Financial Analysis Report for Exotic Manufacturers: Malaysian Market

This report provides a comprehensive financial analysis of Exotic Manufacturers, a proposed automobile business in Malaysia. It begins with an economic and industry analysis, highlighting the growth potential of the Malaysian automotive sector and the company's strategic positioning. The report then delves into financial management, including the selection of a limited company structure, a SWOT analysis, and projected cash flows for the next five years. Sources of finance, both internal and external, are identified. Risk analysis is conducted using the CAPM model and WACC calculation. Finally, the report utilizes valuation methods such as NPV, IRR, payback period, and profitability index to assess the business's viability, concluding with a recommendation to accept the business based on positive financial indicators.

Business accounting and
finance

Table of Contents
INTRODUCTION...........................................................................................................................3
2. Economic and Industry Analysis.................................................................................................3
3. Financial Management.................................................................................................................4
A) Choose a business...................................................................................................................4
B) Projected cash flows for next five years.................................................................................5
C) Sources of finance...................................................................................................................6
4. Risk Analysis...............................................................................................................................7
A) CAPM Model.........................................................................................................................7
B) Cost of Capital (WACC)........................................................................................................7
C) Valuation.................................................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Starting new venture requires proper planning of activities in order to attain desired
results. Present report deals with choosing business in Malaysian market to earn revenue. New
business is named as Exotic manufacturers which will be engaged in automobile sector. In
relation to this, projected cash flows are calculated from assumed income statement. Moreover,
WACC, CAPM are computed to analyze risk. Moreover, multiple valuation methods are used for
analyzing whether business will be profitable or not.
2. Economic and Industry Analysis
The local markets of Malaysia can be explained with varied elements. The business will
require various aspects to perform well and remain long in the market. New venture will be
named as Exotic manufacturers which will be engaged in automobile sector. Company would
require to perform in adequate manner so that desired profits may be garnered in the best
possible way. The automotive industry of Malaysia is the third largest in South East Asia.
Moreover, sector is 23rd largest across the world. Furthermore, production of vehicles on annual
basis is around 500,000 which clearly shows that GDP is largely influenced by this industry.
Economic growth is provided to the country as more of goods are produced over the year. This
enhances automotive industry as it is able to garner profits in good quantum which imparts
overall growth of the nation with much ease (Loughran and McDonald, 2016).
Furthermore, stock markets are also positive as it can be discovered by market share of
the sector. The passenger vehicles total sales were increased by 2.3 % in 2017 as compared to
previous year. This means that in 2018 financial year, sales are expected to increase by 2 %. It
implies that automobile sector will continue to grow at a rapid rate. The industry provides more
than 4 % of total GDP to the nation. Malaysian currency which is Malaysian Ringgit also has
good exchange rate in external value. Thus, all these factors would impact business as
competitors in the market are trying their level best to gain more market share in effectual
manner. Hence, it is required that well-structured strategies would lead path for effective
launching in local market and sustain quite long so that revenue may be achieved with desired
market share (Cleary and Quinn, 2016).

3. Financial Management
A) Choose a business
The proposed business is Exotic manufacturers in the automobile industry of Malaysia.
The form of entity will be Limited Company. This form is chosen because goods may be
provided to customers in effective way as large operations are possible when company is formed.
Greater variety of products can be imparted in exchange of money. Moreover, investment can be
attained from shareholders in the best possible manner for carrying out operational activities.
Additional funds may be raised as well with this form of business. Thus, company is chosen in
automobile sector as a new venture. SWOT analysis is listed below-
 Strengths
The main strength of new venture will be use of advanced technology for producing cars
in the best possible manner. The cars would be provided with reasonable guarantee as well.
Moreover, customers will get delighted good quality of cars will be provided and that too at low
prices in order to gain market share (Collis, Holt and Hussey, 2017).
 Weaknesses
One of the major weakness is that there are no varieties of cars that would lure customers
to buy as compared to the rivals present in local market. Diversified product portfolio will be
required to capture market. Thus, such weakness might be reduced in future by injecting
operations in effectual manner.
 Opportunities
Exotic manufacturers will have ample of opportunities in Malaysian market. This will be
achieved by introducing cars at lower range with adequate quality. It means that prices of goods
will be kept low as compared to rivals so that customer base can be gained. Moreover, product
portfolio might be expanded and as such, hybrid cars would also be manufactured by the
company (Wood, 2016).
 Threats
There are various threats to new business. First of all, major competitors in the market are
Proton Cars, Perodua Company are consistently maximizing their market share and as such, it

