Business Finance Management

8/18/2019 Business Finance Management

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Business FinanceManagement

ASSIGNMENT/DISSERTATIONHELP, PLEASE CONTACT:

Muhammad Sajid SaeedPhone: +44 !4!"4#4$!%&Emai':(od)*aeedmai'-.om

mailto:[email protected]:[email protected]


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Ta2'e o3 Con(en(*

1. Introduction.............................................................................................2

2. Sources of Finance Available to Fashionista............................................2

2.1 Equitybased Sources.........................................................................2

2.1.1 Shares..........................................................................................2

2.1.2 !etained earnings........................................................................"

2.2 #ebtrelated Sources..........................................................................$

2.2.1 Ban% &oans...................................................................................'

2." Analysis of Available Sources.............................................................'2.$ Merits of #ebt over Equity Sources....................................................(

". Analysing )om*arator+ Su*er,rou* -lc..................................................

$. )onclusion / !ecommendation................................................................0

!eferences.................................................................................................1

A**endi A................................................................................................11

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!- In()odu.(ion

Fashionista 4ants to treble the number of retail outlets over the net 5ve

years and for this *ur*ose6 the com*any is loo%ing for a longterm

5nancing o*tion. In this re*ort6 three signi5cant sources of 5nance 7i.e.

shares6 retained earnings6 and ban% loans8 are critically evaluated based

on Fashionista9s si:e and nature. ;he re*ort also includes a discussion on

equity 5nancing and debt 5nancing and merits of raising debt versus

equity. In order to analyse industrial situation6 a close com*etitor of

Fashionista6 Su*er,rou* *lc is evaluated based on ho4 its mar%et value

has changed over the *ast three years6 together 4ith ho4 its 5nance

needs 4ere met during that *eriod.

- Sou).e* o3 5inan.e A6ai'a2'e (o 5a*hioni*(a

;4o ty*es of 5nance sources are available to Fashionista+ equity 5nancing

and debt 5nancing. Equity refers to the echange of o4nershi* of ca*ital

in the business and consequently the *ro5t is divided. Fashionista can

secure funds through equity using a number of choices including friends

and family6 shares6 retained earnings6 dividends6 investment ban%ing

5rms6 and venture ca*italists6 angel investors6 and governmentbac%ed

community develo*ment agencies 7


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fashion9. ;herefore6 it needs a longterm 5nancing 4hich is *ossible

through issuing equity shares because in this case6 Fashionista is not

required to *ay 5ed dividends to the shareholders. In contrast to equity

shares6 *reference shares have a 5ed *ayout ratio and com*any is liableto *aybac% investments to shareholders 7?orthcott 100@8.

Issuing equity shares can be a fruitful source of 5nance for Fashionista

because raising ca*ital through this source can be *ermanent 7Ba%er and

Martin 2118. ;his means that Fashionista 4ill not require re*aying the

5nances during its lifetime. But on the other hand6 issuing equity shares

can be *roved as a costly alternative for Fashionista for generating long

term 5nance. ;his is because of the higher costs associated 4ith equity

ca*ital as com*ared to the borro4ed ca*ital 7Singla6 28. Moreover6

Fashionista can lose the cost advantage by issuing ecessive shares and

therefore it 4ill cause over ca*italisation. Another *oint is etremely

relevant here 4hich highlights the legal rights of shareholders for ne4ly

issued shares. According to the la46 it is the legal res*onsibility of

com*anies to oer additionally issued shares to eisting sta%eholders

before oering them into the o*en mar%et. ;his right is %no4n as -re

em*tive rightC of shareholders and thus Fashionista must %ee* it in mind

before choosing the equity shares o*tion.

Dn the *ositive side6 Fashionista can raise funds on unsecured grounds

4ithout oering its assets as collateral to the investors. Another foremost

advantage of issuing equity shares is that Fashionista 4ill have no liability

of *aying 5ed dividends to the investors 7Singla 28. !ather the ratio

for *aying dividends 4ill be based on annual *ro5ts each year. =o4ever6

considering equity shares for raising longterm 5nance can restrict

Fashionista to trade by issuing other securities in the future 7Moles et al.

2118.

