Monday, June 3, 2019

Sources Of Finance For Marks And Spencers

Sources Of finance For Marks And SpencersMarks Spencer is one of the leading retailers in UK with middling 21 million customers visiting per week in stores. They provide with quality clothing, home products and food which is supplied by approximately 2000 suppliers all over the world. The telephoner has 75,839 employees as valuated in 2008 and has about 700 stores in UK. The 49% of the sales is occupied by clothing and home products while 51% is occupied by food products. extraneous UK the telephoner ope consecrates in approximately 40 other countries which include India, China and Indonesia etc. The companies 90% business comes from sales in UK while rest comes from foreign sales. Marks Spencer values Quality, value, Service, Innovation and Trust.The company generated an overall revenue of 9062.1 million as on 28th March, 2009. The overall profit was 768.9 million of which 652.8 million was generated from trading operations in UK and 116.1 million from operations overseas. The case study takes into consideration the analysis of financial reports of Marks and Spencer and relates the academic principles of Corporate finance with the analysis of the report.2. SOURCES OF FINANCE2.1 on the spur of the moment MEDIUM termination FINANCETrade CreditTrade Credit is finance obtained from suppliers of goods and services over the period betwixt delivery of goods and the subsequent closing of the account by the recipient.(Pike Neale, 2006)It is round cartridge holders also called spontaneous finance as the company piece of tail enjoy the goods or benefit from the service provided without having to pay up. public way of expressing the credit term is- 2/10 bread 30This implies that the supplier will provide 2% discount if the money is payed vertebral column in 10 days otherwise the company has to pay full payment in 30 days.The length of the trade credit depends on certain factors standardised industry custom and give, relative bargaining power and type of products.Factoring- Sometimes the suppliers need payment earlier than expected. Institutions called factors help by offering to purchase a firms debtors for currency. Factoring involves raising immediate cash based on the security of the companys debtors, thus accelerating payments from customers. jargon CreditBank lending to companies is predominantly short term, although forthwith it is also a valuable source of medium term finance.OverdraftsOverdrafts specify the amount that a company may withdraw either in forms of cash or cheques. Interest is charged on a daily basis depending on how much the company is overdrawn each day. Bank generally takes security which quite a little be fixed charge (where overdraft is secured over against specific asset) or floating charge (which offers security over all of the companys assets)Short Term LoansShort term loans atomic number 18 generally provided for more(prenominal) than 1 category. The bank can charge variable or fixed rate o f sake. Usually fixed rate of interest is preferably high. Variable rate of interest can be also in various formsBullet Loans Balloon LoansRevolversIt allows the borrowers to borrow, repay and re-borrow over the life of loan set.SecuritisationThis is the practice whereby instead of lending money to customers, banks raise finance for them by arranging and selling to customers their securities like commercial papers often allowing lower interest rates. shoot FinanceBill allows the company to pay out a specific amount afterward a specific period of time.Bills of ExchangeTrader purchase goods from suppliers draws up a flyer stating a promise to pay at some future date and its up to the supplier to keep the bill or sell it in the market at a discount if he needs the money earlier.Acceptance CreditIt is a tie up between the company and the bank. The bank issues a bill for the company and company can use it at a later date. The bank can sell the bill in the market at a discounted pri ce. If it does whence the company collects the money from the company which bought the bill from the bank.Hire PurchaseIt may be simply delimit as hiring with the option to purchase. On payments of final installment possessorship of the asset passes to the customer. The inland revenues will generally permit the customer to claim and retain seat of government allowances provided that the option to purchase fee is less than the market value at the end of the contract term.LeasingA leasing transaction is a commercial arrangement whereby an equipment owner conveys the right to use the equipment in return for payment by equipment user of a specified rental over a pre-agreed period of time.