The Closing Stock Market Price of Caffe Nero - Research Paper Example

 Caffe Nero is a coffee restaurant business that started in London. It has presently expanded to North America. It is the number one coffee brand in London. It is one of the top three coffee brands in North America. Starbucks is the number one brand in the United States. Its operations are funded from sources such as long term debts that have been acquired from many financial institutions. Another source of funds for Caffe Nero is cash generated from issuance of stocks that are offered in the stock exchange of London. Caffe Nero is one of the three biggest coffee shops in England and North America. It has expanded operations(Helfert E, 1997) to North America. The company has acquired various sources of funds thru issuance of stocks and borrowings of long term loans. The handling of its financial resources are clearly explained in the succeeding sections. Question 1 What sources of finance has the company used during this reporting period? The company, Caffe Nero generated funds(Brighan & Houston, 2001) for use in its daily operating expenses & expansion(Harvard Business School, 1999) programs from cash inflows of operating activities worth 15,253,000 pounds for 2005 and 7,467,000 pounds for 2004. Cash came from returns on investments(Harvard Business School, 1999) & servicing of finance interest income of 108,000 pounds for 2005 &101,000 pounds for 2004. Cash(Harvard Business School, 1999) came from issuance of stocks worth 408,000 pounds for 2005 and 133,000 pounds for 2004. Other sources long term loans (Harvard Business School, 1998) of 3,000,000 pounds for 2005 and 2,000 pounds for 2004. b) Discuss how a stock market listing has enhanced the financial resources options of the company. When the stocks of companies are offered in the stock exchanges, like in this case of Caffe Nero, people will be encouraged to invest or sell stocks(Harvard Business School, 1998) there. The potential investors of Caffe Nero will refer to the financial statements in deciding to invest in Caffe Nero. The financial statements(Harvard Business School, 1998) is a big factor that will be entice prospective investors to invest in Caffe Nero because of its 2005 net income of 1,719,000 pounds and 2004 net income is 1,684,000. Bankruptcy news can bring down the company’s stock price. News of a merger or acquisition by one big company of another big or small company will generate another round of huge investments in the new company. The prospective investors can artificially cause the stock market price of Caffe Nero to go up. The stock market price for a single stock of Caffe Nero has increased because many investors want to put their money in the income generating Caffe Nero. The closing price of Caffe Nero stock is very high due to its aggressive marketing strategy. According to Allegra Strategies, the United Kingdom coffee industry will rise by more than 10% annually for the next few years. c) Is a stock market listing in the interest of shareholder? Discuss with examples drawn from your chosen company. Stock market listing of the stocks of Caffe Nero and other companies will generate funds for their business. The stock market price is based on the basic economic principle of supply and demand principle. But if there are more people offering to dispose of their stock market shares in a company, like the Caffe Nero located in picturesque England than there are buyers, then the tendency is for the stock market price to go down. In the case of Caffe Nero, the market price just remained the same for the past years. d) Discuss what factors should be taken into account when deciding the mix of debt and equity finance. One of the factors that will be taken when choosing between debt or equity financing is whether the company wants creditors or stockholders. When debt is incurred through long term debts the company pays interest. And interest is paid regardless of whether the company earns money or not. Whereas, if the company offers shares of stocks, the new investors will earn income through distributed dividends. Dividends are only issued if there is income during the accounting period. If the annual accounting period generates a loss, then the investors will not receiving anything. The advantage in bringing in stockholders is that they are part owners of the company and they can participate by voting in some major decision making plans of the company. In long term debt situations, the creditor will not be a part owner of the company. Therefore the creditors do not participate in the Caffe Nero’s decision making process if the company chooses the debt method of sourcing funds. If we look deeper into the issue, it is better to enter into a debt relationship, such as applying for long term loans from banking and other financial institutions, if we do not want to increase the number of stockholders. The stock or equity method of fund sourcing is a better alternative if the company is expected to generate a loss for the first few years of operations because dividends will not be issued. But if the investors feel that they are sure the coming years will produce profits, then the debt method is better. The creditor banks prefer to use the debt to equity ratio in determining whether to approve long term loans. Too much debt will tell the creditors that the owners of the business have no serious interest in the company since the funds that are used for the daily operations of the business are taken from borrowed money. On the other hand if the funds of the business are all taken sourced from issuance of shares of stocks, then the creditors may think that they are not maximizing their full business potential. Therefore the best debt to stockholders equity ratio method is that the stockholders’ equity investments must be equal to or even twice the amount of outstanding long term debt. The creditors prefer this one is to