2.1.2 Retained earnings

!etained earnings is another source of 5nance that Fashionista canconsider to generate ca*ital. !etained earnings indicate the savings of the

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com*any after *aying e*enses6 taes6 dividends6 and ful5lling other

obligations. )om*anies retained their earnings for several *ur*oses

including+ debt redem*tion6 renovations6 modernisation6 business

e*ansion6 meeting 4or%ing ca*ital obligations6 buying ne4 assets6 usingne4 technology6 etc. 7&asher 21"8. !etained earnings can be bene5cial

for Fashionista if the com*any 4ill u*hold an adequate balance. =o4ever6

the im*ro*er use of retained earnings can *roduce un4anted results and

com*any9s eistence can be at ris%.

Fashionista can enoy several bene5ts by ta%ing into account retained

earnings as an internal and reliable source of 5nance. For instance6

retained earnings is an ine*ensive source of 5nancing 4hich can assist

Fashionista to stay a4ay from entering into legal agreements by raising

ca*ital through eternal sources such as ban%s and loangiving agencies

etc 7


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- De2(8)e'a(ed Sou).e*

#ebt 5nancing refers to the variety of loans that can be acquired from

commercial ban%s and other 5nancial institutions. #ebt 5nancing is

suitable for any business that 4ants to %ee* the o4nershi* itself. ;here

can be a variety of o*tions of debt 5nancing including *ersonal loans6

credit cards6 home equity loans6 family and friends6 and ban% loan

7


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several 4earisome *rocedures and requirements for a business. Some

eam*les of these *rocedures are+ collateral of assets6 guarantee

statements6 margin money sti*ulation6 and *eriodic statements etc.

-% Ana'0*i* o3 A6ai'a2'e Sou).e*

In the *revious sections6 three dierent sources of 5nance available to

Fashionista are critically discussed. In this section6 these three sources are

evaluated on the basis of 5nance available6 5nancial requirements6

re*ayment terms6 and cost of 5nance.

According to #enis 72$86 com*anies should not rely on a single source of

5nance. ;his means that Fashionista may consider and evaluate more

than one 5nancial source in order to ensure the availability of at least one

in case if a single source is not available due to unavoidable

circumstances. Similarly6 the 5nancial requirements of each source are

dierent and Fashionista is required to consider so many things for

eam*le6 a**roval of directors6 con5dence of shareholders6 legal

constraints6 debt to equity ratio6 interest coverage ratio6 and credit score

needs etc. Braggs 72118 highlights the im*ortance of obtain information

about all *rerequisites of each source of 5nance before ma%ing a 5nal

decision.

In order to generate longterm funds to treble the number of retail outlets

over the net 5ve years6 Fashionista should consider interest amounts and

each o**ortunity that the 5rm can avail. For eam*le6 Balloon *ayments6

*eriodic *ayments6 or interestonly *ayments oered by many ban%stoday to let the businesses to re*ay loans easily 7Slee 2118. )handra

72@8 asserts that com*anies must loo% for loans 4ith a higher allocation

to *rinci*al in order to minimise the overall cost.

Many hidden and small costs tend to increase the overall cost of debt and

equity 5nancing. For eam*le6 loan a**lication fee6 bro%er9s fee6 interest

rates6 origination fee6 dividend *ayments and venture ca*italists.

Fashionista requires to %ee* in mind these fee and additional associated

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costs 4hen using debt 5nancing. Also6 it is necessary to carefully read and

understand the legal terms and conditions of a contract es*ecially in case

of asset collateral. ;able 1 *resents the analysis of source of 5nance

available to Fashionista based on factors discussed in this section.

;able 1+ analysis of sources of 5nance available to Fashionista

5a.(o) Sha)e* Re(ainedea)nin*

9an 'oan

5inan.ea6ai'a2i'i(0

Hes Hes Hes

5inan.in

)e7ui)emen(

-ayodividends

&egalres*onsibilities

Shareholder

con5dence

-eriodic

statementsAsset collateral

Re1a0men((e)m*

#ividends on*ro5t

?o or easy

-eriodic*ayments

=igh interestrate

Co*( o3 nan.e =igh &o4 =igh

Lon8(e)m Hes ?o Hes

-4 Me)i(* o3 De2( o6e) E7ui(0 Sou).e*

Although the merits of a ban% loan have been discussed in the *revious

section6 but the overall advantages of debt 5nancing over equity 5nancing

are discussed in this section.