(Pike Neale, 2006)2.2 LONG TERM FINANCEEquitySh ars are described as permanent seat of government because the funds supplied for their acquisitions are non-returnable in most circumstances other than in the position of a liquidation. packages are issued at nominal value and are sold at the m arket price. shell outholders have a influence out in ownership of company and also have voting rights. Dividends are payed as a percentage return on their nominal value. A company can receive legality finance from various sources likeBusiness Angels Private equity investor with spare funds to invest who wishes to gamble on the future prospects of young companies.Venture large(p) Sale of equity to a specialist institution that may also provide management assistance. For e.g. 3i.Obtaining a Quotation (IPO)Preference SharesPreference shares are authorize to a fixed percentage dividend, which is paid before any profits are distri notwithstandinged to ordinary shareholders. Participating preference shares may be entitled to some extra dividend, over and above their fixed dividend entitlement. Convertible preference shares can be converted to ordinary shares. Cumulative preference shares have unpaid dividends that are carried forward and must be paid before dividends are paid to or dinary shareholders. Preference share holders do not qualify for tax relief.DebtDebenturesDebentures are basically loan secured on company assets with floating or fixed interest rate. It is a multiple loan to the company in the sense that it is contributed by several people opposed to just one individual. Debenture holders are creditors but not members of the company. Loan Stock is a kind of debenture that is issued at face value. It is not secured on assets but effectively secured on firms earning power, thus more risky and lower ranking of payment. Debentures issued at large discounts and redeemable at par or above are known as Deep Discount Bonds. They are generally issued at low rate of interest but have cost of redemption.MortgagesIt is a form of secured loan placing the title deeds of property with a lender as security for a cash loan. The interest is payable on the amount borrowed.WarrantsThey are rights given to investors allowing them to buy new shares in a company at a fut ure date, at affix given price. They are generally issued alongside unsecured debt as a bribe to potential investors.2.3 SOURCES OF FINANCE IN MARKS SPENCER2.3.1 Current Non-Current LiabilitiesCurrent liabilities are the one MS needs to pay within 1 year time whereas non- ongoing liabilities are the one MS can pay any time after 1 year. As per the yearbook report for MS,Current LiabilityMS has short term loans in the form of Bank Loans and overdrafts worth 147.9 millions.Syndicated Bank Facility worth 781.2 million which relates to a 1.2 bn committed bank revolving credit facility set to mature on 26 March, 2013.Finance Lease liability worth 13.7 million. The average lease term for the equipment is 6 years and 125 years for property. Interest rates are fixed.Non-Current LiabilityBank Loans worth 11.2 million.Finance lease liabilities worth 88.2 million.Medium-term notes worth 2018.5 million.2.3.2 enlighten AssetsEquityOrdinary Share CapitalSharesmAllotted, called up and fully paid ordinary shares of 25p eachAt start of year1,586,478,423396.6Shares issued on recitation of share options2,217,7630.5Share purchased in buy-back(10,901,267)(2.7)At end of year1,577,794,919394.42,217,763 ordinary shares having nominal value were allotted during the year under two schemes namely Save As You Earn (SAYE) Share Option scheme and Executive Share Option Scheme. In SAYE, the board may offer options to purchase ordinary shares in the company once in each financial year to those employees who enter into an HM Revenue Customs approved (SAYE) savings contract. In terms of Executive Share Option Scheme, the Board may offer options to purchase ordinary shares in the company to executive directors and major(postnominal) managers at the market price on a date to be determined prior to the date of the offer.10.9 million shares having a nominal value of 2.7m were bought back and subsequently cancelled during the year in accordance with the authority granted by the share hold ers at the Annual General Meeting in July 2007.Share Premium AccountA reserve setup to account for the issue of new shares at a price above their par value.