one ratio(Thompson & Strickland, 1999) or one is to two ratio is because the creditors will be assured that when the time comes for the payment of the debt. Question 2 a) Describe why cash is of importance to a company. Cash is very important to the company because they have to pay costs and expenses with cash. Although some suppliers and creditor companies allow credit lines, when payment is not made when the payment arrives, all future credit terms, most likely, will be stopped. Companies, in some instances, will have to give a collateral as guarantee for the long term loans. In case the business will not be able to pay the loan, then the guarantee collateral will be the replacement payment. Companies must concentrate their business efforts to make sure that when the time comes to pay the bills, there will be enough collections and loan amounts to pay these bills. b) Has the company you are investigating described its motive for cash management policy? The motive for its cash management is that it has borrowed money from many sources such as cash inflows from operating activities worth 15,253,000 pounds for the year 2005 and 7,467,000 pounds for the year 2004. Another cash inflow came from returns on investments and servicing of finance interest income received totaling 108,000 pounds for the year 2005 and 101,000 pounds for the year 2004. Still another source of cash came from issuance of the ordinary shares(Collins & Devanna,1992) of the capital stocks of the company worth 408,000 pounds for the year 2005 and only 133,000 pounds for the prior year 2004. Additional money(Samuelson, P. 1973) was taken from agreeing to long term loans with a total of 3,000,000 pounds for the year 2005 and 2,000 pounds for the year 2004. The money inflows above are used to defray the daily operating expenses of the many branches of the London and North America based Caffe Nero. Question 3 Treasury management and working capital policy a) Explain the treasury management and working capital policy for your company Caffe Nero generates funds as explained in sources of funds in no. 1 above for the payment of daily operating expenses of the business. Funds are generated from both long term debts and issuance of stock certificates in the London Stock Exchange. Long term loans are acquired to pay some of the prior approved loans that are already due for payment. Evaluate the advantages and disadvantages of the various means of long term finance available to the company. Caffe Nero acquired a US$600 million guaranteed notes due 2008 and another loan Worth US $ 1,100 million 5.5% guaranteed Notes due 2013. $ 294 million. The advantages of borrowing that now they can continue with the expansion to other new territories. The long term financing will be used to maintain the operations of their different branches. This will increase the income of the Caffe Nero. The disadvantage is that a loan will always be payable whether there is a loss or income. The payment includes the principal amount paid plus the interest expense for borrowing such huge funds. Another advantage of stocks being listed in the stock enable that the implementation of expansion plans to other new uncharted territories approved. b) Explain how the company has reduced its exposure to risk. Give details , (supported with financial data from the accounts) Marketing risk occurs when there is possibility the business will generates a loss. They will not be able to pay the monthly loans due. This will result non paying the long term loans. Marketing risk can be reduced by producing high quality products. High quality products will translate to increases in sales. These sales increases will help in reducing the risk of non payment of long term loans. Insurance acquired will reduce risk of loss of property due to fire, floods and others. As shown in the cash flow statement of Caffe Nero, the company gave shares of stocks worth 408,000pounds for 2005 and 133,000 pounds for 2004. Caffe Nero also borrowed long term loans worth 3,000,000 pounds for the year 2005 and 2,000,000 pounds for the year 2004. It paid long term loans totaling 500,000 pounds for 2005. It also paid the cost of long term loans for 2005 worth 54,000 pounds and for the year 2004 the company paid loan costs of 20,000 pounds. The company reduced its exposure to risk by borrowing money from several money lending institutions. Caffe Nero borrows money from one credit institution to pay the debts that are current and due from another long term loan institution. Question 5 FTSE listing and share price mapping The closing stock market price of Caffe Nero on Jan 10, 2006 is 250 pounds. For the fifty two week period it has reached the peak of 257 pounds and hit its lowest at 122 pounds. As of Jan 10, 2006, the trend line shows that the projected closing price of Caffe Nero will increase in the coming month unless there are contrary news items that will change the minds of the present stockholders and prospective investors(Murray, D.,Neumann, B. and Elgers, P, 1997) . BIBLIOGRAPHY: Helfert E, (1997), Financial Analysis, London, R Irwin Press Brigham & Houston, (2001) Financial Management, Harcourt Press, Collins & Devanna, (1992) The Portable MBA, P 123,John Wiley & Sons, Thompson & Strickland, (1999) Strategic Management, McGraw-Hill (11th Ed.) Harvard Business School, (1999), Harvard Business Review on Corporate Strategy, Harvard Press Harvard Business School (1999), Harvard Business Review on Managing Uncertainty, Harvard Press Harvard Business School (1998), Harvard Business Review on Corporate Strategies for For Growth, Harvard Press Choi, F., (1991), Handbook of International Accounting, J.Wiley & Sons, (1st Edition) Samuelson, P. Economics,(1973) McGraw-Hill,(9th Edition) Harvard Business School, (1998), Harvard Business Review on Corporate Performance, Harvard Press Murray, D.,Neumann, B. and Elgers, P, (1997),Using Financial Accounting,(1st Edition) Read More