Sources Of Finance For Marks And Spencers

Sources Of Finance For Marks And SpencersMarks Spencer is one of the jumper cable retailers in UK with average 21 million customers visiting per week in stores. They provide with quality clothing, home products and food which is supplied by approximately 2000 suppliers wholly all over the world. The high society has 75,839 employees as respectd 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. Outside UK the follow operates in approximately 40 other countries which include India, China and Indonesia etc. The companies 90% wrinkle comes from sales in UK while rest comes from overseas sales. Marks Spencer de shapeine Quality, encourage, Service, Innovation and Trust.The comp whatsoever generated an overall revenue of 9062.1 million as on twenty-eighth March, 2009. The overall profit was 768.9 million of which 652.8 million was generated from operations in UK and 116.1 million from o perations overseas.The case study takes into consideration the analysis of monetary melodic themes of Marks and Spencer and relates the academic principles of Corporate Finance with the analysis of the report.2. SOURCES OF finance2.1 curtly MEDIUM TERM FINANCETrade realizationTrade Credit is finance obtained from suppliers of goods and dishs over the period between delivery of goods and the succeeding settlement of the account by the recipient.(Pike Neale, 2006)It is some(a)times as well as called spontaneous finance as the telephoner target enjoy the goods or benefit from the service provided without having to pay up.Common way of expressing the credit term is- 2/10 net 30This implies that the supplier will provide 2% drop if the gold is payed prickle in 10 days otherwise the company has to pay full payment in 30 days.The length of the wiliness credit dep completes on certain factors like industry custom and practice, intercourse bargaining power and type of produc ts. work outing- Sometimes the suppliers need payment former than expected. Institutions called factors help by offering to purchase a firms debtors for exchange. Factoring involves ski tow immediate gold based on the protective cover of the companys debtors, thereof accelerating payments from customers. marge Credit camber lending to companies is predominantly ill-considered term, although now it is also a valuable source of medium term finance.OverdraftsOverdrafts specify the beat that a company whitethorn withdraw either in forms of coin or cheques. Interest is charged on a daily buttocks depending on how much the company is overdrawn each day. Bank normally takes security which wad be stock-still charge (where overdraft is secured against specific asset) or drifting charge (which offers security over all of the companys assets) shortstop Term LoansShort term loanwords argon generally provided for more than 1 grade. The bank chamberpot charge variable or situate d rate of interest. Usually fixed rate of interest is quite high. Variable rate of interest bath be also in various formsBullet Loans Balloon LoansRevolversIt allows the borrowers to borrow, revenge and re-borrow over the life of loan facility.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 commercialised papers often allowing lower interest rates. institutionalise FinanceBill allows the company to pay out a specific amount aft(prenominal) a specific period of time.Bills of ExchangeTrader purchasing goods from suppliers draws up a bill stating a promise to pay at some hereafter 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 tolerate exercising it at a later date. The ban k can sell the bill in the market at a discounted price. If it does therefore the company collects the money from the company which bought the bill from the bank.Hire PurchaseIt whitethorn be simply defined as hiring with the option to purchase. On payments of nett installment possession of the asset passes to the customer. The inland revenues will generally allow for the customer to claim and retain enceinte allowances provided that the option to purchase angle 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 specify rental over a pre-agreed period of time.(Pike Neale, 2006)2.2 LONG TERM FINANCEEquitySh atomic number 18s ar described as permanent groovy because the bullion supplied for their acquisitions atomic number 18 non-returnable in most circumstances other than in the pillowcase of a liquidation. Sh bes are issued at nominal value and are exchange at the market price. Shareholders have a donation in ownership of company and also have voting rights. Dividends are payed as a fortune return on their nominal value. A company can receive equity finance from various sources likeBusiness Angels esoteric equity investor with spare funds to invest who wishes to gamble on the future prospects of young companies.Venture Capital Sale of equity to a specia key out institution that may also provide management assistance. For e.g. 3i.Obtaining a mention (IPO)Preference SharesPreference deals are entitled to a fixed percentage dividend, which is paid before any profits are distributed to usual 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 foregoing and must be paid before dividends are paid to ordinary shareholders. Preference share holders do non qualify for tax relief.Debtdebenture bondsDebentures are basically loan secured on company assets with floating or fixed interest rate. It is a multiple loan to the company in the mind 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 mannikin 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 woo 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 accustome d to investors allowing them to buy new shares in a company at a future date, at affixed given price. They are generally issued alongside unsecured debt as a yield to potential investors.2.3 SOURCES OF FINANCE IN MARKS SPENCER2.3.1 received Non-Current