will be a threat to business. Moreover, fuel prices are increasing as well at a rapid rate which is
again threatening for the organization
B) Projected cash flows for next five years
Income Statement
Particulars 2018 2019 2020 2021 2022
Sales revenue 2500000 2600000 2650000 2675000 2800000
Less: Cost of Goods sold
(COGS) 550000 560000 562000 565000 570000
Gross profit 1950000 2040000 2088000 2110000 2230000
Operating expenses
Selling expenditures 200000 210000 211200 212220 220000
Administration expenses 25000 26000 26500 27000 28000
Rent expense 100000 110000 112500 116500 120000
Depreciation 10000 10000 10000 10000 10000
Wage expenses 250005 260000 262000 263000 264000
Utilities expenditures 255500 256000 256500 260000 261000
Telephone expenses 36000 37000 37200 38000 38500
Cost of Advertising 300000 310000 312000 314000 315000
Insurance 65000 66000 66500 67000 68000
Fuel costs 150000 152000 153500 155000 157000
Total operating expenses 1391505 1437000 1447900 1462720 1481500
Operating income 558495 603000 640100 647280 748500
Interest expenditure 15000 15000 15000 15000 15000
Earnings Before Taxes 543495 588000 625100 632280 733500
Income tax @ 30 % 163048.5 176400 187530 189684 220050
Net Profit 380446.5 411600 437570 442596 513450
C) Sources of finance
There are various source of finance that can be categorized as external and internal
sources-
Internal Sources
1. Share capital-
This is the internal source of raising funds as business founder may invest in the start-up.
It is effective and common method for generating finance so that organization may be started
with much ease. Thus, Exotic manufacturers can use this source of finance for getting things
done in a better way (Olson and Wu, 2017).

2. Borrowings from family-
It is another common source of raising funds from friends and family members. This is
one of the quickest way of arranging finance as compared to bank loans. It is also cheaper as
compared to loan from bank and borrowings from friends is adequate source of finance because
repayment terms and conditions is much flexible in it.
External Sources
1. Bank loan
This is one of the common source of raising funds by availing bank loan quite effectually.
It can be used by Exotic manufacturers and as such, project can be launched with much ease.
Usually, collateral security is given to bank and thus, loan may be sanctioned. Principal amount
is required to be paid along with interest accrued on it. Hence, it is useful source of generating
funds for start-up (Kim and Zhang, 2016).
2. Angel investors
Angel investors is another option for business to arrange funds in the best possible
manner. Generally, they provide finance to company in exchange for ownership in organization.
In simple words, funds are imparted and ownership is taken by angel investors in the shares of
firm. Thus, it can be availed by company for starting operations quite effectually.
4. Risk Analysis
A) CAPM Model
CAPM (Capital Asset Pricing Model) is quite useful for assessing risk associated with
investment in shares of the firm. This model help to evaluate relationship between expected
return of the security and risk in investing in the same (What is CAPM?. 2018). The formula of
CAPM is-
Risk Free Rate + (Beta value * Market Risk Premium)
= 4.05 + (0.68 * 4.17)
= 6.88 %

The above calculation of CAPM is arrived by taking Risk Free rate of government
maturity bonds of 10 years. Moreover, Market risk premium is carried out in relation to
automobile sector of Malaysia. Thus, it can be interpreted that Exotic manufacturers will be able
to garner profits in effective way. This is because investors’ may provide good investment as
CAPM is good and investors would take risk in investing in the securities of the firm.
B) Cost of Capital (WACC)

The capital structure comprises of debt and equity which is used to finance operational
activities. It can be interpreted cost of debt is 4.87 % and that of equity is 8.13 %. It implies that
Particulars 2018
Market capitalization (E) 32017.85
Beta 0.68
Risk Free Rate (rfr) 4.05
(10 year government maturity bonds of
Malaysia)
Risk Premium of Market 4.17
Cost of equity (Ke) 8.13
Cost of debt (Kd)
Interest expense 1266
Debt of Book Value 26000
Cost of debt (Kd) 4.87%
Tax rate 25.00%
Loan (Weights)
formula
D / (E + D) 0.448137944
Capital (Weights)
E / (E + D) 0.551862056
WACC
(We*Ke + Wd*Kd*1-Tax
rate) 4.26

