integrity, and humanity.
Open and candid environment.
Commitment and team work.
Encourage innovation and initiative.
Recognition growth and respect for individual.
Customer focus.
Service to nation.
Introduction
Descon the mother company founded in 1981 with a title Delta Industries
Pvt Limited, and then changed to Dawcham which is now Descon
Chemicals Pvt Ltd, has expanded its product range ever since it’s in
corporation with the manufacturing of Alkyd resin now its product range
is over 200 products (alkyd resins, saturated and unsaturated polyesters,
paper industries and textile chemicals). It started its new project with name
of Descon Oxychem Limited (“the Company”) was incorporated in
Pakistan as a private limited company on 12 November 2004 under the
Companies Ordinance, 1984. The Company has been converted into a
Public Limited Company with effect from 28 February 2008 as approved
by Securities and Exchange Commission of Pakistan (SECP) vide letter
No. ARL 16222 dated 14 March 2008. The registered office of the
Company is situated at 18-KM Ferozpur Road, Lahore. The principal
activity of the Company is manufacture, procurement and sale of
hydrogen peroxide and allied products. The Company has not commenced
commercial operations.
Effective from 15 September 2008 Company’s shares have been formally

listed on Karachi stock exchange of Pakistan.
I. Corporate Governance
Analysis
A. MANAGEMENT AND STOCKHOLDERS
Balance of Power:
At Descon Oxychem Limited the power clearly resides, with the

incumbent management, and in particular, with the director/chairman
Mr.Abdul Razak Dawood.This power emanates from the fact that the
board of directors is composed almost entirely of Insiders and people who
are close to Mr.Abdul Razak Dawood (see exhibit 1for a listing of the
directors).
• Insiders (current at descon Oxchem) hold six of the seven

positions on the board.
EXHIBIT 1
Board of Directors:
Mr.Abdul Razak Dawood Director/Chairman

Mr. Muhammad Nabeel Arif Director/Chief Executive Officer
Shaikh Azhar Ali Director
Mr.Taimur Dawood Director
Syed Zamanat Abbas Director
Mr. Muhammad Sadiq Director
Mr. Faisal Dawood Director
B. Firm and Financial Markets:
Descon is a well-followed firm. While the Firm provides

substantial amounts of information about itself in form of earnings reports,
there is a substantial amount of information that is available about the firm
from external sources. Both facts would lead us to expect less bias in the
information that is available about the firm.
C. Firms and Society
Companies need to answer to two aspects of their

operations. 1. The quality of their management - both in
terms of people and processes (the inner circle). 2. The
nature of, and quantity of their impact on society in the
various areas.
Social responsibilities of Descon Oxychem Limited is

about capacity building for sustainable livelihoods.
It respects cultural differences and finds the
business opportunities in building the skills of
employees, the community and the government
Corporate finance - 10
-
Financial Performance:
Descon Oxychem Limited is socially responsible
which results in positive financial performance. It’s ethical corporate
behavior directly affects the stock prices.
Slide in Operating Costs

DOL’s environmental stewardship and workplace safety
initiatives help improve work place practices, and processes, reduce
wastes, and resource consumption. Thus they improve productivity and
reduce costs. Enhancement of social standards and benefits result in
employee retention which saves hiring and training cost and increase
profit by improved productivity through stable work force.
Brand Image and Reputation

Descon Oxychem Limited with good image and
clearly defined strategy on corporate social responsibility attract a large
number of customers. It is socially responsible organization which can
benefit from its good reputation amongst its customers and is also
recognized as a respectful entity in their business community. Increasing
their ability to attract investment and trading
Productivity and Quality Enhancement
Descon Oxychem Limited invests in the working

conditions and environmental friendly atmosphere and also involves the
employees in decision making tend to have an increase in productivity.
Employee loyalty and dedication results in effective man hour utilization
and hence increase in quality.
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II. Stockholder Composition
A. Average And Marginal Investors
To analyze Descon’s stockholders, we began with an analysis of who

the stockholders are at the firm. The pie chart breaks down the stock
holdings in Descon Oxychem Limited into mutual funds, other
institutional investors (pension funds), individual investors and insiders.
Breakdown of stockholder
Associated
Companies
Directors
Inidividual
Mutual Funds
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Most of these investors are still domestic investors, though they may
be diversified into other markets. Finally, Descon Oxychem’s
stockholdings are fairly dispersed. The largest investor, Mr. Abdul Razak
Dawood owns about 15.43% of the outstanding stock.
The following table lists out the 10 largest stockholders in Descon