Dne of the vital merits of debt over equity 5nancing is that loans do not

4ea%en the o4nershi* of the com*any and lenders 4ill have no claim on

sharing the *ro5ts. =o4ever6 it is necessary to re*ay loan and interest

amount on time 7)handra 2@8. #ebt 5nancing *ermits an organisation

to %ee* control over its business activities and the com*any is not

ans4erable to investors or *artners about the decisions. ;he interest rate

in debt 5nancing is normally based on *rime interest rate and ta

deductable at the end of the year 7)handra 2@8. It acts li%e a shield of

income and consequently reduces the ta res*onsibility each year.


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then it can fully utilise its resources 4ithout any *ermission of %ey

sta%eholders and business *artners. Moreover6 debt 5nancing can be

easily secured for both short and long time *eriods 7,uerard and Sch4art:

28. ;his can be bene5cial for small and medium si:ed organisationssuch as Fashionista in terms of its gro4th in >fast fashion9 industry. Finally6

it is *ossible for a com*any to forecast the *rinci*al re*ayments and 5ed

interest amount for the future consideration of a ban% loan.

%- Ana'0*in Com1a)a(o): Su1e)G)ou1 P'.

In this section of the re*ort6 the mar%et value of Su*er,rou* -lc for the

last three years is evaluated. Su*er,rou* is a listed J com*any and it isselected because it is a close com*etitor of Fashionista in the fashion

mar%et 4ith K1."2b current mar%et ca*italisation. ;he selection of

Su*er,rou* is based on etensive search of matching the mar%et

ca*italisation of dierent com*anies in &SE 4ith Fashionista9s mar%et

ca*italisation. ;he com*etitors in the same mar%ets either have very lo4

mar%et ca*italisation or large ca*italisation ranging from $ billion to (

billion.

Su*er,rou* is a distinctive J fashion retailer selling qualitybased

clothing accessories of both men and 4omen. Su*er,rou* 4as initially

founded in 10@' and successfully established a good brand name over the

years. ?o4 the com*any is selling their stylist *roducts under the Lagshi*

brand names of Su*er#ry and )ult. )urrently6 Su*er,rou* has 1

standalone stores in the J and '( 4orld4ide 4hile 1$" licensed stores

are franchised as 4ell. Su*er#ry brand is in '$ countries through a

licensed franchised net4or% 7Su*er ,rou* 21"8.

;he full 5nancial data about Su*er,rou* are

available in a**endi A and some highlights

of it are *resented in the gra*hs at right.

Figure 1 sho4s a slight reduction in the

*ro5tability of Su*er,rou* due to reduction 211 212 21"

2'.$2.0@

2.@"

".("$.0

2.@0

!DA !D)E

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in ca*ital em*loyed.

Figure 26 " and $ are more relevant to this

re*ort. Figure 2 sho4s the mar%et

ca*italisation of Su*er,rou* 4hich is

increasing on annual basis. ;his means that

both com*any9s mar%et value *er share and

outstanding shares are gradually increasing.

;he gearing ratio in 5gure " demonstrates

Su*er,rou*9s decreasing longterm debt

com*ared to its equity ca*ital. ;his

indicates that Su*er,rou*9s leverage level

is shrin%ing on yearly basis and it is out of

5nancial ris% and ban%ru*tcy due to

decreased volatility of *ro5ts and debt

re*ayment schedules 7!yan 28. ;he

-rice to Earnings 7-/E8 ratio in 5gure $

sho4s that the stoc%s are highly valued due

to the higher earnings gro4th rate of Su*er,rou* *lc. Fashion clothing industry

has relatively higher -/E ratio because of

high ho*es of investors in the future 7!yan

28.

;he 5nancial statements and accounts of

last three years sho4 that no longterm loan

4as ta%en by Su*er,rou* *lc and also nodividend and shares 4ere used to generate

longterm 5nance. ;his is because that

Su*er,rou* has retained an adequate level

of earnings 7See a**endi A8. In this case6

Su*er,rou* does not need to acquire a

ban% loan because the com*any can use its

retained earnings for investment *ur*ose.

Figure 1+ -ro5tability

ratios

211 212 21"

1. 1.1

1."2

Mar%et )a*italisation 7Kb8

Figure 2

211 212 21"

'$.11$.''

$.2

,earing

Figure "

211 212 21"

"'.0

"2.$$

"(.01

-E ratio

Figure $

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4- Con.'u*ion / Re.ommenda(ion

balloon *ayments9 4hich refer to

gradually increase in monthly re*ayments as the business gro4.