firm is under leveraged as amount of equity is more as compared to debt. Furthermore, by
assigning weights, WACC (Weighted Average Cost of Capital) is carried out which is 4.26 %.
This means that business will be able to increase its value in the future as WACC is low. It is
beneficial for company so that it decrease WACC which will maximize its value and further
increase shareholders’ wealth as well.
C) Valuation
Year
Net Cash
flows
Discountin
g factor @
10%
Present
Value
0
1 390446 0.909
354950.90
9
2 421600 0.826
348429.75
2
3 447570 0.751
336265.96
5
4 452596 0.683
309129.15
8
5 523450 0.621
325021.26
7
1673797.0
5
Initial
outlay 1000000
NPV
673797.05
1
Year
Net Cash
flows
Cumulativ
e Cash
flows
0 -1000000
1 390446 390446
2 421600 812046
3 447570 1259616
4 452596 1712212
5 523450 2235662
2235662
IRR 33%
Year
Net Cash
flows
0

1 390446
2 421600
3 447570
4 452596
5 523450
2235662
Initial outlay 1000000
Payback
period
0.4472948
1
Profitability Index (PI)
Formula- (NPV + Initial cost) / Initial cost
= (673797 + 1000000) / 673797
= 1.67
5. Recommendations for accepting or rejecting business
It is recommended that business should be accepted. This is cleared from the fact that
valuation or investment appraisal techniques such as NPV, IRR, Payback period and Profitability
Index (PI) all are favorable for the project. This is evident from the figure of NPV that business
will be profitable. It is assumed that initial cost or outlay of the investment would be 10, 00,000.
On the other hand, there are increasing cash flows as per the projected income statement. It can
be analyzed that NPV is 6, 73,797 which is positive and good for the business. It means that
Exotic manufacturers will be profitable as greater the NPV, more beneficial for organization to
invest in the same in the best possible manner. NPV is used for projecting whether investment
would be worth for the organization or not. Thus, business should be started as it will have
positive cash flows in next five years (Ratiu, 2016).
On the other hand, PI index is also calculated with the help of NPV which is further
extension of this technique. The ideal PI as recommended by market experts is at least 1. This
means that if the figure comes below 1, then project should not be accepted. However, PI
calculated for Exotic manufacturers is 1.67 which implies that business will flourish and as such,
organization would be able to survive in Malaysian market with much ease. While, IRR is 33 %
which is also good as better return in investment will be garnered in the best possible manner.

Thus, it can be said that organization would extract good returns while investing in project.
Furthermore, payback period is also computed which is 0.44 and it means that business will be
able to gain initial investment in shorter duration. Thus, after analyzing all the valuation
techniques, it is recommended to accept the business and start operations in local market of
Malaysia in order to earn good amount of profits and enhancing customers quite effectually
(Brusca and Martínez, 2016).
CONCLUSION
Hereby it can be concluded that starting a new venture requires proper planning for
accomplishing success in the best possible manner. Moreover, analyzing competitors is also
required so that well-mannered strategies may be implemented to outreach them with much ease.
WACC and CAPM are calculated which are favorable for business and it may start operations as
risk associated with business is low and as such, investors’ may be able to invest in the
securities. Furthermore, valuation techniques also shows that business will be profitable to
launch in new market.
REFERENCES
Books and Journals

Brusca, I. and Martínez, J. C., 2016. Adopting International Public Sector Accounting Standards:
a challenge for modernizing and harmonizing public sector accounting. International Review
of Administrative Sciences. 82(4). pp.724-744.
Cleary, P. and Quinn, M., 2016. Intellectual capital and business performance: An exploratory
study of the impact of cloud-based accounting and finance infrastructure. Journal of
Intellectual Capital. 17(2). pp.255-278.
Collis, J., Holt, A. and Hussey, R., 2017. Business accounting. Palgrave.
Kim, J. B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm‐level
evidence. Contemporary Accounting Research. 33(1). pp.412-441.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research. 54(4). pp.1187-1230.
Olson, D. L. and Wu, D. D., 2017. Data Mining Models and Enterprise Risk Management.
In Enterprise Risk Management Models (pp. 119-132). Springer, Berlin, Heidelberg.
Ratiu, B. A., 2016. A reversed engineered pitch based on Rietveld (2016)," Creating value
through the freemium business model: a consumer perspective". Accounting & Management
Information Systems/Contabilitate si Informatica de Gestiune. 15(4).
Wood, D. A., 2016. Comparing the publication process in accounting, economics, finance,
management, marketing, psychology, and the natural sciences. Accounting Horizons. 30(3).
pp.341-361.
Online
What is CAPM?. 2018 [Online] Available Through: <
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-capm-formula/ >