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Examination of the Corporate Finance Practices in Dhofar Power Company (S.A.O.G)Course: MBASHR-BF-100204-1 Instructor: Susanne Trimbath Student: Latifa Said Bait Saleem ID: 15374639 Submission date: March 31,2010 Word Count (5,367)

TABLE OF CONTENT EXECUTIVE SUMMARY ......... ERROR! BOOKMARK NOT DEFINED. 1.0 COMPANY BACKGROUND ............................................................. 5 1.1 COMPANY BACKGROUND ............................................................... 5 1.2 CORPORATE OBJECTIVES .............................................................. 5 1.3 ORGANIZATION OF FINANCE DIVISION .................................... 6 1.4 SHAREHOLDERS ANALYSIS ............................................................ 6 1.5 SOURCES OF FINANCE...................................................................... 6 1.6 AGENCY PROBLEMS AND CONTROL .......................................... 7 2.0 RISK ......................................................................................................... 7 2.0.1 RISK FACING DPC............................................................................ 7 2.0.1.1 DPC SYSTEMATIC RISK .............................................................. 8 2.0.1.2 DPC UNSYSTEMATIC RISK ........................................................ 8 2.1 RETURN AND COST OF CAPITAL .................................................. 9 2.1.1 MEASURING DPC RETURN ........................................................... 9 2.1.2 DPC RETURN TREND ...................................................................... 9 2.1.3 DPC WACC.......................................................................................... 9 3. CAPITAL STRUCTURE ....................................................................... 10 3.1.1 DPC CAPITAL STRUCTURE ........................................................ 10 3.1.2. EQUITY HISTORY ......................................................................... 10 3.1.3 DPC LEVERAGE .............................................................................. 11 3.1.4 IMPLICATIONS FOR EQUITY SHAREHOLDERS .................. 11 3.1.5 RIVALS CAPITAL STRUCTURE ................................................. 12 3.2 DIVIDENDS .......................................................................................... 13 3.2.1 DIVIDENDS POLICY ...................................................................... 13 3.2.2 COMPARISON WITH RIVAL DIVIDENDS ................................ 14 4. WORKING CAPITAL........................................................................ 14 4.1. WORKING CAPITAL DEFINITION .............................................. 14

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4.2 DPC WORKING CAPITAL COMPONENT .................................... 14 4.2.1 CURRENT ASSETS.......................................................................... 14 4.2.2 CURRENT LIABILITIES ................................................................ 15 4.3 DPC WORKING CAPITAL TREND AND INTERPRETATION . 15 4.4 CASH CYCLE ...................................................................................... 16 4.5 DPC AND RIVALS .............................................................................. 17 4.6 MONEY MARKET .............................................................................. 17 5. CONCLUSION ....................................................................................... 17 5.1 AGENCY THEORY AND CORPORATE GOVERNANCE .......... 17 5.1.1 AGENCY THEORY .......................................................................... 17 5.1.2 CORPORATE GOVERNANCE ...................................................... 18 5.2 THEORY OF CAPITAL STRUCTURE AND COST OF CAPITAL ....................................................................................................................... 18 5.3 THEORY OF DIVIDEND POLICY................................................... 19 5.4 EFFECTIVE WORKING CAPITAL MANAGEMENT ................. 19 5.5 CAPITAL MARKET EFFICIENCY AND IMPACT ON SHARE PRICE OF THE COMPANY .................................................................... 19 APPENDIXES ............................................................................................. 21 APPENDIX D .............................................................................................. 24 APPENDIX E .............................................................................................. 25 APPENDIX F .............................................................................................. 26 APPENDIX G .............................................................................................. 27 APPENDIX H .............................................................................................. 28 APPENDIX I ............................................................................................... 29 APPENDIX J ............................................................................................... 30 APPENDIX K .............................................................................................. 31 APPENDIX L .............................................................................................. 32 APPENDIX M: ............................................................................................ 33 APPENDIX O: ............................................................................................ 34