(Pike Neale, 2006)In MS, Share Premium Account had 236.2 m as on 28th March, 2009 out of which 231.4 m were carried forward from previous year and 4.8 m was from share issued on exercise of employee share options.Capital Redemption ReserveIt is a reserve established when the firm buys its own shares in a scenario that result in loss of share capital letter. In MS it was worth 2202.6 m. As discussed earlier 2.7 m worth were purchased in buy back, thus added to the capital redemption reserve. hedgerow ReserveHedging is an attempt to minimize the risk of loss stemming from exposure to adverse foreign exchange rate movements. MS as on 28th March,2009 had 62.6 m in Hedging Reserve.2.3.3 Net Debt hard currency Cash EquivalentsIt includes short term deposits with banks and other financial institutions, with an initial maturity of three months or less and credit bill payment received within 48 hours. It was worth 422.9 m for MS.Financial AssetsMS has electric current and non-current assets worth 53.1 m that includes unlisted investing fundss and Listed UK Securities.Bank Loans OverdraftMS has current and non-current loans overdrafts that include 4.0 m loan from the Hedge End Park Limited joint venture.Syndicated Bank FacilityIt relates to a 1.2 bn committed bank revolving credit facility set to mature on 26 March 2013 and is worth 781.2 m.Medium Term NotesThese are notes that actually retire in 5 to 10 years. A corporate note continuously offered by a company to investors through a dealer. Investors can choose from differing maturities, ranging from nine months to 30 years.(Forbes Digital)In MS these notes are issued under MS plcs 3bn European Medium Term Note Program and all pay interest annually. The medium term notes are worth 1848.1 m.Finance LeasesIt is groups policy to lease certain of its properties and equipments under finance leases and is worth 101.9 m.3. COST OF CAPITAL3.1 Weighted Average monetary value of Capital3.2 Weighted Average embody of Capital for MSAs seen earlier MS has capital in the form of debt and equity. To evaluate the Weighted Average equal of Capital, we need to evaluateCost of Debt ( Kd)Cost of Equity ( Ke)Weight or proportion of debt equityCost of Debt (Kd)To evaluate Kd, we need to findI = Interest paid for the debtMV(Market Value) = Total current Market Value of the DebtT = Corporate Tax if anyAs Kd = I(1-T) / MV X 100 looking at at the Annual Report we can see in Cash flows from financing activities that I = 197.1 m which is approximately 7.9%In Taxation ChargesT = 28%In net DebtMV = 2490.8 mThus we can calculate Kd by putting in the values asKd = 197.1 m(1-.28)/ 2490.8m X 100= (141.912/2490.8) X 100= 4.7Cost of EquityTo evaluate Ke, we need to evaluateD = Dividend on ordinary share capitalMV = Market value of equityAs Ke = (D/MV) X 100Looking at the report we can findNet dividend = 22.5 p per shareThe get no. of shares at the end of the year = 1,577,794,919The total Dividend D = .225 X 1,577,794,919 = 355 m approxMarket Value MV= .25 X 1,557,794,919 = 394.4 mTherefore Ke = (D/MV) X 100= (355/394.4) X 100= 90Weighted Average Cost of Capital (WACC)Weighted Average Cost of Capital can be calculated by formulaWACC = Ke E/(E+D) + Kd D/(E+D) Where E = Market Value of Companys EquityD = Market Value of Companys DebtTherefore WACC = 90394.4/(394.4 + 2490.8) + 4.72490.8/(394.4 + 2490.8)= (90 X 0.135) + (4.7 X .86)= 12.15 + 4.902= 17.052 %3.3 caravan Indicators for MSTo be doneCapital GearingCapital Gearing =4. INVESTMENT APPRAISAL TECHNIQUESAn investment show is a series of cash inflows and outflows, typically starting with cash outflows (the initial investment outlay) followed by cash inflows and/or cash inflows in later periods.(Gotze, Northcott, Schuster, 2008)The financial manager needs to employ appraisa l techniques in narrate to decide which projects to accept and which to reject because these decisions largely shapes the future of the business and its ability to manage its future operations. The project accept must meet the financial criteria of the company, generally its a return greater than the cost of capital needed to finance it.4.1 Return on investing (Accounting Rate of Return)This approach expresses the profit before tax arising from an investment as a percentage of the total outlay on the investment. When victimisation the return on investment approach the project which gives the highest ARR is the one that should be accepted. Difficulties arise with the method when the duration of the investment extends for more than one year, as it then becomes necessary to determine some re showative profit and investment value for the duration of the project. Other problem is that profits are the results of receipts and outgoings and they do not represent cash transactions and th e cash flow arising is not taken into account during the term of the investment.4.2 Return on Investment (ARR) related to MSAs per the annual reports of MS from year 2006 to 2009, MS has invested on property. The investment, depreciation Net Profit are described in the annual report related to property. The tax budgeted profits are assumed accordingly.Year 2006 2007 2008 2009Investment 38.5 m 24.1 m 24.3 m 24.3 mBudgeted Profits 4 m 4 m 32 m 8 mLess Depreciation ( .1 m) ( .2 m) (.3 m) ( .5 m)Tax ( 9.6 m) ( 1.9 m) ( 4.7m) ( 1.1m)Net Profit ( 4.7 m) 1.9 m 27 m 6.4 mThe average profit for the four years would beAverage Profit = (4.7) + 1.9 + 27 + 6.4 / 4= 29.6 / 4= 7.4 mWe can compare this