Case of Agthia Group company ---[1].pptx

Agthia Group Overview:
Established: 2004
Principal Activities: Food and beverage sector
Business Segments:
Agri Business Division
Consumer Business Division (CBD)
Bottled Water and Beverages
Food
Ownership: 56% owned by the UAE government (51% Senaat General Holding Corporation, 5% Abu Dhabi Retirement Pensions & Benefits Fund)
Geographical Presence: UAE, Egypt, Turkey
Employees: Approximately 2,100

1. Agthia Group

2. Agthia Group Overview: Established: 2004 Principal Activities: Food and beverage sector Business Segments: Agri Business Division Consumer Business Division (CBD) Bottled Water and Beverages Food Ownership: 56% owned by the UAE government (51% Senaat General Holding Corporation, 5% Abu Dhabi Retirement Pensions & Benefits Fund) Geographical Presence: UAE, Egypt, Turkey Employees: Approximately 2,100

3. How do Agthia Group is performing in comparison with its peers? We would look at several financial and operational metrics such as profitability margins, revenue growth, market share, and strategic initiatives. Agthia Group's profitability margins, the average of LTM ended from December 2012 to September 2014 was 10.6%, the net profit margin was second higher company at this period. Return on assets (ROA): the ratio of net income at the average of LTM ended from December 2012 to September 2014 was 8.1% which reflect that the company used its assets more efficiently than other companies to generate more profits.

4. Revenue growth rate: The average of revenue at the period form December 2012 to September 2014 was 13.4% which reflect how Agthia Group's increasing its sales and expanding its business operations. The Price-to-Earnings ratio(P/E): It was 22.2 which indicate that the ratio of Agthia Group's current share price to its earnings per share was the highest compare to the other companies. The Price-to-Book Value ratio(P/BV): It was 3.1 which indicate that the Price-to-Book Value ratio par with or above the GCC average. geographic expansion: Certainly, Strategic initiatives play a crucial role in enhancing company performance, these initiatives compare with industry trends and those of its peers can provide insights into its future growth prospects, and Agthia Group has a portfolio of integrated businesses providing food and beverage products for consumers across the UAE, GCC, Turkey and the Middle East.

5. 2-How has Agthia Group’s stock price evolved over time?   The Agthia Group’s stock price, as depicted in the figure, has experienced the following evolution over the observed period: Early September 2015 : The stock price started around 8.30 and quickly rose to around 8.70. AED Mid-September to Early October 2015 : There was a gradual decline in the stock price from around 8.70 to around 7.80 AED Mid-October to end of the year 2015 : The stock price showed some volatility but mostly remained in the range of 7.60 AED to 7.80 AED January 2016 : The stock price showed a gradual decline, moving from around 7.70 AED to approximately 6.99 AED by the end of January The P/BV ratio compares the market price of a stock to its book value Agthia P/BV ratio is 3.1 Which indicate growth for the company Regarding the P/E Compared to the sub-segment average P/E ratio of 14.6, Agthia appears relatively more Expected to increase and potential growth Overall, the stock price of Agthia Group showed a declining trend from early September to late January, starting from a high of around 8.70 AED and ending at 6.99 AED.

6. Cost of Capital for Agithia group The cost of capital is the cost of funds used to finance a business. It depends on the mode of financing used. If a business is financed uniquely by debt, the cost of capital equals the cost of debt. If a business is financed uniquely by equity, the cost of capital equals the cost of equity. Usually, firms use a combination of equity and debt to finance their activities. In such case, the cost of capital is weighted average of all capital sources

7. The following formula enunciate the cost of capital equation using the cost of equity, the cost of debt, and the proportions of total assets financed by debt capital and equity capital. Cost of Capital = WEquity . Cost of Equity + WDebt . Cost of Debt (1) Where WEquity is the proportion of total assets financed by equity capital, i.e WEquity =Equity/Assets WDebt is the proportion of total assets financed by debt, i.e WDebt =Debt/Assets Cost of Debt reflects the interest charges on the debt component. Cost of Equity reflects the cost of financing firm’s activities using equity capital.