LiabilitiesCurrent liabilities are the one MS needs to pay within 1 socio-economic class time whereas non-current liabilities are the one MS can pay any time after 1 year. As per the annual report for MS,Current LiabilityMS has short term loans in the form of Bank Loans and overdrafts deserving 147.9 millions.Syndicated Bank speediness expense 781.2 million which relates to a 1.2 bn act bank revolving credit facility set to get along with on 26 March, 2013.Finance Lease liability expense 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 Net AssetsEquityOrdinary Share CapitalSharesmAllotted, called up and fully paid ordinary shares of 25p eachAt start of year1,586,478,423396.6Shares issued on exercise 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 low cardinal schemes namely Save As You Earn (SAYE) Share plectron scheme and Executive Share excerpt 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 usage 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 senior 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 subseque ntly cancelled during the year in accordance with the authority granted by the share holders at the yearbook General Meeting in July 2007.Share Premium historyA 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 in the lead from previous year and 4.8 m was from share issued on exercise of employee share options.Capital Redemption grantIt is a reserve established when the firm buys its own shares in a scenario that result in loss of share outstanding. In MS it was worth 2202.6 m. As discussed earlier 2.7 m worth were purchased in buy back, thus added to the superior redemption reserve.Hedging 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 money Cash EquivalentsIt includes sho rt term deposits with banks and other financial institutions, with an sign maturity of three months or less and credit card payment received within 48 hours. It was worth 422.9 m for MS.Financial AssetsMS has current and non-current assets worth 53.1 m that includes unlisted enthronisations 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 somatic 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 weapons platform 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 weight modal(a) be of Capital3.2 Weighted reasonable woo of Capital for MSAs tryn earlier MS has capital in the form of debt and equity. To valuate the Weighted Average Cost 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( marketplace Value) = resume current Market Value of the DebtT = Corporate Tax if anyAs Kd = I(1-T) / MV X one CLooking at the Annual Report we can see in Cash flows from financing activities that I = 197.1 m which is approximately 7.9%In revenue ChargesT = 28%In net DebtMV = 2490.8 mfrankincense we can calculate Kd by putting in the values asKd = 197.1 m(1-.28)/ 2490.8m X degree centigrade= (141.912/2490.8) X 100= 4.7Cost of EquityTo evaluate K e, 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 fare 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 Gearing Indicators for MSTo be doneCapital GearingCapital Gearing =4. INVESTMENT judgment TECHNIQUESAn investiture childbed is a series of cash inflows and outflows, typically beginning with cash outflows (the initial investment outlay) followed by cash inflows and/or c ash inflows in later periods.(Gotze, Northcott, Schuster, 2008)The financial manager needs to employ judgement techniques in order to decide which proposals 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 accepted must meet the financial criteria of the company, generally its a return great than the comprise of capital needed to finance it.4.1 outlet on investing (Accounting treasure of Return)This approach expresses the profit before tax arising from an investment as a percentage of the total outlay on the investment. When using the return on investment approach the project which gives the highest ARR is the one that should be accepted. Difficulties arise with the system when the continuance of the investment extends for more than one year, as it then becomes needful to determine some re dumbfoundative profit and investment value for the duration of the project. O ther problem is that profits are the results of receipts and outgoings and they do not represent cash transactions and the cash flow arising is not taken into account during the term of the investment.4.2 Return on Investment (ARR) colligate to MSAs per the annual reports of MS from year 2006 to 2009, MS has invested on property. The investment, wear and tear 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(prenominal) 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 equalize 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 payback the initial capital invested. When approach with a straight accept or reject decision it can provide a rule 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 grievous bodily harm investments (Lumby, 1988).This method simply measures the time period taken until the profits generated from the investment equal the initial equal 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 attem pt to consider reinvestment possibilities for inbound 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, be 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 Outflow 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 mNow 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 better 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 m ethod, all future cash flows related to investment project are discounted back to time 0. In order to establish the cash flows arising from a project into their present values, it is obligatory to establish the cash inflows and outflows arising from it, and what appeal 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 hail 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 Formula 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.