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Capital Structure And Cost Of Capital For Morrisons Finance Essay

It is very essential in today’s modern day to upgrade and promote business in such a way that functioning can take place efficiently. This assignment is approximately the capital structure and price of capital for Morrisons PLC. As well in this project an analysis on easily was a project manager and had to design a new project for the company what all levels and things I’d have to do; are mentioned. This analysis is founded on facts taken from the company website and total annual report of 2009/10. Other details is collected from educational case studies, website and core textbooks upon this topic.

Introduction

According to www.wisegeek.com [1] “Corporate finance is a broad term that is utilized to collectively identify the various economical dealings undertaken by a company”. Basically we are able to say that corporate finance can be a division within a particular company that handles financial operations of the business i.e. raising finances for various projects, examination of various mergers and acquisitions etc. In the present world scenario, one of the lucrative sectors is retailing. Significant scale retailers have become very powerful, in some ways even more powerful as companies than companies. The British layman is normally highly dependent on these sellers like ASDA, Morrisons, Morrisons, Tesco etc in order to buy everyday use products and services. Even these retailers contain broadened their scope of activity and have diversified into more than just everyday goods. One expository essay such retailer is WM Morrison Supermarkets PLC also referred to as Morrisons.

Morrisons was a provider started at Bradford marketplace by William Morrison in the year 1899. Today it is referred to as the fourth major chain of supermarkets in the United Kingdom. With almost 124,000 employees working in 403 stores over the nation, Morrisons has an operating income of £671 million in 2010 2010. The various types of goods that Morrisons provides are as below:-

Groceries

Consumer products

Fuel and Oil

Pharmaceuticals

Alcohol and beverages

These are the major regions of business for Morrisons but aside from these also certain companies can be found at different spots which are store particular. Morrisons hasn’t yet create base outside the UK but in line with sociology research topics the company website as well as the annual reports, the business enterprise can be divided into 6 main regions, namely

Scotland with 51 stores

North UK with 72 stores

Midlands with 75 stores

South East incorporating Gibraltar at 63 stores

South Central with 62 stores

South West with 51 stores

To discuss on the size of its business relative to its industry we can consider the report prepared by Edward Garner, 2008 [3] as proven below (certain specific areas deleted as appropriate):-

TOTAL TILL ROLL

Great Britain Consumer Spend

Includes all expenditure through primary shop tills and excludes petrol & instore concession

12 Weeks to 12 August 2007

12 Weeks to 10 August 2008

change

£000s

% **

£000s

% **

%

Total Till Roll

26,615,239

27,621,890

3.8

Total Grocers

18,733,701

100.0%

20,076,033

100.0%

7.2

Total Multiples

17,402,359

92.9%

18,719,527

93.2%

7.6

Tesco

5,962,922

31.8%

6,351,531

31.6%

6.5

Asda

3,142,151

16.8%

3,410,431

17.0%

8.5

Morrisons’s

3,016,586

16.1%

3,175,543

15.8%

5.3

Sainsbury

2,042,026

10.9%

2,233,137

11.1%

9.4

Total Coops

815,208

4.4%

846,405

4.2%

3.8

Total Independents

516,134

2.8%

510,101

2.5%

-1.2

Total Symbols

183,349

1.0%

181,137

0.9%

-1.2

Other Independents

332,785

1.8%

328,964

1.6%

-1.1

** = Percentage Show of Total Grocers

According to this report we can clearly say that in comparison to different supermarkets, Morrisons is rated as #4 in this sector. The performance over the last few years could be summed in by the utilization of a table as proven below: – (all numbers are in million £)

Year

Turnover

Profit or damage before tax

Profit or reduction after tax

2009

14,528

655.0

460.0

2008

12,969

612.0

554.0

2007

12,462

369.0

247.6

2006

12,115

(312.9)

(250.3)

According to the figures shown in the desk above we are able to say that although 2006 was a hardcore and bad season for the company, its recovery process was efficient and prepared. Through 2007 the company improved methods in order to maximize profits. The complete tenure has shown an increase in turnover for the business but although the turnover in 2009 2009 was at its peak the company failed to achieve a higher profit which could possibly be due to a number of reasons which will be discussed in the task ahead.

