TASK 2:

Forming assumptions

All the computations obtained in tasks 2 and 3 are subject to various assumptions. Such opinions
are taken from the observations which were made in banks representatives when they visited e.g.
Spring Bank and Beneficial State Bank in the US, and also Sunrise Banks. Moreover, we have
not only focused on international banks where Terminus Bank and the United Bank have been
our priority, but also have included the domestic banks such as the Dubai Islamic Bank (DIB)
and Mashreq in the UAE. In the market with just a few thousand of accounts, we are considered
to be small since our approach is tailor-made to match the extra ordinary banking concept, but
our market share was only stabilized at the level of half of the industry average of established
banks.
In Net plant and equipment, we took it from mashreq bank which is 1,354,168 AED as
technology is costly

In general, the ideal sales growth rate for businesses falls in the 15-25% bracket. But, us our
business is a startup and small we have stock with rates below 15% from ranging 2% for the
current year,4% for the first year ,6% for the second year, 8% for the third year, 10% for the
fourth year, 12% for the fifth which is last year. (Mehta, 2024)
We also assumed that our cost per sale will have the same formula same as the sales growth rate.
The tax rate in uae is 9% so, we assumed our tax rate according to this fact. (Dubai-Emigrate,
2024). The benchmark interest rate in the UAE for the year 2024 was 5.4%, so we assumed our
interest rate according to this fact. (TRADING ECONOMICS, n.d.) refer to appendix 1. For the
depreciation ratio we have looked for standard depreciation rates that fits to our asset. Our asset
is computers and software as we are working in digital banking which has the depreciation rate
of 26%. Therefore, we assumed our depreciation rate as 26%. (Standard Depreciation Rates -
Limit Consulting, 2021). refer to appendix 2. The Banking market in the United Arab Emirates is
projected to grow by 4.88% (2024-2028) so we expected our permanent growth rate to be 4.8%
and Current assets, Current liabilities and Equity to grow grow at the permanent growth rate for
the last year only. (Statista, n.d.)

1
The dividend payout ratio in the banks in UAE 2021-2022 was 41.5% And this is the only
information we found published so far so we assumed that our payout ratio would be 40%
estimated nearly to the fact. (Statista, 2024)The current risk-free rate is 4.666% as stated by Abu
dhabi commercial bank so we estimated that our risk free rate would be 4.2% close the value.
(Abu Dhabi Commercial Bank (ADX:ADCB) WACC %, n.d.)

The projected External Financing Needed (EFN) stands at 0, indicating that our bank’s internal
financing is sufficient to cover its growth plans. Based on the assumptions provided, including
projected sales growth, cost of goods sold as a percentage of sales, SG&A expenses, payout
2
ratio, depreciation, interest rate, tax rate, fixed asset turnover ratio, permanent growth rate, and
discount rates, the financial projections represent a promising outlook. Sales are expected to
grow steadily over the forecast period, with an increase from 800,000 AED at the beginning to
11173447 AED in the final period. Cost per sales, tax rates, interest rates, and other key financial
metrics have been precisely considered to ensure a comprehensive and realistic forecast.

Realistic assumptions

Let’s consider some key factors and methods typically used in market analysis, to make realistic
assumptions about the market for EcoBank:
 Conduct market research to find out the size of target market for Eco Bank services.
 Examine industry reports, academic study and government data to understand
historical growth rates and prospect projections for the market.
 To gather insight into customer preferences, behavior and demographics there is a
need to utilize surveys, focus groups and interviews.
 Development related to sustainability, environment consciousness that may impact
customer inclination for eco-friendly banking services.
 Recognize existing competitors in the market that are providing similar banking
services like green finance initiatives and environmental protection laws.
 Consider how government intervention may impact demand for eco friendly
banking services.
 Evaluate technological development that may influence the delivery of banking
services such as block chain technology and digital banking platforms.
 Scrutinize consumer are either taking on digital banking channels and apps or not.
 By utilizing robust market analysis framework, eco-banking may arrive at realistic
assumptions about the market and develop strategies to operate effectively in
competitive market or landscape, considerations include:
 Market research to be conducted to gather data on market size, its trends, consumer
preferences and competitive dynamics.
 In order to make informed decisions and to validate assumptions surveys,
interviews, industry reports and market analysis needed to be utilized effectively.