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Executive SummaryThis report between your hands have been written to examine the corporate finance practices in Dhofar power company DPC- (SAOG). DPC is listed in the stock market in which initiate a more efficient financial practice, which compose a good environment for studying financial theories. This reports will shed the light on the financial performance of Dhofar Power Company (SAOG) . The report will move forward to cover several aspect of the corporate finance in DPC, industry and its rivals which have been presented in the coming five chapters. The first chapter of this report takes chance to depict the company background, objectives and highlights some important points about the company source of finance and the corporate governance practiced in the company. In addition the report presents the possible agency problem that DPC might face and best method to avoid such clashed and problems. The second chapter of this paper highlight the type of risk that might face the company internally and externally and hazard its well being. In addition the second chapter give a clear picture about the company cost of capital and return which will present a key for the following sections of the report. In the subsequent chapters chapter three- the report introduces a clear presentation of the companys Capital structure in which the report shows the companys WACC and its interpretation along with the findings. Since DPC is leveraged company the report study its history and Cost of capital in as its shows the full picture of the funding process in the company. Additionally the report mentioned the Dividend policy that DPC used to satisfy its shareholders. Chapter four of this report have summarized the company working capital and other ratios that highlight the company operational status. Through this chapter some problems and recommendation have been raised due to the analysis of the company operational working capital and other calculated ratios. The last chapter of this report create a comprehensive conclusion and recommendation in which the company can get use of to improve its performance among its rivals in the market. Moreover, its depict the capital market efficiency and its impact of the company share price.

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1.0 Company Background 1.1 Company backgroundDhofar Power Company DPC (SAOG) started its operation as closed joint company on Feb 25, 2001 on the power and utilities industry. DPC have been converted to (SAOG) which is a company subsequent to initial public offering in May8, 2005. On May1, 2003 DPC become a parent company to Dhofar generating company (SAOG) which is the subsidiary company (Anon, 2009). The group DPC and Dhofar generating company start commencing its commercial operation since the day of its inception May1, 2003, with a generation capacity of 242 megawatts and high voltage transmission. The group major owners are the Electricity holding company (SAOG) with 82.92% of the company preference share. The Company board of directors consist of Mr. Hamoud Bin Ibrahim Bin Soomar Al Zadjali (Chairman) and Habib Hussein (Vice Chairmail) to see the full hierarchy of the owner checks [Appendix A] (Zawaya, 2010a). The company has one branch that is located in Salalah city south the sultanate. The company maintains 45.5% of Omani staff out of 109 total staff Omani and non Omani- which is a compatible percentage with what have been requested by the Ministry of Manpower in the Sultanate (Zawaya, 2005b).The major business line of the company is the fossil fuel generation, transmission and distribution of electricity in Salalah city. The group granted a concession agreement by the Omani government. The main purpose of the grant is to support the group to generate, transmit distribute and supply electricity in the region through building and taking over the exited assets. Under the term of the government agreement the group is eligible to sell natural gas as the company is leading its business from its power station that contain six gas turbines (Anon,2010a).

1.2 Corporate ObjectivesThe company is working with clear standard to ensure the highest safety in the provided services. The company main concern is the stakeholders as the company objective is designed to direct the company vision towards providing the customer and the environment with top of range service. The company is dumping a lot of funds as will be illustrated in the coming section of this report and thats funds are used to improve and upgrade the provided service. Although, the company is concerning about its stakeholders but its satisfying its shareholders with gaining high profit and distributing dividend of RO 1,576,160 at the rate of 8% per share which increase the shareholder satisfaction. The company is yielding high return to its owner which creates a balance atmosphere in the company environment between its stakeholders and stockholders.

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1.3 Organization of Finance DivisionThe finance department is directly observed by the chief financial officer that is supervised by the accounts director. The chief financial officer and the account director are having totally different but aligned duties that support enhancing the workflow in the department. The hierarchy is needed to extend to achieve the main target of the company. The Finance department hierarchy as depicted in [Appendix B] are consist of chief financial officer who is managing several accountants. In order to create sort of specialty in the services provided the company should divided the finance department to sections such as account payable, budgeting, account receivables and general accounts. The purpose of the added division is to help the financial officer to utilize the maximum of the staff experience in the different financial fields to achieve the management requirement.

1.4 Shareholders AnalysisThe company preference share have a right of two vote per share at any general meeting while the ordinary share have the right to one vote in the meeting. As per the financial statement issued on September 2009 Electricity holding Co. own 82.92% of the company preference stock after acquiring the 70.77% that have been owned by Salalah power holding prior to 19 July 2009 as illustrated in the below table. Major Stockholder 30 Sep 2009 No of Shares held (Preference) 10,619,378 30 Sep 2008 No of Shares % held (Preference) 9,062,920 70.77

%

Electricity Holding Co SAOC (Oman) Salalah Power Holding Ltd(Bermuda)

82.92 -

Electricity holding Co dominate the major shares of the company and the remaining shares are owned by individuals and other companies.