8. Calculation cost of capital for agethia

9. Summary & conclusion summary, Agithia WACC decreased from 20.7 % in Mar 2009 to 7.11 % in sept 2011 , which is on the lower end of the range seen for 5 years. driven by changes in the market value of equity and debt, the cost of equity, and the corporate tax rate.   Agithia WACC has fluctuated between around 10.53 % in 2011 to 10.53 % in 2013 , with the lowest point being 10.54 % in Q2 2013, and the highest point being 12.4% in Q4 2013 and Q2 2021. As of June 2015, Agithia WACC was 14.09 %, which is on the lower end of the range seen for this year

10. 4. What is the impact of Agthia’s merger and acquisition strategy on its overall cost of capital? Discuss this issue in the relationship with risk-return trade-off principle

11. Agthia has played a role by using mergers and acquisitions to increase its capacity and production. Agthia uses merger and acquisition as a strategy to increase its profitability and competitiveness. This strategy helps Agthia to enhance significant diversification of its products and increase its scale economies. The significant point in this strategy is the reduction of the cost of capital.  Those mergers and acquisitions have to be financed by Agthia, potentially by incurring new debt or issuing new equity. This might change the capital structure of the company and therefore the cost of capital itself – an increase in debt might make interest expenses higher (increasing the cost of debt) and issuing new equity to finance might increase the cost of equity (because existing shareholders’ equity will become diluted).

12. the risk-return trade-off It means that investors will be willing to take risks because they believe that the return they get will get higher too. However, if in this case, the Agthia Group does not have the trust of several shareholders and other investors because it knows that the return on equity will take a long time, there will be no investors who dare to take the risk to invest their money in the Agthia Group. Return on equity is an important measure for a company because it compares with similar companies. Return on equity (ROE) measures performance, and generally the higher the better. And it directly impacts stock valuations — higher the ROE, higher the intrinsic value of a company. That explains why a lot of the companies with high RoEs have higher valuations.

13. 5. How corporate governance inefficiencies can impact the cost of capital? Discuss this issue in relationship with agency theory.

14. Corporate governance inefficiencies can impact the cost of capital in several ways, particularly about agency theory. Agency theory focuses on the relationship between principal’s shareholders and managers in a corporation and how conflicts of interest may arise between them. When corporate governance is inefficient, these conflicts of interest can lead to increased risks and costs for investors, resulting in a higher cost of capital for the company. Here are some ways in which corporate governance inefficiencies can impact the cost of capital in the context of agency theory:

15. 1. Agency Costs : Inefficient corporate governance can lead to higher agency costs, which are the costs incurred by principals to monitor and control agents. If shareholders do not have sufficient oversight and control over management, there is a risk that managerial actions may not align with the interests of shareholders. This can lead to agency costs such as excessive executive compensation, perks, or unethical behaviors, which ultimately raise the cost of capital for the company. 2. Information Asymmetry : Poor corporate governance often results in information asymmetry between managers and shareholders. When managers possess more information about the company's operations and financial health than shareholders, it can lead to conflicts of interest and opportunistic behaviors. Investors may demand a higher return on their investment to compensate for the increased uncertainty and risk associated with this information imbalance, thus driving up the cost of capital.

16. 3. Risk Management : Effective corporate governance is essential for proper risk management within a company. When governance mechanisms are weak, there is a higher likelihood of taking on excessive risks or engaging in questionable practices that can negatively impact the company's financial performance and reputation. Investors may perceive the company as being riskier and require a higher return on their investments, resulting in a higher cost of capital. 4. Lack of Accountability : Inefficient corporate governance may lead to a lack of accountability among management, as there may be insufficient checks and balances in place to ensure that executives act in the best interests of shareholders. Without proper accountability, investors may view the company as a riskier investment and demand a higher cost of capital to compensate for this perceived risk.

17. In conclusion, corporate governance inefficiencies can significantly impact the cost of capital by increasing risks, information asymmetry, agency costs, and lack of accountability within a company. Effective corporate governance mechanisms that align the interests of managers with those of shareholders are crucial for reducing these inefficiencies and ultimately lowering the cost of capital for the company.

18. 6. How can we reduce the cost of capital? Refer to agency theory in your discussion. When investors have more accurate and timely information, they perceive lower risk, which can lead to a lower cost of capital. strong corporate governance practices help the interests of managers with those of shareholders and signal to investors that their interests are protected, potentially lowering the cost of capital. Companies with better access to capital markets, including debt and equity financing, can diversify funding sources and potentially lower their overall cost of capital.   Agency theory states that “agents may take corporate decisions that may diverge from the principal’s interests”.

19. 7. How can the government reduce agency costs and maximize firm value? Government's Role: As a major shareholder, the government can play a crucial role in reducing agency costs and maximizing firm value. Active Monitoring: The government can ensure active monitoring of management practices and enforce stringent governance standards. Strategic Guidance: Providing strategic direction and supporting long-term growth initiatives can help align management actions with shareholder value maximization. Stakeholder Engagement: Facilitating better communication between management and stakeholders can improve trust and reduce conflicts. Market Forces such as major shareholders and the threat of a hostile takeover act to keep managers in check. Performance plans tie management compensation to measures such as EPS growth; performance shares and/or cash bonuses are used as compensation under these plans