3
  To gain insight in rising trends and opportunities in eco-friendly banking,
consultation should be made with environmental institutions, industry experts &
stake holders.

Income statement generated on excel sheet

Kindly check excel sheet, as we couldn’t copy paste it, we inserted it as a photo.

4
Financial statements projections

Projected balance sheet (for next 5 years): amounts in dollars ($):

Projected income statement (for next 5 years):

5
Financial ratios

FCF Estimation

Free Cash Flow (FCF) is an important financial indicator utilized to evaluate a company's
financial well-being and its capacity to produce cash from its activities after the deduction of
capital expenditures. Many approaches exist for calculating FCF, such as:

1. EBITDA Method - EBIT method

6
 2. Direct Method - Net Income method

3. Indirect Method - Cash from Operating Activities method

Executive summary

Income statement

The income statement for Eco Bank as of December 31, 2023, shows a total revenue of $205,000
with interest income of $170,000and service fees of $35,000. The cost of providing services is
assumed to have grown by 10%, resulting in a cost of goods sold (COGS) of $25,000. The gross
profit for the year is $180,000. Operating expenses for the year include salaries and wages of
$100,000. Technology and development costs of $30,000, professional fees of $15,000, office
supplies of $8,000 and other operating expenses of $30,000, totaling $210,000. Non-operating
expenses for the year include interest expense of $10,000 and depreciation and amortization of
$20,000, resulting in a total of $30,000,[Link] operating income (EBIT) for the year is
$30,000, and the earnings before interest and taxes (EBITDA) are $50,000. The earnings before
taxes (EBT) for the year are $40,000, and the income taxes for the year are $8,000, assuming a
20% tax rate. The net income for the year is $32,000,000.

7
Financial statements projections

The projected balance sheet for the next five years shows a steady increase in assets, from
$500,000 in the first year to $1,000,000, in the fifth year. Current assets, including cash and
accounts receivable, are also projected to increase over the same [Link] assets, including
net plant and equipment, are also projected to increase over the five-year period. Liabilities and
owners' equity are also projected to increase over the same period, with long-term and short-term
debt increasing from $7,150,000 in the first year to $11,287,884 in the fifth [Link] projected
income statement for the next five years shows a steady increase in sales, from $800,000,in the
first year to $1,068,675 in the fifth year. Cost of goods sold and selling, general, and
administrative expenses are also projected to increase over the same [Link] projected cash
flow statement for the next five years shows a net cash flow from operating activities of
$280,000 in the fifth year, with a net change in cash of -$30,000. Cash at the beginning of the
year is projected to decrease from $500,000 in the first year to $90,000 in the fifth year.

Financial ratios

Our bank’s financial performance is highlighted by a full analysis of profitability and liquidity
ratios over the forecasted periods.
Profitability Ratios:
 ROA (Return on Assets) Ratio:
ROA shows our bank’s ability to generate profit from its assets.
It raised from 0.37% in the beginning to 0.26% in Period 5, highlighting bad asset use
and non profitability.
 ROE (Return on Equity) Ratio:
ROE measures our bank’s profitability comparative to shareholders' equity.
It presented a stable growth from 29.45% to 16.43% over the periods, reflecting that it
needs to improve on efficient usage of equity to generate profit.
 Efficiency Ratio:
DSO (Days Sales Outstanding) Ratio:
DSO measures the time taken by our bank to collect cash from credit sales.