1.5 Sources of financeThe company had a concession agreement with the sultanate of Oman government that give the company the right to run the electrical supply project in the region. When the concession agreement will be expired after 20 years the government will transfer the project assets ownership to the Ministry of Housing, Electricity and Water (MHEW) and reimburse the company with R.O 5.2m for the taken assets. Under the umbrella of this agreement the government is paying the company a fixed amount of money as allowance for running the project which considers a source of finance to the company operation. In addition to the government grant the company is financing it project through having long term loan from Calyon Credit Agricole CIB which was about R.O 8.2 m with 6.72%

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interest rate. In addition the company is financing its operation through having overdraft from commercial bank which was about R.O 3 m with 6% interest rate. The company has 26,000,000 shares that have been authorized and 19,702,000 shares issued and fully paid-up capital. There is no share premium or any financing leases in DPC.

1.6 Agency Problems and ControlIn order to keep the whole matter within the right track that company is following strict corporate governance rules. The first step was to ensure that the whole board directors members are independent person who have reasonable power. In addition the directors have good technical experience and are satisfied with the offered scheme. The executive committee builds guidance to the executive manger to protect the utilization of the company authority and resources. In addition the audit committee is playing a major internal role to control the whole process. Moreover, Price Water House as external auditor is creating an external power that ensures the quality and transparency of the company operation. This internal and external control is controlling any conflict that may rise between the management and board of directors which represent the agency problem (Zawaya, 2005b).

2.0 RiskThe risk measurement, management and control become a major topic in the world of finance and regulation. The importance of risk has been increased since the collapse of the Long term capital management in 1998. Frank H. Knight developed the famous economics definition for risk and differentiates it for uncertainty in his book. He defines the risk as outcomes that can be insured against and uncertainty to outcomes that cannot be insured against (Brooke, 2007). Based on the famous definition of Knight there were several definition and theories have been built about the term risk. Risk is known as external and internal threat of probability of having negative occurrence that will affect the company return and investment. This probability of having risk can be controlled or avoid through taking well designed action. The financial risk is the probability of having low return for the company investment. The major type of risk is the systematic and unsystematic. The systematic risk is type of risk that affect the whole economic such as the serious dieses like swine flu and inflation while the unsystematic is mainly risk usually hit part of the economic such as political situation in certain country

2.0.1 Risk facing DPCDPC is facing several risks that are either systematic or unsystematic. Most of those risks have been managed by the company management. The coming few sentences will depicts most of the risk that DPC faced during its operation in the market.

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2.0.1.1 DPC Systematic RiskDPC face some of the risk that is not just hitting the electricity industry but its affect the whole Omani and international world of economic. This type of risk is what have been defined as systematic risk as its spread all over the economic world and affect all industries in the market. The following are the systematic risk that DPC are exposing too (Al Khalili et al.,2005): DPC is exposing to the inflation risk. This macro economic risk had affected the whole Omani market. The inflation rate in Oman jumped dramatically from 0.5% in 2003 till 12.5% in 2009 [Appendix C] (CIA, 2009). This leads to a fluctuation in the Omani company demand and supply. DPC expose to exchange rate risk. DPC expose to interest rate risk The un-availability of gas and fuel oil might hamper DPC operation since the gas and fuel oil is the main tool for DPC operation.

2.0.1.2 DPC Unsystematic RiskThere are a lot of unsystematic risk which is listed in the points below: DPC is exposes to construction risk which consider a prime risk for the power plant. Generally the power plants are facing construction challenge that creates a risk on the running business. The company manages this risk through supplying the construction project with the full requirement and sources of human capital and material which lead in finalizing the project on time and avoid any construction risk. DPC project delivered the power on the time agreed on, on its contract with government. Revenue risk that is originally divided to three risks which are the demand risk, price and payment risk. (1) DPC will receive a fixed allowance from the government based on the availability of the running system which represents the demand risk. (2) DPC the allowance will be paid to the company by the government for 20 year which creates a price risk. (3) At the end of the DPC contract with the government the company should receive a payment from the Ministry of Housing, Electricity and Water (MHEW) which will be a payment risk for DPC. DPC might face a risk of being penalized for power outages. Those should be considering by the company to treat the matter carefully and avoid any risk. It happened before that there was an outage on the DPC system. In order to avoid this risk the company maintains specific outage provision in its contact with government to avoid future penalties.

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2.1 Return and Cost of CapitalGenerally speaking the Cost of capital is stand for the cost of financing the company debt and equity. Adversely, return on capital is measuring the cash flow that the company will generate from its capital. To have worthwhile project or investment the return should be greater than the cost of capital.