Fashionista can acquire longterm business loan to treble the number of

retail outlets over the net 5ve years. Besides6 several ban%s oer

interestonly *ayments as 4ell 4hich can be hel*ful for Fashionista to

lo4ering do4n monthly note 7Slee 2118.

;he case of Su*er,rou* is dierent from Fashionista because unli%e

Fashionista6 Su*er,rou* retained an adequate level of earnings 4hich 4ill

hel* the com*any to invest in future. Also6 the o*tion of debt 5nancing

through by a ban% loan is also o*en to Su*er,rou* because of its healthy*ro5tability level and mar%et ca*italisation.

-age 3 1


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Re3e)en.e*

Ba%er6 =.J. and Martin6 ,.S. 72118. Capital Structure and Corporate FinancingDecisions: Theory, Evidence, and Practice. ohn


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A11endi; A

Income Statement (£ m) 28-Apr-13 29-Apr-12 01-May-11

Continuing Operations

Revenue 360.40 313.80 237.90Operating Profit/(Loss) 1.0 1.30 47.20

!et "nterest 0.00 0.00 0.00

Profit #efore $a% 1.80 1.40 47.30

Profit &fter $a% 36.30 36.10 30.10

iscontinue! Operations

Profit &fter $a% 0.00 0.00 0.00

"#O$I% $O# %&' "'#IO 330 310 3010

Attri*uta*+e to,

'inorit "nterests 0.40 0.00 0.00

*+uit ,o-ers of Parent opan 3.90 36.10 30.10

Continuing '"S*arnings per are #asi 44.70p 4.00p 37.90p

*arnings per are i-ute 44.30p 44.70p 37.90p

*arnings per are &5uste 47.80p 38.10p 4.20p

Continuing an! iscontinue! '"S

*arnings per are #asi 44.70p 4.00p 37.90p

*arnings per are i-ute 44.30p 44.70p 37.90p

*arnings per are &5uste 47.80p 38.10p 4.20p

ivien per are 0.00p 0.00p 0.00p

a+ance S.eet (£ m) 28-Apr-13 29-Apr-12 01-May-11

Assets

/on-Current Assets

Propert P-ant *+uipent 63.70 63.80 38.60

"ntangi-e &ssets 41.0 40.70 29.40

"nvestent Properties 0.00 0.00 0.00

"nvestents 0.00 0.00 0.00

Oter inania- &ssets 0.00 0.00 0.00

Oter !onurrent &ssets 34.00 38.00 44.20

13920 120 11220

Current Assets

"nventories 72.0 .0 2.30

$rae Oter Reeiva-es 4.90 42.60 3.70as at #an: in ,an 4.0 30.90 32.20

urrent &sset "nvestents 1.40 0.00 0.00

Oter urrent &ssets 0.00 0.00 0.00

130 12900 12020

%ota+ Assets 3130 210 2320

ia*i+ities

Current ia*i+ities

#orro;ings 0.20 0.20 0.00

Oter urrent Liai-ities 7.20 3.00 42.70

-0 -320 -20

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a+ance S.eet (£ m) 28-Apr-13 29-Apr-12 01-May-11

Assets

/et Current Assets 1190 80 0

/on-Current ia*i+ities

#orro;ings 0.20 0.40 0.90Provisions 2.90 3.10 3.0

Oter !onurrent Liai-ities 29.10 30.80 34.0

-3220 -330 -3890

%ota+ ia*i+ities -890 -80 -810

!et &ssets 223.90 184.00 10.80

Capita+ 4 #eser5es

are apita- 4.00 4.00 4.00

are Preiu &ount 140.10 138.60 138.60

Oter Reserves 303.00 304.60 340.60

Retaine *arnings 382.40 346.00 348.80

S.are.o+!ers6 $un!s 2230 1800 1080

'inorit "nterests/Oter *+uit 0.40 0.00 0.00

%ota+ '7uity 22390 1800 1080

#atios - *ase! on I$#S 28-Apr-13 29-Apr-12 01-May-11

Continuing Operations

P* Ratio &5uste 36.91 32.44 3.09

ivien over n/a n/a n/a

Revenue Per are 448.93p 391.10p 299.86p

Pre$a% Profit per are 64.2p 64.06p 9.62p

Operating 'argin 14.29< 16.3< 20.47<

Return on apita- *p-oe 27.89< 34.97< 37.60<

Source: 0ondon Stoc) E$change

-age 3 1"

Business Finance Management

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