Oxychem Limited.
Holder Shares % of
Owned Descon
Oxyche
m
Limited
Mr. Abdul Razak 10,781,250 15.51%
Dawood
Individuals 10,722,000 15.43%
Descon Chemicals (Pvt)10,062,3 14.48%
Limited 00
Descon Corporation 8,725,25 12.55%
(Pvt) Limited 0
Descon Engineering 7,500,00 10.79%
Limited 0
Mr. Taimoor Dawood 5,644,50 8.12%
0
Mr. Faisal Dawood 5,644,50 8.12%
0
Directors spouses and 4,439,50 6.39%
minor children 0
IGI Investment Bank 4,000,00 5.76%
Limited 0
Descon Holding (Pvt) 1,953,20 2.81%
Limited 0
Conclusions:
In conclusion, these facts suggest that:
• The average stockholder in Descon Oxychem Limited is an

individual investor, more likely to be a pension fund than a mutual
fund.
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• Since no stockholder is large enough to dominate the holdings so
the marginal stockholder is likely to be the director/chairman, Mr.
Abdul Razak Dawood.
III. Risk Profile
Overall Risk Profile
DOL — Descon Oxychem Limited
Last Trade 11.83 ( 0.54) Day's Range 10.99 - 12.05

Trade Time Apr 03, 2009 Volume 1,387,000
Previous's Close 11.29 ( 0.99) Previous's Range 10.50 - 11.30
Avg Volume (3M) 518,175 3M Range 5.49 - 12.05
P/E N/A 1Y Range 5.49 - 12.05
EPS N/A Dividend N/A
Highest 12.05 (on Apr 03, 2009)
Lowest 5.49 (on Feb 11, 2009)
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To analyze the risk profile for Descon Oxychem Limited, we
begin with a plot of DOL weekly stock prices and earnings over the last 3
months. Both DOL’s stock prices and earnings have been on an upward
path over the period. The maximum stock price of DOL was Rs.12.05 as
on April 03, 2009, and the minimum stock price of DOL was Rs. 5.49 as
on February 11, 2009.
RISK FACTORS
The following risk factors which may affect the returns on the
investment in the Company should be considered carefully before making
any investment decision:
A. COMPANY SPECIFIC RISKS:
(a) INABILITY TO ATTRACT THE MARKET
This risk relates to the inability of the Company to attract

customers towards the product. H2O2 is used in a number of industries
such as textile, paper and board, leather, food, pharmaceuticals, etc. At
present, there is only one local manufacturer of the product, Sitara
Peroxide Limited, with an installed capacity that is not sufficient to meet
local demand. The increased availability of locally produced hydrogen
peroxide will encourage smaller manufacturers to consume the product.
This would allow a greater segment of industrial consumers to reap
benefits from consumption of H2O2. Additionally, it will also act as a
catalyst in facilitating import substitution thereby reducing the import bill
of the country.
With Descon Chemicals and Nimir Resins providing over 100
chemical products to the paper and textile industries, these companies
have close relationships that DOL can leverage on. Descon Chemicals and
Nimir Resins are supplying chemicals that are used in association with
hydrogen peroxide in various processes. Therefore, DOL will find a ready
market for its product within the existent customer base of these
companies. Furthermore, DOL management also has arrangements with
industry leaders, ensuring supply of H2O2 for their usage.
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(b) CONSTRUCTION RISK
Construction risk relates to the Company not being able to install
the plant & machinery and/or construct building/offices for the project
within the specified time period.
The construction risk has been mitigated by engaging Descon
Engineering Limited and JGS Descon Limited for complete installation of
the plant.
(c) OPERATIONAL RISK