Morissons nonetheless been facing problems in 2006 & 2007 they have been winning awards and getting high percentage of income with the production units of morissons as with special brewing, wines and bakery device. there is also been The Oracle Store of the year 2009,The Oracle Merchant Week Awards, March 2009

Morissons have been pioneering in the retail sector comprising The Individual Grocer Label awards, with silver and gold allocades among the sellers wining The Cloudy Apple Juice THE VERY BEST Toffee Popcorn offering wide selection of fresh farm goods to freshly prepared breads and confectioneries within the nested systems of morissons along with wide range of wine cellars and brewed beers and café outlets within

Financial structure

The financial structure of a company is known by the balance sheet of the business. In what areas adjustments are needed and in what ways are known through the total amount sheet of the company. For a person to investigate the balance sheet appropriately one must understand the essential concepts of the total amount sheet as a fiscal analyst. After going right through the financial report (equilibrium sheet along with the twelve-monthly report) for Morrisons, I have come to a spot where a conclusion could be made on the fiscal framework with relevance to turnover and working profits, capital expenditure, getting per show, tax payable, return to shareholders and dividend go over. All these factors will help to calculate the position of Morrisons. A short study can be done based on the return on resources to compare and contrast Morrisons with different retailers.

Turnover and operating earnings –

2008/09

2009/10

Changes

Turnover

£14528m

£15410m

6.07%

Operating profit

£671m

£907m

35.17%

Capital expenditure – the capital expenditure has heightened by £228m and now is £906m. This is because of the recent buying of the brand new co-operative and Somerfield retailers at a price of £223m and a refurbishment cost of £102m. Apart from this we can visit a fall in the previous made capital expenditure. This is a wholesome growth projector.

Earnings per share – the earnings per show has increased from 17.4pence per share to 22.8 pence per share. This is mainly due to the increase in underlying profits. There have been no other significant elements that would impact the earning per talk about.

Tax payable – the tax paid during the year is £209m. In comparison to the tax paid in the last year i.e. £104m there’s been a vast increase, this is mainly as a result of effective tax amount that was heightened and produced 30%.This represents 50% of the tax for the entire year ended 1 February 2009, and 50% of the expected tax for the year ended 31 January 2010, and repayments of previous years.

Return to shareholders – the final dividend paid during the time is 7.1pence which ultimately shows an increase of 2.1pence per share compared to last year. This makes the entire dividend paid during the 12 months 8.2 pence and the dividend cover 2.5 instances. The calculation is as shown below

Comparative study

According to a study by Biz/Ed [4] the next information could be gathered on the return to assets and income. As we

can plainly observe in the desk underneath, Morrison gets the highest return on resources in comparison to any other store of food and the profit margin is also comparative greater than any other retailer.

Company

Return on Assets

Profit margin

Marks and spencers

4.43%

3.91%

Morrisons

5.60%

3.61%

Morrison

12.93%

5.87%

Tesco

9.99%

5.72%

Working Average Price of Capital

“The average representing the expected go back on most of a company’s securities. Each source of capital, such as stocks, bonds, and additional debts, is assigned a necessary rate of return, and then these required rates of return are weighted in proportion to the share each way to obtain capital contributes to the company’s capital composition. The resulting rate is what the company would use as a minimum for analyzing a capital job or purchase.” According to www.investorwords.com [5] . The calculation for this is as displayed below. All data is usually sourced from the total annual report of 2009/10:-

Current share price = £277.50 (P1)

Previous year’s share cost = £237.75 (P0)

Dividend for previous time = 5.80 (D-1)

Dividend because of this year = 8.20 (D0)

Increase in dividends = 41.37%

The formula for calculating the cost of equity is really as follows:

Re = D1/P0 +G

Therefore cost of Collateral (Ke) = 10.6/326.25 + 41.37%

= 41.40%

Cost of debt (Kd) = Interest Paid/Normal debt

= 260/924

= 28.13%

Therefore,

WACC = Ke*(proportion of collateral) + Kd*(proportion of debts)

= 41.40*0.28 + 28.13*0.71

= 11.59+19.97%

= 31.56%

This shows that the average return that the business must pay for to its buyers is 31.56 %

Project analysis

If I were appointed as a project manager for the business, several roles would need to be fulfilled by me. For just about any new project to be successful the project manager is the key. The concentration and aim achievements depends very on the manager. The main functions for me in such a case regarding to Duncan Haughey [6] happen to be as follows:-

Planning and Defining Scope

Activity Planning and Sequencing

Resource Planning

Developing Schedules

Time Estimating

Cost Estimating

Developing a Budget

Managing Risks and Issues

Creating Charts and Schedules

Risk Analysis

Morrison’s is a big retail organization which operates and markets virtually all consumer goods. The latest expansion plan was also diverse into household household furniture. The job being evaluated is the introduction of Morrison’s in to the furniture segment. The aims of such a project is always to beat Morrisons which has already started out into this sector. The final aim of beating the various other retailers would nearly be fulfilled so.