2.1.1 Measuring DPC returnReferring to section 1.5 in the previous chapter the company source of finance which is a combination of debt and equity as following: 1. Long term loan of R.O 78,843 m with 6.72%. Which have a cost of capital of 6.72% [Appendix D] 2. Preference shares 12,806,300 share, R.O 1. DPC preference shares have a cost of capital of 10% Appendix E] 3. Ordinary shares 6,895,700 share , R.O 1. The ordinary share have a cost of capital of 8.5% [Appendix E]

2.1.2 DPC return trendDPC shares are performing well in the market. Especially with the good effort that the company spending to improve and develop its service on the electricity market. Appendix E shows the trend of the company shares form 2007 till 2009. The share price is fluctuated up and down in the presented period. In results the company return is fluctuated up and down till the price per share reach 1.42 per share. As mentioned in section 2.0.1 DPC is facing several risks which cause either material affect or immaterial affect to the company return and share price. The fluctuation in the return is raised because of several risks and condition that face DPC business.

Return on Equity (for three year as accessible by the stock market)Year Net Income SHE ROE 2006 3,208,956.00 18,152,824.00 0.18 2007 3,535,595.00 18,857,540.00 0.19 2008 2,949,612.00 18,689,657.00 0.16

2.1.3 DPC WACCDPC (Weighted average Cost of Capital) WACC is equal to 8.846% [Appendix G] which is considered the weighted average for the company source of finance. This percentage is the minimum return that the company has to earn in its assets to be able to satisfy its

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creditors. Appendix G shows table that is used to predict the (company return, return on equity and check for the periodic maintenance). The table showed the return on equity that will be received for 15 years. Tariff electricity table, are build for the purpose showing the Concession Agreement that the government is paying fixed allowance accordingly for it. When comparing the WACC with the return we would find that DPC is returning around 10% while its costing 8.846% which depict the good performance of the company.

3. Capital Structure 3.1.1 DPC capital structureSection 1.5 from this report has drawn the exact picture DPC Capital Structure of the company source of finance that was mainly a combination between the incurred debt and equity. As per June 2009 presented balance sheet DPC has equity of 23% and 77% debt. This shows that the majority of 23% DPC assets are financed by debt which incurred an amount of interest which is equal to 2118361 R.O out of the total loan of 67,024,729 R.O. the companies might be driven close to the optimal structure if they manage to maintain a low cost of capital and enjoy high return. As have been highlighted in section 2.1.3 DPC WACC 77% is 8.846%. With the given WACC if we calculate the company value that might give a clear picture about the probability of the optimal structure existence. With the current used WACC of 8.846% the company value will be about R.O 11,330,545 [Appendix J]. In the current situation the company can be considered on moderate optimal structure which is leading to high return. Its known that the optimal structure can be achieved through driving the cost of capital down and increase the incurred return which still needs to be achieved by the company as the debt is high compared to the equity. This doesnt mean that financially DPC is in good financial shape but that doesnt necessarily mean that it reach the optimum. In addition having 77% of debt turn on the risk alert, in which DPC should be careful about in the future.

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3.1.2. Equity HistoryBased on the DPC financial statement statement of change in equity- the company didnt issue new share since its inceptions. The total equity (ordinary and preferred stock) is 19,702,000 R.O which have been incurred as 19,702,000 shares @ rate of 1 R.O per share. The break down of the issued share is as the following: Ordinary shares Preferred shares Total Equity 6,895,700 12,806,300 19,702,000

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3.1.3 DPC leverageWith 77% debt DPC considered to be Leverage Company because most of its assets are financed by debt. The DPC debit to equity ratio [Appendix K] is measuring the company financial leverage which can be computed by dividing the company long term debt by the equity. The debit/equity ratio is measuring the company ability to borrow and repay the money. The debit to equity ratio table below depict that the company ability to borrow and repay its loans is decreasing from 2003 till 2009. This resulted from the huge percentage of debt that the company is taken. With the existence of 77% debt in the company capital structure thats mean that the company is facing risk, as the borrower has right on the company assets in case of shortage in liquidity.Table 3.1 (Change is Capital structure) 2009 19,702,000 67,024,729 86,726,729 23% 77% 2008 19,702,000 62,735,117 82,437,117 24% 76% 2007 19,702,000 59,718,879 79,420,879 25% 75% 2006 19,702,000 63,408,857 83,110,857 24% 76%

Equity Debit Total Equity % Debit %

Table 3.1 reflects the changes that face the company capital structure. The trend shows that there were no change in the company equity and the whole change have been done in the debt slice which is increasing by taking more debt to finance the company operation and assets. The finding states that the company is becoming more leverage due to increase in its debt from 2006 to 2009 by 3,615,872 R.O. This increase in debt will lead to increase in the gearing as gearing and risk have positive relation with the debt.