This is the risk that DOL might not be able to sustain production
and/or quality in the long term or might not be able to engage qualified
and competent personnel. This risk is mitigated by the fact that the
sponsors bring with them considerable experience in the chemical sector.
DOL signed an agreement with Chematur Ecoplanning Oy for delivering
the basic and detail engineering design of their licensed hydrogen
peroxide. Chematur will also provide supervision for the commissioning
of the plant and is responsible to deliver the agreed quality and production
capacity as backed by a process guarantee, hedging DOL's risks. DOL has
been given the exclusive license to be the sole operator of Chematur
technology in Pakistan. Chematur has provided a performance guarantee
to assure DOL of its obligations under the Supply Contract. Chematur has
a total liability of 15% of the total contract amount which will remain
outstanding throughout the construction period. The performance
guarantee covers the capacity, quality and raw material consumptions
under the contract.
In addition to this, DOL has inducted a group of highly trained
professionals having relevant experience to manage the project. The team
has been working on the project since its inception. The average
technical / management experience of the senior executives of DOL is
over 20 years with renowned companies worldwide.
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(d) REGULATORY RISK
Regulatory risk relates to uncertain government policies affecting

the industry in the future. Changes in the regulatory framework can greatly
influence the performance of any sector. It is expected that in order to
support this new industrial segment and to promote local production of
H2O2, the GOP may enforce favorable regulatory frame work and help
support the industry which in return assist the Government to reduce
import bill.
(e) ECONOMIC SLOWDOWN
The growth of the H2O2 industry is dependent upon the economic

conditions prevailing in the country, as the product is used by various
sectors of the economy. The success of this industrial segment is
correlated to the success and growth of other industries as well.
Pakistan's economic environment has improved considerably in
recent years mainly due to the Government of Pakistan's political and
economic reform initiatives. These initiatives have focused on
macroeconomic stability and have included the deregulation of industries,
tax reforms, interest rate rationalization, trade liberalization and
promotion, proactive fiscal and debt management and the successful
privatization of several state-owned commercial enterprises. Most recently
the country has witnessed economic slowdown mainly due to political
unrest which is expected to normalize in the near future and we expect the
economy to return back on track post this transitional phase.
(f) COMPETITION RISK
The profitability of Descon Oxychem Limited may be affected due

to risk of increasing competition from other domestic companies.
Descon group over the number of years has established market
reputation and is well positioned in the chemical and allied industries.
Presently there is only one local producer of H2O2 in the market and
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demand is met through imports. Descon Oxychem is expected to replace
or reduce import share due to price differential.
POWER
i. ELECTRICITY
Shortage in the supply of electricity can adversely affect the

production capacity of the plant. The plant facility includes a 132 KVA
Grid for H2O production that has been provided by Lahore Electricity
Supply Corporation (LESCO). It is supported by a stand-by generation
system with a capacity of 1,250 KVA. The Company does not foresee any
problem to ensure year round availability of the power requirements.
ii. NATURAL GAS
Inflation and interruption in the gas supply can have a negative

impact on the production and selling price of H 2O2. In order to mitigate
this risk, the Company has entered into a gas supply contract with Sui
Northern Gas Pipeline Limited (SNGPL). As per the agreement SNGPL
will supply gas at the rate of 83.4 MCF/hr for a period of 3 years (on roll
over basis).
(g) TECHNOLOGICAL OBSOLESCENCE
The Company's profitability can be adversely affected by potential

obsolescence of DOL's process technology and also due to second hand
plant. In this regard, it is noteworthy that the technological advancement
in the H2O2 industry comes after long intervals and this technique of
producing H2O2 has been considered the best so far and procured from
the industry leaders providing such services for many year also the second
hand hydrogen plant has been designed by Howmar International UK
having a capacity of 1,700 Nm3/hr.
-
SGS UK has inspected and confirmed the operational efficiency of
this plant before its shipment to Pakistan and estimated 10 years useful life
for this plant.
B. INSTRUMENT SPECIFIC RISK
(a) UNDER-SUBSCRIPTION RISK