with the original investment made in four yearsAverage investment = 38.5 + 24.1 + 24.3 + 24.3 /4= 28.55 mBy comparing, Avg Profit/ Investment= (7.4/28.55) X 100 = 24.91 %Thus the company can decide on whether the investment is good or not.4.3 PaybackThis method refers to how quickly the incremental benefits that accrues to a company from an investment project vengeance the initial capital invested. When faced with a straight accept or reject decision it can provide a regulate where projects are accepted if they payback the initial investment outlay within a certain predetermined time. In addition, the payback method can provide a rule when a comparison is required of the relative desirability of several mutually exclusive investments (Lumby, 1988).This method simply measures the time period taken until the profits generated from the investment equal the initial cost of investment. The advantage of Payback is that it focuses on risks in considering the period during which the investment remains outstanding. The drawback is that the method takes no account of cash inflows after payback, neither is there any attempt to consider reinvestment possibilities for incoming funds during the period prior to payback.4.4 Payback related to M SWith relation to MS, we again take the project of investment in property, plant equipment.We take the 2 investments made in 2008 and 2009 and compare them with assumptions made for returns in the following years.2009 2008Investment making water Year 0 ( 540. 8 m) ( 958.4 m)Cash Inflows Year 1 58.3 m 91.6 mYear 2 142.6 m 400.4 mYear 3 222.4 m 300.2 mYear 4 100.4 m 286.7 mYear 5 143.7 m 123.2 mTotal cash Inflow 667.1 m 1202.1 m in a flash comparing the two projects of 2008 2009 we can see that payback for 2009 is 5 years and payback for project in 2008 is 4 years. Thus project that MS invested is 2008 is die in terms of investment.4.5 Net Present ValueNet Present Value is the net monetary gain (or loss) from a project, computed by discounting all present and future cash inflows and outflows related to the project.(Gotze, Northcott, Schuster, 2008)Using the NPV method, all future cash flows related to investment project are discounted back to time 0. In order to establish the cash flows arising fro m a project into their present values, it is necessary to establish the cash inflows and outflows arising from it, and what cost of capital should be used to evaluate such projects.In order to determine the NPV of a project, we need to list all the cashflows related to the project. The net cash flows are then discounted at the cost of capital using the formulaeDiscount factor = 1/ (1+i) nwhere n represents the number of periods andi represents the cost of capital per periodThe general rule is that if NPV is positive, the project is accepted else it is rejected.4.6 Net Present Value related to MSWe assume the example that taken in the pay back technique for the year 2009 and we assume the cost of capital to be 10 %.Year Net Cash Flows practice Disc. Factor NPV 2009 ( 540.8 m) 1 540.8 m2010 58.3 m 1/(1+.1)1 .909 52.99 m2011 142.6 m 1/(1+.1)2 .826 117.78 m2012 222.4 m 1/(1+.1)3 .751 167.02 m2013 100.4 m 1/(1+.1)4 .683 68.57 m2014 143.7 m 1/(1+.1)5 .621 89.094 m 126.3 m ( 44.35 m)As we can see above the NPV for the project is negative thus this project should be rejected.4.7 Internal Rate of Return (IRR)Internal Rate of Return of a Project is that cost of capital which makes the net present value of a project equal to zero. If the cost of capital required to reduce the future cash flows to zero is greater than the companys cost of capital, then the project will be accepted because it gives a positive return for the business.4.8 Internal Rate of Return related to MSIn internal rate of return we need to assume cost of capital so that NPV nears 0. Thus we assume the cost of capital as 9% first.Year Net Cash Flows Formula Disc. Factor NPV 2009 ( 540.8 m) 1 540.8 m2010 58.3 m 1/(1+.09)1 .917 53.46 m2011 142.6 m 1/(1+.09)2 .842 120.06 m2012 222.4 m 1/(1+.09)3 .772 171.69 m2013 100.4 m 1/(1+.09)4 .708 71.08 m2014 143.7 m 1/(1+.09)5 .650 93.40 m 126.3 m ( 31.10 m)Now we try with cost of capital as 7 %Year Net Cash Flows Formula Disc. Factor NPV 2009 ( 540.8 m) 1 540.8 m2010 58.3 m 1/(1+.07)1 .935 54.51 m2011 142.6 m 1/(1+.07)2 .873 124.48 m2012 222.4 m 1/(1+.07)3 .816 181.48 m2013 100.4 m 1/(1+.07)4 .763 76.6 m2014 143.7 m 1/(1+.07)5 .713 102.45 m 126.3 m ( 1.7 m)As we can see that with cost of capital as 9% the NPV is 31.10 m and with cost of capital 7% the NPV is 1.7 m, thus it shows that NPV will be zero between 6 and 7 % cost of capital. As the companys cost of capital is 10 % and the cost of capital to make the NPV zero is between 6 7 %, thus this project cant be accepted as its less than the companys cost of capital.

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