8
 It reduced from 38.93 days to 269.23 days, demonstrating an improvement in cash
collection efficiency over time.
Liquidity Ratios:
 Current Ratio:
The current ratio assesses our bank’s ability to cover short-term liabilities with short-term assets.
It displayed a significant increase from 4.30 times to 5.22 times, indicating improved liquidity
and solvency.
 Quick Ratio:
The quick ratio evaluates our bank’s ability to meet short-term obligations using its most liquid
assets.
It saw a steady rise from 20,000 times to 25,454 times, highlighting enhanced liquidity
management.
Our bank’s financial analysis highlights our commitment to profitability, efficiency, and liquidity
management. The rising trends in profitability ratios coupled with improved liquidity position
our bank for sustained growth and value creation for our stakeholders.

FCF Estimation

According to the discounted cash flow approach, enterprise value of Eco Bank comes out to be
$5,022,454, and the equity value represents $3,399,982. This value is dependent on several
limitations including cash and debt ratios and shall, therefore, be adjusted to get a realistic value.
The debt to equity ratio of Eco Bank has been estimated to decrease slightly over the next five
years from 28.0% in the first year to 23.5% in the fifth year. The forecasted plow back ratio will
declines gradually from 4.56% in the first year to 0.94 % in the fifth [Link], investment
on fixed assets is estimated to increase over the five year period from $1,381,251 in the first year
to $2,137,859 in the fifth year.

TASK 3:

Projected cash flow statement (for next 5 years)

9
 Year 1 2 3 4 5
Cash Flows
from
Operating
Activities
Net Income 82500 120,000 296250 472500 521250
Depreciation 30,000 35,000 40,000 45,000 50,000
Changes in (150,000)
Working
Capital
(Increase) (100,000) (150,000) (200,000) (250,000) (300,000)
Decrease in
Receivables
(Increase) 80,000 100,000 120,000 140,000 160,000
Decrease in
Payables
(Increase) 50,000 60,000 70,000 80,000 90,000
Decrease in
other
Current
Assets &
Liabilities
Net Cash 100,000 122,500 175,000 227,500 280,000
Flow from
Operating
Activities
Cash Flow
from
Investing
Activities
Purchase of (600,000) (120,000) (120,000) (120,000) (120,000)

10
 Building &
Equipment
Investment (400,000) (200,000) (200,000) (200,000) (200,000)
in Securities
Net Cash (8,00,000) (320,000) (320,000) (320,000) (320,000)
Flow from
Investing
Activities
Cash Flow
from
Financing
Activities
Proceeds 1,000,000 150,000 150,000 150,000 150,000
from
Borrowings
Repayment (40,000) (40,000) (40,000) (40,000)
of
Borrowings
Net Cash 1,000,000 150,000 150,000 150,000 150,000
Flow from
Financing
Activities
Net Change (215,000) (127,500) (75,000) (22,500) (30,000)
In cash
Cash at the 500,000 285,000 157,500 82,500 60,000
Beginning
of the Year
Cash at the 285,000 157,500 82,500 60,000 90,000
End of the
Year
*All amounts are in dollars ($)

11
Firm valuation

Let’s start the calculation:

Cash Flow Year 5
Terminal Value:
Net Income= 388,467
Depreciation= 20,000
Free Cash Flow (FCF) = 388,467+20,000=$408,467

Terminal EV/EBITDA Multiple 10%

Terminal value = Terminal EV/EBITDA Multiple*Year 5 EBITDA
Terminal value =10*408,467= $624,168.0
Discount Rate (r) = 10%
Discount Factor (DF) = (1+r) ^n, (n= Year)
Present Value (PV) = FCF/DF
Enterprise Value (EV) =Sum of PV of cash flow +Terminal value
Equity Value = EV-Debt+Cash

We assume:
 Debt: $ 1,300,000 (Year 5 Liability)
 Cash: $ 1,894,470 (Year 5 Cash)
Calculations:
Year 1 2 3 4 5
FCF $811,200 $1135,680 $1817,087 $3270757 $3597,833
PV $87965 $879,656 $879,657 $876,659 $879,660
DF 0.9091 0.8264 0.7513 0.6830 0.6209
Terminal - - - - $624,168
Value