This is the risk that the IPO may get under subscribed on account
of lack of investor interest. The IPO of DOL is for 32.5 million shares at
par value (PKR 10/- per share).
Given the sound financial performance, vast experience and
reputation of the Group, the future prospects of this new venture are
reasonably bright. Therefore, the probability of under subscription of the
IPO of DOL is low. The Company will receive the funds from the IPO in
its entirety even in the case of under subscription, as the IPO is fully
underwritten.
(b) PRICE RISK

Price risk refers to the share price performance, once listed.
In recent times, Karachi Stock Exchange has seen volatile trends;
however, the risk is mitigated by the zero premiums being charged on the
offering.
(c) LIQUIDITY RISK
-
The investors assume the risk that they will not be able to sell the
ordinary shares in the secondary market without adversely affecting the
market price.
Ordinary shares are proposed to be listed on the Karachi Stock
Exchange which would enable the investors to undertake secondary
market trading.
Values of firm:-
Value of firm = 1718896249

Value of debt = 1038153846
Market value of equity =695000000
DOL’S WEIGHTS FOR DEBT AND EQUITY
Using the market value of debt and equity, we estimate the

following weights for debt and equity in the capital structure calculation.
Equity ratio = 0.39

Debt ratio = 0.60
Rdebt = 0.10
Requity = 0.125
DOL’S COST OF CAPITAL
= rdebt (debt ratio) + requity

(equity ratio)
= 0.10 (0.60) + 0.125 (0.39)
= 0.06 + 0.049
= 0.109 or 10.9 %
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IV: Measuring Investment and
Returns
THE PROJECT:
The hydrogen peroxide plant being set up by DOL is a fully automated DCS
controlled production facility for all product variants of H 2O2. It has an installed
capacity of 30,000 MTY on the basis of 50% concentration output. The complex
mainly consists of a) Hydrogen Plant and b) H2O2 Plant. Process technology,
knowledge, license and commissioning supervision is being provided by
Chematur Ecoplanning Oy Finland, (Group Company of Chematur Engineering,
Sweden). Other contractors include Descon Engineering Limited (responsible for
fabrication of major plant equipments and also responsible for complete civil,
mechanical and electrical construction/installation of the plant) and JGC Descon
Engineering (Pvt) Limited (responsible for complete detailed engineering,
issuance of drawings for construction and arrangement and technical approval of
all equipment being procured for the project).
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PROJECT LOCATION:
The project is being set up on 28 acres of freehold land on 18km

Lahore Sheikhupura Road. The location is in proximity with major industrial
clusters of Punjab and ideal with respect to transporting raw materials and
finished products
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PROJECT COST AND SOURCE OF FINANCING:
The total cost of the project is estimated at PKR 2,490 million

which will be financed in debt equity ratio of 59:41. The sponsors have injected
PKR 503 million as equity while PKR 192 million has been raised through pre-
IPO placement. The remaining equity portion of PKR 325 million will be raised
through IPO.
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Equity Financing:
The Company has raised equity of PKR 695 million comprising of

Sponsors contribution (PKR 503 million) and Pre-IPO placement (PKR 192
million). In addition to this, the Company will raise PKR 325 million through the
IPO.
Debt Financing:
Syndicate Term Finance
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PLANT AND MACHINERY:
The cost of the total plant and machinery comprising of local and
imported machinery is PKR 1,383 million. Plant and Equipment costs include
procurement of process plant, auxiliary equipment and arrangement of utilities.
Chematur Ecoplanning Oy Finland (Group Company of Chematur Engineering
Sweden) has delivered detailed engineering of the licensed H2O2 Plant and will
also assist in the commissioning of the plant. The construction of H2O2 plant
equipment is being done by Descon Engineering Ltd which is also responsible
for the erection and pre commissioning activities of Hydrogen plant and H 2O2
plant. As per the project scheduling document and the verification carried out by
independent consultants 54.56% of the plant and machinery has been installed till
April 30, 2008, the mechanical installation is expected to be completed by July
31, 2008. Breakdown of local and imported machinery and equipment is as
follows:
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IMPORTED:
All imported plant & machinery (except the hydrogen plant) is brand
new and has been purchased at the most competitive rates from a number of
international suppliers. The second hand hydrogen plant has been designed by
Howmar International UK having a capacity of 1,700 Nm3/hr. SGS UK has
inspected and confirmed the operational efficiency of this plant before its
shipment to Pakistan and estimated 10 years useful life for this plant. Complete
details of imported plant and machinery are given below:
-
-
payment.
As of 30th April, 2008 approximately 46% of plant and machinery has been
purchased while LCs of remaining 54% have been established by the Company.
However LCs for less than 1% of the imported plant and machinery are yet to be
opened as at 30th April, 2008.
LOCAL:
Besides imported machinery, the project also constitutes locally manufactured