Key determinants

Initial Investment – As a way to conclude the first speculation for mounting into the manufacturing segment a mindful research will be needed on part of Morrisons. This would occupy looking at a organization plan of a medium to large scale furniture producer. It will involve selecting of an actuary to choose several costs. The acknowledgement of accurate expenses necessary calls for hiring of engineers aswell. A detailed study into the accessible furniture industry will be the best source of identifying the principal investment.

Annual Revenue – The quantity of price to be incurred can be recognized with logical

accuracy, however, twelve-monthly revenues cannot. This is because of the fact that revenues

are based upon demand for the merchandise. Since Morrisons features been always selling

furniture its growth in the furniture creation will have reasonable revenue if the quality

is maintained. It can be seen from the intensity of sales of Morrisons’s own range

of item labeled ‘Morrisons’s Basics’.

Annual Operating Costs – The present level of functions of Morrisons is based upon buying and reselling. This indicates that there is a low level of operating cost. To make out the correct level of operating price an imminent into the economic statements of a household furniture business will be mandatory. Further transport costs should become assessed as Morrisons operates in numerous locations of UK. So as to reap the profit of economies of scale Morrisons will need to generate a central production facility. This will enhance the set cost and help decrease the operating costs.

Rates of Inflation – Costs of price rises straight affect sellers like Morrisons. Specific inflation of raw materials like hardwood will unfavorably affect the business directly. General inflation will also have an result as the price paid by buyers will reap lower value in the future. This has to be accounted for in the task assessment. The sources of inflation will maintain print data supplied by the government. These will include national financial approach and forecasts.

Rates of Taxation/ repayment and Relief – Costs of taxation are significant elements of capital budgeting because they affect the cash flow. The tax rates are definitely particular by the government. So are there no challenges identifying them. Other than taxes several allowances can be obtained when purchasing a fresh project. There are special release programs that promote buyers to invest rather than take dividends. Furthermore the preset equipment bought can be qualified to receive capital allowance which is a taxation relief.

Risk

When any project has to be adopted, an analysis on the risk involved needs to be done. Risk can be known as the probability of making a loss. If we desire to analyse this when it comes to money then, we can use the formulae:-

To manage the chance effectively I would perform the following steps:-

Identify threats – the chance can be of various types i.e. overshooting costs, interest fluctuations, careers taking too long etc.

Estimate risk – employing the formulae granted above, we are able to calculate how much risk for the proposed job.

Managing risk – you can take care of risk by either utilizing the present resources or by creating fresh assets.

Review – testing systems and plans can be used effectively to be sure of the progress to control risk.

Due to lack of data, the figures that are shown here are fictitious. The assumption that the project will function in the form of the merchandise life cycle.

Year

2011

2012

2013

2014

Sales Revenue

1500

2000

2350

2550

Variable cost

620

680

720

860

Contribution

880

1320

1630

1790

Fixed Costs

500

500

500

500

Net Cash Flow

380

820

1130

1290

Taxation 30%

114

246

339

387

After Tax Cash Flow

266

574

791

903

8% Discount Factor

0.926

0.857

0.794

0.735

Present Value

246.31

491.91

628.05

663.70

Assumptions –

Initial investment is £3000

Fixed cost is £500

Variable cost is at 40% of sales

Discount factor is 8%

Tax price is fixed at 30%

£

Sum of Present Values

2029.97

Written down Allowance

400.03

PV after 4 years

4000

Less: Initial Investment

3200

Net Present Value

3230

Quarterly report format

Following may be the table assumed for the year with four quarters considering the assumed forecast for the year 2011

Year

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Budget

Actual

Budget

Actual

Budget

Actual

Budget

Actual

Sales Revenue

Variable cost

Contribution

Fixed Costs

Profit

The per quarter report starting for the earliest month of year for a quarter will be as follows

Quarter 1

January

February

March

Budget

Actual

Budget

Actual

Budget

Actual

Sales Revenue

Variable cost

Contribution

Fixed Costs

Profit

The above comparative affirmation is for all 4 quarters of the economical year. Each one fourth is split into Budgeted and Actual. The record I would be mailing to the directors if I were a manager the report will be in this format because it can be easily comprehended by the directors. If there is a difference between the budget and you see, the amount in the assertion then, this could be for a number of reasons such as interpretation of budgets. If the difference is large i quickly would have to try to re-modify the budget for another quarter and try and improve actual figures by all ways feasible.

References

The role of a project manager; Duncan Haughey; 2009

“a snapshot of the united kingdom grocery market”(2008); Edward Garner; TNS World-Panel

http://www.wisegeek.com/what-is-corporate-finance.htm

http://www.morrisons.co.uk/Corporate/About-Morrisons/Company-history1/

http://www.bized.co.uk/compfact/ratios/ror12.htm

http://www.investorwords.com/5849/WACC.html

English
United States

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