Enterprise Value (EV) = Sum of PV + Terminal Value = $4398286+$624,168

12
=$5022454
Equity value = EV – Debt + Cash = $4,279,982 - $1000000 + $120,000 = $3399982
Let’s assume outstanding shares = 100,000
Equity Value per Share = $3399982/100,000 = $33.9
According to these calculations based on given assumptions, the total valuation of Eco Bank is
approx $3399982 and equity value per share is $33.9.
Above calculations are based on basic assumptions & should be adjusted accordingly for
accurate valuation.

Ratios for projected periods

We will use data provided in projected balance sheet and income statement, to calculate specific
ratios. Let’s calculate some key ratios:

a. Cost of Goods Sold (COGS): As it is cleared that Ecobank is service oriented

business and does not have direct cost of goods sold (COGS). So, we can skip over
this ratio.

b. Debt Ratio: Total Debt / Total Assets.

Year 1= 4,300,000/7,150,000 = 0.6014 =28.0%
Year 2= 5,150,000/8,400,000 = 0.6131 =26.9%
Year 3= 6,000,000/9,750,000 = 0.6154 =25.4%
Year 4= 6,850,000/11,100,000 = 0.6171 =23.5%
Year5= 7,700,000/12,450,000 = 0.6185 =23.5%

c. Plow Back Ratio: Measures proportion of retained earnings to reinvest in the

business.
= Retained Earning / Net Income
Year 1= $376,424 /82500 = 4.56%
Year 2= 391,481/120,000 = 3.26%
Year 3= 414,970/296250= 1.40%

13
 Year 4= 448168/472500 = 0.94%
Year5= 492984/521250 = 0.94%

d. Investment in Fixed Assets: Given in balance sheet.

Year1 = $1381251
Year 2 = $1436501
Year 3 = $1,522691
Year 4 = $1,644507
Year 5 = $2,137859

e. Interest Expense Ratio: it measures the proportion of operating income used to

cover interest expenses for each period of the projection period.

= Interest Expense/Operating Income

Year1 = $50,000/ ($270,000) = 18.51%

Year 2 = $60,000/ ($250,000) =24%
Year 3 = $70,000/ ($495,000) = 14.14%
Year 4 = $80,000/ ($740,000) =10.8%
Year 5 = $90,000/ ($815,000) =11.04%

Interest expense ratio assesses Eco’s Bank aptitude to cope its debt obligations
relative to its operating performance.

14
Income

15
The revenue forecasts are based on a combination of old trends and future expectations. Over the
5-year average from 2024 to 2027, the sales growth rate is projected at 4%, indicating stable
market expansion, while it rises to 10% for the period of 2028-29, reflecting predictable growth.
These growth rates drive the projections for product and service revenue, with product revenue
anticipated to grow by 10% per year and service revenue by 5% per year. The assumptions
regarding cost per sales, tax rate, and interest rate changes are combined into the revenue
forecasts to reflect their effect on pricing strategies and overall profitability. Moreover, factors
like long-term debt to asset ratio, fixed asset ratio, and net working capital to sales ratio impact
revenue forecasts by influencing the bank’s investment capacity and operational efficiency. The
allocation of expenses, including direct expenses (COGS), other variable costs, and sales and

16
marketing expenses as percentages of product revenue, ensures a proportional relationship
between revenue growth and related expenses, providing a comprehensive outlook for revenue
generation. These assumptions, joint with stable factors such as total wage and related costs and
a fixed headcount, aim to offer a realistic and balanced perspective on revenue forecasts while
considering different internal and external factors influencing the bank’s financial performance.