equipment, all of which is brand new and bought at competitive rates. The
Company has already incurred 36% of the projected cost of local plant and
machinery as on 30 April, 2008 while the remaining is expected to be completed
th
by 31st July, 2008 as confirmed by he contractor Deson Engineering Limited vide

its letter dated 19 May, 2008. Details are as follows:
th
CIVIL WORKS:
Building and structure cost includes civil design and civil works for
development of the Project which amounts to PKR 233 million. All the civil
work has been awarded to the construction contractors. As of April 30th, 2008,
approximately 69% of civil work has been completed and remaining is expected
to be completed by July 2008.
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FACILITIES AND UTILITIES:
Power
The plant facility includes a 132 KVA Grid for H2O2 production that has been
provided by Lahore Electricity Supply Corporation (LESCO). It is supported by a
stand-by generation system with a capacity of 1,250 KVA sufficient for
uninterruptible supply of electricity to the plant. The Company does not foresee
any problem to ensure year round availability of the power requirements.
Water
Water requirements of the plant will be met through tube wells installed on the
factory site. The Company has constructed a large water reservoir at the premises
which will provide adequate water storage facilities for manufacturing of H2O2.
Raw Material
The Company has entered into a gas supply contract with Sui Northern Gas
Pipeline Limited (SNGPL) to fulfill its gas requirement of 83.4 MCF/hr. In
addition to this, the hydrogen plant has a cylinder storage capacity to store gas
for 4 days of production. As per the agreement SNGPL will supply gas at the rate
of 83.4 MCF/hr for 3 years (on roll over basis).
PROJECT IMPLEMENTATION SCHEDULE:
Activity Completion
Date
Acquisition of Land Acquired

Civil Work July 2008
Completion of Arrival of Machinery End of July
2008
Completion of Erection / Installation End of July
2008
Plant Commissioning August 2008
Trial Production October 2008
Commercial Production December 2008
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TARGET MARKET AND SALES STRATEGY
The product will be distributed in different sized containers, making it

readily available to small scale consumers as well as large manufacturers. DOL
will distribute its product in large tankers as well as smaller drums. This will
allow the Company to distribute its product to all types of consumers.
The management of Descon Oxychem Limited has strong relationships with

various industry leaders in sectors that are the key demand drivers of their
product, including the textile and paper industries. As part of its organizational
structure, DOL has created a separate department solely for the purpose of
marketing. The Company has already started to market its product to other large
scale industries and has received a positive response.
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] Assessments for the Future:
We believe that the Descon Oxychem Limited, Hydrogen Peroxide Project

is likely to continue generating surplus value into the future, because of
several barriers to entry, including:
• DOL’s strong brand name value is likely to allow them to earn

higher margins and maintain healthy returns on capital into the
future.
• The bulk of the investment, in the Hydrogen Peroxide Project, has
been made already. DOL will continue to enjoy the benefits of this
investment in the form of earnings.
• The potential for excess returns in the Hydrogen Peroxide Project
division will continue to be greater for Descon Oxychem Limited
(where the brand name counts).
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V. Capital Structure Choices
Current Financing Mix:
PROJECT COST AND SOURCE OF FINANCING:

The total cost of the project is estimated at PKR 2,490 million
which will be financed in Debt equity ratio of 59:41. The sponsors have injected
PKR 503 million as equity while PKR 192 million has been raised through pre-
IPO placement. The remaining equity portion of PKR 325 million will be raised
through IPO.
-
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Trade Off on Debt versus Equity:
Looking at the advantages and disadvantages of debt, and DOL’s specific

characteristics yields the following:
Factor Descon Oxychem Limited

Tax Benefit Descon Oxychem Limited has no taxable income in the current
year so is tax exempt.
Added Discipline Descon Oxychem Limited is a widely held firm. While
of Debt institutional stockholders own a significant percentage of the
firm, no individual stockholder or institution is large enough to
have much say in management. The firm has significant cash
flows and should gain from the use of debt.
Bankruptcy Risk Some of DOL’s earnings are volatile, but a significant portion
of the cash flows are stable. The bankruptcy risk should be low,
given this factor and the size of the company
Future Flexibility The need for financing flexibility is increasing as the business
needs changes technologically and becomes more global.
A Qualitative Judgment:
Based upon this trade off, we would expect Descon Oxychem Limited to
have significant debt capacity. It has potentially large benefits from debt
— tax benefits and added discipline — and has the cash flows to sustain
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the debt without significant bankruptcy and agency costs. DOL’s current
debt ratio is probably low.
VI. Optimal Capital Structure
OPTIMAL DEBT RATIO:
Based upon the current cost of capital DOL’s current/existing debt

ratio is its optimal ratio. If we compare DOL’s debt with the sector and
market, we came to know that the comparison from sector our debt is
normal but if we compare it to market ratio then the company’s debt ratio
is slightly higher.
CONSTRAINTS:
Keeping in mind market and economy constraints we would

like to recommend the DOL to minimize their debt ratio as this year
‘2009’ is proved to be the toughest year from business concerns, all the
economy conditions become more worst than the expectations so, DOL
should also consider this factor and try to minimize their debt ratio from
60% to 50% or 48%.
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VII. Mechanics of Moving to the
Optimal
Due to economy’s worst conditions the firm is unable to get its

optimal debt ratio. Current debt ratio of Descon Oxychem Limited is
54.4:41.6 and it is suggested by the CFO of the company that they will try
to reach to the optimal debt ratio gradually overtime by following the
strategy as decided in the last board meeting that they will after their
existing mix (buy back stock or retiring debt) and achieve a more to the
optimal. For this purpose they are using long term financing in PKR.
A Path to the Optimal:
The Right Financing For Descon Oxychem Limited
Project Cash Flow Characteristics Type of Financing

Projects are likely to Debt should be
• be long term • long term
• have cash outflows are primarily in PKR but • mix of currencies

cash inflows could have a substantial foreign
-
currency component (because of overseas sales)
• have net cash flows which are heavily driven by

the success of Hydrogen Peroxide Project.
VIII. Dividend Policy: The Trade

Off
DIVIDEND POLICY:
The rights in respect of capital and dividends attached to each share are
and will be the same. The
Company in general meeting may declare dividends but no dividends shall
exceed the amount recommended by the Directors.
The Directors may from time to time pay to the members such interim
dividends as appear to the Directors to be justified by the profits of the
Company. No dividends shall be paid otherwise than out of the profits of
the Company for the year or any other undistributed profits. No unpaid
dividend shall bear interest or mark-up against the Company. The
dividend shall be paid within the period laid down in the Ordinance.
DIVIDEND HISTORY
The Company has not paid any dividends since its incorporation.
ELIGIBILITY FOR DIVIDEND
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The Company in this matter will follow the provisions of Section 92(2) of
the Ordinance, which reads as under:
"The new shares issued by a Company shall rank pari passu with the
existing shares of the class to which the new shares belong in all
matters, including the right to such bonus or right issue and dividend
as may be declared by the Company subsequent to the issue of such
new shares."
DEDUCTION OF ZAKAT
Income distributed will be subject to the deduction of Zakat at source

pursuant to the provisions of the Zakat and Ushr Ordinance, 1980 (XVIII
of 1980).
WITHHOLDING TAX ON DIVIDENDS:

Profit distribution to the shareholders will be subject to
withholding tax at source under Section 150 of the Income Tax Ordinance,
2001 at the rate of 10% as specified in Part I, Division III of the First
Schedule to the said Ordinance. In terms of the provision of Section 8 of
the said Ordinance, said deduction at source, shall be deemed to be full
and final liability in respect of such profits except in case of a Company.
EXEMPTION FROM CAPITAL GAINS:

Capital gains derived from the sale of listed securities are
presently not liable to income tax, pursuant to Clause (110) of Part 1 of the
Second Schedule of the Income Tax Ordinance, 2001. This exemption is
presently available up to the income year ending June 30, 2010.
DEFERRED TAXATION:
Deferred tax is provided in full using the balance sheet

liability method, on all temporary differences arising on differences
between carrying amounts of assets and liabilities in the financial
statements and their corresponding tax bases. Deferred tax liabilities are
recognized for all taxable temporary differences and deferred tax assets
are recognized to the extent that it is probable that taxable profits will be
-
available against which the deductible temporary differences, unsued tax
losses and tax credits can be utilized.
Deferred tax is calculated at the rates that are expected to apply to the
period when the differences reverse based on tax rates that have been
enacted or substantively enacted by the balance sheet date. Deferred tax is
charged or credited in the profit and loss account, except in the case of
items credited or charged to equity, in which case it is also included in
equity.
The Company has made no provision for deferred taxation up till February 29, 2008.
CAPITAL VALUE TAX ("CVT") & WITHHOLDING

TAX ("WHT") ON SALE/ PURCHASE OF
SHARES:
Pursuant to the provision of Section 233(A) of the Income Tax Ordinance,
2001, and Capital Value
Tax (Finance Act 1989), the following charges have been made on
sale/purchase agreement:
(a) 0.02% CVT will be charged on purchase of all shares, modaraba

certificates, and instruments of redeemable capital as defined in the
Ordinance.
(b) 0.01% WHT will be charged on sale of all shares, modaraba

certificates, and instruments of redeemable capital as defined in the
Ordinance.
-
By analysis of the firm’s financial characteristics we would like to
recommend the company, Descon Oxychem Limited to return the cash to
their stockholders, based on the assumption that they are having excess of
cash; in shape of more likely to be equity buyback and then spun off their
assets.
Dividends
IX. Dividend Policy: A Framework
Karachi Currency: PKR

Price11.050 Change- % Change- Bid11.030 Ask11.140 Open11.200
0.010 0.090
Volume1,760,500 High11.690 Low10.850 52-Wk 52-Wk 1-Yr
High15.900(07/31/08) Low5.490(02/11/09) ReturnN.A.
Shares Market Cap EarningsN.A. Price/ Relative ROEN.A.

(Millions)102.000 (Millions)1,127.100 EarningsN.A. P/EN.A.
Last Dividend Dividend Yield Rel. Dividend 90-Day Beta
ReportedN.A. (Trailing YieldN.A. VolatilityN.A. vs. KSE100N.A.
-
12mo.)N.A.
Company Industry Sector S&P 500

Dividend -- 0.06 0.13 3.00
Yield
Dividend -- 1.36 1.26 1.98
Yield - 5
Year Avg.
Dividend 5 -- 13.11 20.87 11.85
Year Growth
Rate
Payout -- 1.45 3.18 48.13
Ratio(TTM)
Price for DOL:PASECTOR COMPARATIVE RETURNS
Chart the Performance of DOL:PA DOL:PA KSE100:IND
Factor Implications for Descon Oxychem Limited

Stockholder Tax Preferences Given its history as a stock with low dividend
-
yields, stockholders are much more likely to be
attracted to capital gains than dividends.
Equity Buybacks
Information Effects and Signaling Descon Oxychem Limited is one of the more
Incentives heavily followed stocks in Pakistan. It should
not have to increase dividends to attract
attention or send signals about future cash
flows.
Effect on Flexibility The technological changes in the industrial
sector and uncertainty about global expansion
needs increase the need for flexibility and are
likely to work against paying more in
dividends.
Bond Covenants and Ratings Neither is likely to be a serious impediment to
Agency Concerns Descon Oxychem Limited raising dividends
Overall, the factors suggest that DOL, if it wants to return cash to its
stockholders, would be better off returning cash to stockholders in the
form of stock buybacks rather than dividends.
X. Valuation
By analyzing the financial condition and growth of the company I