3.1.4 Implications for equity shareholdersStock holders and bondholders are always having an interesting relation. This relation caused a lot of theory and practices that reflect the reality of the relation. When the bondholders are enjoying receiving their interest and having priority to their money in the liquidity stage the shareholders will be suffering from facing the risk alone. Although increasing the debt portion help in enjoying high firm value due to tax shield but the company might face risk of bankruptcy that may result from shortage of meeting obligation. The agency cost conflicts have been resulted between the bondholders and shareholders which the latest use to be able to enjoy some of the privilege that the bondholders have. The all equity company is facing lesser headache than the leverage company as stated in the in Miller and Modiglianis theory about capital structure.

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3.1.5 Rivals capital structureDhofar Power Company has many rivals in the market that are working in different region but in the same field who are AES Barka, Al Kamil Power Co and United Power and Sohar Power Company(Bankmuscat,2008) [Appendix L].

Figure 3.1

Rival Comparison100% 80% 60% 40% 20% 0% AES Barka SAOG Al Kamil SAOG United Power SAOG Sohar Power SAOG DPC SAOG Series1 Series2

* Equity * DebitFigure 3.1 compare DPC capital structure with its rivals in the same industry all of them are leverage companies but the only one that still dominant more equity than debt is United power SAOG other than that most of the companies in the field are financed through high percentage of debt.

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3.2 Dividends 3.2.1 Dividends policyThe dividends are paid to the shareholders from the company earning after covering the company obligation. Usually after issuing the financial report the board of director in their ordinary meeting is taken decision of the percentage, amount and period for the dividends to be paid. DPC is paying yearly dividends starting 2005- to its investors (Figure 3.2) which is shown the amount of dividends that the company was paying for five years. Figure 3.2

(Corporate information,2010)

The reason behind distributing dividends is to satisfy the stockholders. The company is applying the policy of paying little dividends or no and consider it to be the more favorable policy. The company is distributing few dividends to the investor to incur privilege to the investor and to motivate other investors to invest in the company. I think that the dividends policy is irrelevant as the investor can create their own dividends that tight the company to spend the incur obligation. Figure 3.3

(Al Khalili et al.,2005)

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3.2.2 Comparison with rival dividends

(Al Khalili et al., 2005) The major competitor for DPC is United power comparatively to DPC is paying the highest rate of dividends compared to its rivals as per 2009 presented data.

4. Working Capital 4.1. Working capital definitionThe working capital term represent the company operating liquidity that is available from running the company operation. The working capital can be derived through the following formula: Working capital = Current assets Current Liabilities The purpose of computing the work in capital is to ensure that the companies have sufficient liquidity to fund its operation activities. Companies with positive working capital have the privilege to enjoy reasonable amount of liquidity to finance its operation transactions. The working capital can be monitor through controlling the company inventories, account receivables, account payable and cash.

4.2 DPC Working capital component 4.2.1 Current assets* Inventories; The company have total inventory of R.O 4,579,142 as of Dec.09. The company inventories are recorded based on lowest cost and net realizable value. The company inventories cost is based on the weighted average method, the total inventories cost includes the expenditure that incur to acquire the inventories and delivering its to the desired location. * Receivables; the balance sheet shows total receivables of R.O 9,680,936 as of Dec.09. The companies have two sole receivables that share the company receivables. Those

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companies are OPWP and ONEIC in where the latest have R.O 3,156,855 and the reset should be covered by OPWP. * Advance and prepayments; the company advances and prepayment shows a total of R.O 387,186 as of Dec.09. * Cash and bank balance; the company cash and bank balance of R.O 1,030,651 as of Dec.09. The bank deposits form 99% from the whole part of the cash and bank balance. The deposits held in the bank with interest rate ranging from 0.25% to 2.5% per annum.

4.2.2 Current liabilities* Bank Overdraft; the company have an amount of overdraft with approximately R.O 456,116. The company takes an overdraft of 3 million from the bank with interest rate that are ranging from 6% to 8.5% per annum. * Current maturities of the term loans; the company record R.O 6,254,155 as current maturity of the term loan. * Amount due to related parties; R.O 60,000 have been recorded as a related parties that the company should paid the amount to. * Payables; R.O 6,452,514 have been recorded as payables. This amount incurred to be paid to the Ministry of Oil and Gaze for supplying fuel to the company * Other payables and accruals; The company have total payables of R.O3,760,844.