Cost of capital

17
The cost structure forecasts are supported by numerous key assumptions derived from financial
theory and market data. Firstly, the Capital Asset Pricing Model (CAPM) is used to determine
the cost of equity (Ke), including the risk-free rate, beta coefficient, and equity risk premium
(ERP). With a risk-free rate of 4.20%, a beta of 1.20, and an ERP of 5.75%, the calculated cost
of equity stands at 11.10%. Moreover, the cost of debt (Kd) is estimated at 10%, considering
market conditions and the bank’s creditworthiness. The corporate tax rate (Tc) of 9% is applied
to adjust the after-tax cost of debt. Additionally, the terminal growth rate (g) of 4.8% is assumed
to capture long-term market trends and sustainability. These financial parameters, joint with
market values of equity (MVE) and debt (MVD), tell the determination of the bank’s weighted
average cost of capital (WACC), an important component guiding investment decisions and cost
structure optimization. Furthermore, the industry price to average ratio of 15 provides context for
evaluating the bank’s market valuation comparative to industry norms, affecting strategic
financial planning and resource allocation. Together, these assumptions offer a strong framework
for forecasting the bank’s cost structure, ensuring alignment with market dynamics and financial
principles to support sustainable growth and profitability.

Executive summary

For a successful business, it is important to create appropriate financial statements, so the

stakeholders, employees and owner have an idea that how business is running or get a true sense
of financial health of a bank. In case of Ecobank, we can expect Ecobank to experience the same

18
financial performance experienced by new ventures, progressing through stages of development,
start-up, early growth, rapid growth, and eventual exit. According to projected financial
statements, EcoBank expects steady revenue growth over the next five years, supported by
strategic investments in marketing, technology and infrastructure. Let’s dig deep into the
projection statements. The income statement for Eco Bank as of December 31, 2023, shows a
total revenue of $205,000 with interest income of $170,000and service fees of $35,000. The cost
of providing services is assumed to have grown by 10%, resulting in a cost of goods sold
(COGS) of $25,000. The gross profit for the year is $180,000. Operating expenses for the year
include salaries and wages of $100,000. Technology and development costs of $30,000,
professional fees of $15,000, office supplies of $8,000 and other operating expenses of $30,000,
totaling $210,000. Non-operating expenses for the year include interest expense of $10,000 and
depreciation and amortization of $20,000, resulting in a total of $30,000,[Link] operating
income (EBIT) for the year is $30,000, and the earnings before interest and taxes (EBITDA) are
$50,000. The earnings before taxes (EBT) for the year are $40,000, and the income taxes for the
year are $8,000, assuming a 20% tax rate. The net income for the year is $32,000,[Link] net
working capital at the beginning of the year is $100,000, and at the end of the year, it is
$125,000, representing a change of $25,[Link] conducting market analysis for Eco Bank, several
key factors and methods are considered, including market research, industry reports, customer
preferences, behavior and demographics, sustainability, environmental consciousness, existing
competitors, government intervention, technological development, and digital banking
[Link] projected balance sheet for the next five years shows a steady increase in assets,
from $500,000 in the first year to $1,000,000, in the fifth year. Current assets, including cash and
accounts receivable, are also projected to increase over the same [Link] assets, including
net plant and equipment, are also projected to increase over the five-year period. Liabilities and
owners' equity are also projected to increase over the same period, with long-term and short-term
debt increasing from $7,150,000 in the first year to $11,287,884 in the fifth [Link] projected
income statement for the next five years shows a steady increase in sales, from $800,000,in the
first year to $1,068,675 in the fifth year. Cost of goods sold and selling, general, and
administrative expenses are also projected to increase over the same [Link] projected cash
flow statement for the next five years shows a net cash flow from operating activities of