(group) would choose to relay more on cash inflows from financing
activities for discounting purpose of firm .And by analyzing other projects
and their returns and performances of the mother company “Descon” it is
fully hopped that this project will also turn into high returns and perform
more efficiently and effectively then expectations and will beat the
competitors with high margin .DOL’s total equity’ value is rs.680742403.
Key variables that worked out in driving this value are risk and profit
-
margin of the firm. If I (group) was hired to enhance value of the firm, the
first step I (group) would take is probably reduce their debt to equity ratio
as economy conditions are changing dramatically, a flow of continuous
ups and downs is there inflation rate is changing accordingly too so our
major portion of profit will used in paying off interest. If we instead of
using debt rely more on our equity it will definitely enhance the value of
DOL.
And we wish them a very best of luck for a bright, healthy & profitable
future.
-

Corporate Finance Project On Descon in Pakistan

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Corporate Finance Project On Descon in Pakistan

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“With the name of Allah the most beneficial and the most merciful”

Sana Ghayyur M-13366

We would also like to pay tribute to the benefactor of humanity ”HOLY

To our “Parents” because of their sacrifices and continuous encouragement

By, Donald H.Rumsfeld

By, Charles A. Dana

 Vision and Mission

 Corporate Governance Analysis

 Risk and Return

 Measuring Investment Returns

 Capital Structure Choices

 Optimal Capital Structure

 Mechanics of Moving to the Optimal

 Framework for Analyzing Dividends

Effective from 15 September 2008 Company’s shares have been formally

A. MANAGEMENT AND STOCKHOLDERS

At Descon Oxychem Limited the power clearly resides, with the

• Insiders (current at descon Oxchem) hold six of the seven

Mr.Abdul Razak Dawood Director/Chairman

B. Firm and Financial Markets:

Descon is a well-followed firm. While the Firm provides

Companies need to answer to two aspects of their

Social responsibilities of Descon Oxychem Limited is

Slide in Operating Costs

Brand Image and Reputation

Productivity and Quality Enhancement

Descon Oxychem Limited invests in the working

A. Average And Marginal Investors

To analyze Descon’s stockholders, we began with an analysis of who

The following table lists out the 10 largest stockholders in Descon

In conclusion, these facts suggest that:

• The average stockholder in Descon Oxychem Limited is an

III. Risk Profile

Overall Risk Profile

DOL — Descon Oxychem Limited

Last Trade 11.83 ( 0.54) Day's Range 10.99 - 12.05

A. COMPANY SPECIFIC RISKS:

(a) INABILITY TO ATTRACT THE MARKET

This risk relates to the inability of the Company to attract

(c) OPERATIONAL RISK

Regulatory risk relates to uncertain government policies affecting

(e) ECONOMIC SLOWDOWN

The growth of the H2O2 industry is dependent upon the economic

(f) COMPETITION RISK

The profitability of Descon Oxychem Limited may be affected due

Shortage in the supply of electricity can adversely affect the

ii. NATURAL GAS

Inflation and interruption in the gas supply can have a negative

(g) TECHNOLOGICAL OBSOLESCENCE

The Company's profitability can be adversely affected by potential

B. INSTRUMENT SPECIFIC RISK

(a) UNDER-SUBSCRIPTION RISK

(b) PRICE RISK

(c) LIQUIDITY RISK

Value of firm = 1718896249

DOL’S WEIGHTS FOR DEBT AND EQUITY

Using the market value of debt and equity, we estimate the

Equity ratio = 0.39

DOL’S COST OF CAPITAL

= rdebt (debt ratio) + requity

= 0.10 (0.60) + 0.125 (0.39)

The project is being set up on 28 acres of freehold land on 18km

The total cost of the project is estimated at PKR 2,490 million