4.3 DPC working capital trend and interpretationAs per data presented on [Appendix M] the Working Caital trend company have a dramatically decrease in its working capital especially at the end of 2008. 8000000 As per [Figure A] the company current assets 6000000 have been slashed starting 2008 which indicate that the company increases its reliance on the 4000000 payables source of funding starting 2008 which 2000000 affect the company liquidity. Since the working capital is the amount that the company in need for 0 1 2 3 4 to stay in business then DPC is facing critical -2000000 problem as its working capital is negative which is mean that the company is durable to bankruptcy -4000000 Years if its need to paid immediate and quick amount money. As result to the negative working capital the company might goes to financial pressure which might lead to one of the following financial interferes:Working Capital

Series1 Series2

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-

Increase on borrowing to finance the operational activities and to help the business moving forwards. Late payment to creditors which might affect the company reputation or might lead to series defect on the operation since the company had two initial suppliers (creditors) who are mainly supplying the initial base for the company operation. Failure to meet obligation might lead to the collapse in the company main business activities which is supplying the region with electricity. Another consequence to this is that creditors might not be gentle with DPC and take the issue to the court which might resulted in bankruptcy.

Generally working capital is designed to fund the sales attraction process. If there were less funding spent to increase and attract the company sales then this will lead to less return on investment. When company achieve high profit margin that mean there is less working capital are freeze in the selling process (Smith, 2000). DPC profit margin = Net income/Net Sales = 3,092,699/5,398,882 = 57% The profit margin is testing the effacing in the operating cycle as its measure the generated earning in relation to particular sales level. This is another indication that the company is not in prefect and effective operation condition which affect its financial health. The moderate profit margin level that DPC have indicates that most of DPC working capital is tied in the operational selling process as clarify by Smith Chris. In the last two years the company starts to be more over trading than before. The company have the sign of the over trading companies as its have higher creditor and debtor with slashed cash all over the five presented years [Appendix O] (Tatum, 2010). Due to lack of funding the company is mainly financing its working capital through its long term liability which creates link between the company long and short term cycle.

4.4 Cash cycleThe company is experience an increase in its cash cycle which means that the company is having a stretched time between purchasing its products and generating its receivables from its debaters [Appendix O]. The company should place a wise decision to manage its working capital, operating cycle and cash cycle. The improvement in those three will help the company enjoy less stress financial opposition, Form the whole finding in the working capital and cash section DPC recommended to rearrange its working capital management.

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4.5 DPC and RivalsAES Barka SAOG 12,698,608 14,543,597 -1,844,989 Al Kamil SAOG 4,218,000 4,516,000 -298,000 United Power SAOG 2,947,000 4,309,000 -1,362,000 Sohar Power SAOG 17,711,000 13,744,000 3,967,000

Current assets Current liabilities Working Capital

(MSM,2009) The above table shows that most of the companies in the electrical industry are having negative working capital. Moving to the initial competitor of DPC which is Sohar power we can finds that its performing well as it manage to maintain positive working capital.

4.6 Money marketThe only used money market instrument in Oman is the certificate of deposits (CBO,2010). The certificate of deposit have newly presented to the Omani market and still doesnt practiced by many companies in the Omani different industries and its also not affecting DPC as its clear from its financial statement.

5. ConclusionThe following chapters will draw a conclusion for the previous presented chapters thoughts and ideas. Through this chapter I will introduce few recommendations to the company in which give room for improvement in the below topics.

5.1 Agency theory and Corporate Governance 5.1.1 Agency theoryChapter 1.6 from this paper mentioned the dilemma of the agency cost between the DPC management and shareholders. The Agency cost is simply an economic concept that is raised in the publicly traded company. In such companies there are costs that are incurred from the inefficiency relation between the shareholders and the management. The agency cost or risk existed because the management might take independent action from shareholders for their own interest. The company shareholders can prevent them selves from being fall in the agency cost trap through offering the management with satisfactory package of salary and allowances to keep their eye away from the shareholders wealth pie. To apply those thought in DPC, the DPC management are enjoying a satisfactory package that keep them in the right track. Its also recommended that the boards of directors can declare a bonus to the management during the revenue peak time or in dividends distribution period to keep the management satisfied and motivated. There are

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other external factors that keep the company a way from falling in the agency cost which will be covered under the corporate governance below.