19
$280,000 in the fifth year, with a net change in cash of -$30,000. Cash at the beginning of the
year is projected to decrease from $500,000 in the first year to $90,000 in the fifth year.
According to the discounted cash flow approach, enterprise value of Eco Bank comes out to be
$5,022,454, and the equity value represents $3,399,982. This value is dependent on several
limitations including cash and debt ratios and shall, therefore, be adjusted to get a realistic value.
The debt-to-equity ratio of Eco Bank has been estimated to decrease slightly over the next five
years from 28.0% in the first year to 23.5% in the fifth year. The forecasted plow back ratio will
declines gradually from 4.56% in the first year to 0.94 % in the fifth year. However, investment
on fixed assets is estimated to increase over the five year period from $1,381,251 in the first year
to $2,137,859 in the fifth year. The interest ratio on the project is forecasted to decline slightly in
a slightly over the next five years from 18.51% to 11.04%.
The forecast shows that, by the end of the next six periods, Eco Bank's revenue should rise
significantly with each period marking 10% growth on the prior one. In the latest period, the
bank's net income is set to grow further, which means that it expects to be able to yield profits.

Total assets and liabilities of the bank's balance sheet are observed to rise consecutively. This
implies that the bank is growing, is getting larger, and borrowing to withstand its expansion
plan. The bank's net margin, rate of return on assets and interest profitability ratio all move
upward during the five years, emphasizing the bank's management has proven to be cost-
effective and that they are able to produce better profits from less assets.

Nevertheless, the financial institution's cash flow to income ratio is extremely low at the period
of 1 years throughout the five years, maybe indicating that the bank may have short-term issues
and need more capital. The Bank's debt is 0.6 to the gross assets for the whole five years, and
therefore the bank would face problems in raising funds to fund its new venture in the financial
market. The top management should try liquidating some of its assets to cater for its debt
payments and relieve the burden of interest cost.

The bank's ratios being low, worry for next business indicates that the bank awaits growth
opportunities and the bank should invest in projects with high returns in order to get high
revenues and increase the bank's plow back ratio. The bank's interest expense ratio exceeds 10%

20
throughout the period and stays high through the five years reflecting the reality that it spends
much more than 10% of its gross income on paying interest to the creditors. The banks
management should sell some of the assets to disperse debt or rearrange their debt payment so
that they pay lower interest expenses.

Conclusion:
In conclusion, the financial performance and competitive situation of Eco Bank is encouraging
the continued growth and profitability of the business as represented in the market analysis. The
bank’s financial report demonstrates consistent turnover growth and a robust profit margin, while
at the same time the bank demonstrates the good financial management through effective
management of costs and assets. The debt ratio is expected to be lower than it is now and the
plow back ratio is expected to decrease subsequently. The financial institution has plans for
capital expenditure, which is a sign of a good use of money to create revenues. Nevertheless, the
ratio of cash flow to income is presumed to remain low demonstrating that additional inputs will
be needed for a better strategic approach to short-term problem. The market report of the bank
has pointed out the presence of competition in the segment related to green banks which provides
guidance for developing business plan with potential to earn a good return. Considering a bank's
projected balance, as well as income statement, it can be said that it has a potential to both grow
and prove profitable over the coming five years.

21
 References

BIBLIOGRAPHY Toptal. (2023). How to Prepare a Cash Flow Statement Model That Actually
Balances. Retrieved from [Link]: [Link]
consultants/how-to-prepare-cash-flow-statement
Miller, K. (2021). HOW TO PREPARE A CASH FLOW STATEMENT. Retrieved from
[Link]/: [Link]
Schmidt, J. (2023). Three Financial Statements. Retrieved from [Link]:
[Link]
HAYES, A. (2023). Cash Flow Statement: How to Read and Understand It. Retrieved from
[Link]: [Link]

Fundamentals of Accounting by E. Meigs, Meigs, Williams, Susan F. Haka, Mark S. Bettner,

“Accounting: The Basis of business Decision”, McGraw-Hill, Inc. 11th Edition, 1999

Financial & Managerial Accounting by Meigs & Meigs , 15th Edition.

Principles of Finance with Excel by Simon Benninga, 2nd Edition

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