5.1.2 Corporate GovernanceThe agency cost can be avoided through making the management happy and through setting clear legal path for the company management to follow. This legal path can be created through having the following factors: Internal Audit unit

The company has an internal audit unit that is taking care of checking and monitoring the posted data in daily bases which minimize the possibility of error and fraud. The internal audit unit present a quarterly repot to the board audit committee in which its highlight the whole findings of discrepancies and biases if existed (Annual report, 2005). - External Audit company DPC have been audited by KPMG Company which is considered one of the big names in the auditing field. KPMG take care of DPC for four years. Recently DPC is under the microscope of Price water house which is also one of the famous names in the audit world. Dealing with such names keeps the company far from falling in any fraud, manipulation, corruptionetc. The company is issuing one audit financial report out of the whole four issued report during the year. Instead being restricted to one yearly visit Price water house is applying an interim visit audit in which it can test a sample without giving the company management time to arrange for having this audit visit which increases the control over the company management creditability. Set a clear internal guidelines and policy

The board of director creates a full manual of structure, guidelines and policy that should guide the management and staff to the right track to reach the planned goal easily. The audit firms and the internal auditor are taking those rules and regulation as base for testing the honesty and creditability of the presented data by the company management and staff. - Follow the guidelines of the country exchange market DPC is working in compliance with the code of corporate governance that has been created by the Capital market Authority. This guidelines control the company transparency with the public.

5.2 Theory of capital structure and cost of capitalSection 3.1.1 of this report shows the different theories about the capital structure and its implication of DPC. As mentioned before that DPC assets are mostly covered by debt 18

which forms around 77% of the company total capital structure. Seeking the optimal capital structure we can found that the company has WACC of 8.846%. With this cost and this capital structure DPC considered to be in its way towards reaching an optimal capital structure which will support the wealth maximization purpose. The company management should target its goal towards driving the cost down and increasing the return which can be achieve through applying difference policy and method to drive the WACC below the return and gain benefit of that, which will keep the shareholders satisfied (Brigham,Houston,2007).

5.3 Theory of dividend policyAs what have been discussed in section 3.2.1 the company is applying the policy of dividends that stated little dividends or no. The company boards declared the dividends yearly in order to keep the investors stratified and gain the attention of other investors. Since DPC have a working capital of -2,000,294 as mention in section 3.2.1 which mean that DPC is having insufficient liquidity to cover its liability to run its operation. This information drives us to ask an important question is it wise to pay dividends with such case of scarcity of the available fund. I would recommend DPC to stop paying dividends till its maintaining acceptable level of liquidity.

5.4 Effective working capital managementSection 4.3 provides a presentation about the company working capital. It have been highlighted that the company is having a negative working capital for two years. This can be interpreted as insufficient fund to finance the operating liabilities which is a very crucial matter that most of the time leads to bankruptcy. With high rate of debt DPC can be considered that its increasing its debt to move the operational cycle. Failing to meet the short term liability will drive DPC to situation were it might face its vendors in court or having their operation cycle stopped due to vendor action of stop supplying till their dues covered by DPC. I do recommended that DPC should analysis the situation and create a plan for improving its working capital and maintain better rate of liquidity to cover its operational needs (Bhattacharya, 2006). DPC need to speed up it receivables collection process to be able to magnify its liquidity, to create clear picture about this we will found that DPC have Days in payable of 144.87 in 2009 compared to 556.23 receivables days in the same year. This mean that DPC is outsourcing the fund to run its operations while its much easier to create mutual benefit by collecting the current receivables and fund the current liability.

5.5 Capital Market efficiency and impact on share price of the companyEvaluating Muscat security market (MSM) we found that it was very volatile in relation to more stable underlying fundamentals. Without a clear data about the stock market the investor cant really beat MSM as the market is going in rally that consistent of a lot of undervaluation and overvaluation. The investor cant predict the next move of the market,

19

the correlation and the consequence which is considered risky to invest in without solid ground (Pattanaik, Ali, 2006).

(MSM,2010) Due to instability of the stock market DPC closing share price is having a fluctuated movement with peak increase between the year 2007 and 2008. With this fluctuation the investor cant predict the future data which make the investment contrary and risky.

20

AppendixesAppendix A

Dhofar Power Company (Board of Directors)Hamoud Bin Ibrahim Bin Soomar Al Zadjali Chairman

Habib Hussein Vice Chairman

Abbas Amiri

Director

Mosabbah Saif Al Mutairy

Salim Tamman Al Maashany

Simon Morgan

Glen F De Silva

Director

Director

Director

Director

21

Appendix B Dhofar Power Company (Management/Finance Department )G Loganathan Chief Executive Officer

S Vishawanath Accounts Director

Sorinda Ruwi Transmission and Distribution Director

Abdulrahman Hussein Generation Director

Saeed Al Hadry Corporate Services Director

Said Al Kathiri Chief Financial officer

Accountant

Accountant

Accountant

22

Appendix C Inflation Rate movement in Oman from 2003 till 2009

(CIA, 2009)

(CIA, 2009)

23

Appendix DThe debit cost of capital is computed as the following formula: Cost of debit (after corporate tax) = RB * (1-tc) * tc is zero, the contract signed with the movement exempted the company from paying tax. Cost of debit (after corporate tax) = 6.72* (1-0) = 6.72 %

24

Appendix E

(Al Khalili et al.,2005) The costs of capital for preferred shares are calculated as following: Cost of capital of preferred shares = Dividends/Shares market value = (**14.3% *12,806,300)/(***1.42*12,806,300) = (1,831,301/18,184,946) = 10%

** Dividend rate derived from table A. *** Market price derive from (Al Khalili et al.,2005)

25

Appendix F

(Authority of electricity regulation,Oman,2005)

The company ordinary share cost of capital can be achieved by computing Capital assets pricing model (CAPM) = **Rf + Risk premium = 3.5% + 5% = 8.5% Rates have been taken from Table C as the central based.

26

Appendix GDPC Share price trends

(MSM,2010)

27

Appendix HWACC Calculation: Proportion Market Cost of Value Capital .35 .646 0.004 100 6.72% 10% 8.5%

Market Value Capital Source R.O Ordinary Shares Preferred Shares Debt 6,895,700 12,806,300 78,843 19,780,843

Contribution to WACC 2.352% 6.46% 0.034% 8.846%

28

Appendix ITariff for electricity

(Al Khalili et al.,2005)

29

Appendix JEBIT x (1 corporate tax) 1,002,300* x (1-0)** ---------------------------------- = ---------------------------------- = R.O 11,330,545 WACC 8.846% *(Business

week, 2010)

**As per the Concession Agreement the company is exempted from paying tax for a period of five years. For the period ended on June 2009 the company was obliged to pay an amount of tax 259,198 R.O which have been covered by third party OPWP as per the government contract.Debt % 77% Equity % 23% Geared b 0.9 Cost of Debt (pre Tax) 8.5% CAPM(Eq) 0.0850 WACC 0.08846 Firm Value R.O 11,330,545

30

Appendix K

(Al Khalili et al.,2005)

31

Appendix LAES Barka SAOG 16,000,000.0 83,173,298.0 99,173,298.0 16% 84% Al Kamil SAOG 9625 23160 32,785.0 29% 71% United Power SAOG 19178 2000 21,178.0 91% 9% Sohar Power SAOG 27800 153231 181,031.0 15% 85% DPC SAOG 19,702,000 67,024,729 86,726,729 23% 77%

Equity Debit Total Equity % Debit %

(MSM,2009)

32

Appendix M:

Elements Current assets Current Liabilities Working capital

2006 16,035,300 9,308,943 6,726,357

2007 14,758,885 9,920,399 4,838,486

2008 13,517,696 16,512,682 -2,994,986

2009 15,677,915 17,678,209 -2,000,294

(MSM,2009)

Figure ACurrent Liability and Current assets20000000

Figures

15000000 10000000 5000000 0 1 2 3 Years 4 5

Series1 Series2 Series3

Current assets * Current liabilities

33

Appendix O:Elements 2006 2007 2,603,827.00 5.50 66.42 4,448,205.50 2.22 164.43 2,665,000.50 5.37 67.98 230.85 162.87 2008 3,446,094.50 4.71 77.46 5,935,201.00 1.52 240.54 4,940,354.00 3.29 111.05 318.01 206.95 2009 4,215,336.00 4.03 90.47 8,227,389.50 0.66 556.23 6,750,266.00 2.52 144.87 646.70 501.82

Average inventory Inventory turnover Days in inventory Average Account Receivables Average Receivables Turnover Days Receivables Average Payables Account Payable Deferral Period Days in Payables Operating Cycle Cash Cycle Calculation bases2006 Inventory COGS AR Credit Sales Payables Cash 2,166,995 15,484,177 3,799,852 9,454,651 2,497,311 9,497,440

2007 3,040,659 14,308,924 5,096,559 9,873,854 2,832,690 6,102,420

2008 3,851,530 16,237,338 6,773,843 9,006,138 7,048,018 1,724,577

2009 4,579,142 17,006,714 9,680,936 5,398,882 6,452,514 1,030,651

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