Finance Management for Business - Kingfisher Plc - Assignment Example

? Financial Management for Businesses Contents Part A: Funding 3 a)Corporate Finance 3 b)Difference between corporate finance and corporate funding requirements 3 c)Debt and Equity Financing 3 Part B 5 a)Methods of corporate funding 5 b)Movement of share prices 6 c)Valuation 7 d)Raising additional capital 8 Part C 8 Efficient market 8 Reference List 10 Appendix: Share price movements of Kingfisher Plc 11 Part A: Funding a) Corporate Finance Corporate finance involves the financial activities related to the running of any corporation (Besley and Brigham, 2008). Corporate finance is a division which looks after the financial activities of an organisation. It is determined for maximising the shareholder’s value by means of short term or long term financial planning followed by the implementation of effective strategies. All financial activities, starting from the capital investment decision making to the investment banking, come under the category of corporate finance (Ehrhardt, 2013). Among all these domains, one of the most important departments of corporate finance is related to the capital investment decisions. It deals with various factors such as, whether a proposed investment should be carried out or not, the proportion of equity and debt investment involved in the investment pattern, whether the shareholders should be provided dividends on the investment made and various other decision making purposes (Megginson and Smart, 2008). The short term issues handled in this domain includes the management of current liabilities and current assets, investments, inventory control and other short term financial factors. The long-term issues deal with new capital investments and capital purchases. Investment analysis is one of the important parts in corporate finance. The role played by a corporate financier is to evaluate the financial needs of an organisation for raising the capital best suitable for the required needs. b) Difference between corporate finance and corporate funding requirements Corporate funding requirements are the necessities for which funding is required by a corporation. On the other hand, corporate finance is the department which deals with the financing of such requirements. Corporate finance deals with the requirements and management of such funding (Gallagher and Andrew, 1968). As already stated above, the function of the corporate financier is to evaluate the financial needs of the organisation that is required for raising the most appropriate capital funding pattern to finance such needs. c) Debt and Equity Financing The debt and equity financing strategies are two entirely different types of financing strategies. The debt financing indicates that the owner of the business has borrowed more money from the external sources for financing the operational activities. On the other hand, equity financing implies the funding by the business owner from the internal sources by means of issuing equity shares (Wyatt, 2009). Debt financing Benefits and drawbacks from the perspective of the borrower One of the benefits of debt financing from the perspective of the borrower is that when he/she borrows from external sources, he/she is not liable to share a part of the business’ ownership with the investor. This is one of the biggest advantages of sourcing finance externally. The drawback of this mode of financing is that the borrower is liable to pay an additional amount of interest along with the principal amount while returning the amount of debt to the investor. Benefits and drawbacks from the perspective of the investor The investor has the facility of earning an additional interest from the borrower by means of making such an investment. Therefore, gaining an additional amount at fixed intervals along with the principal amount is advantageous for the investor. Equity Financing Benefits and Drawbacks from the perspectives of the borrower Generally, the business owners finance their operational activities initially by issuing equity shares in the market instead of borrowing huge loans from external sources. This would enable the borrower to reduce the risk associated with repayment of the loan amount and an additional interest. No loan repayment indicates higher amount of cash in hand. Moreover, if there is no profit left with the company, then it is not obligated towards repayment of the equity contributions. This is one of the biggest advantages of equity financing for the borrower. However, there are drawbacks of acceptance of equity funding as well. The owner looses sole authority over the business. The investors who are investing on the equity shares receive a certain portion of the company’s ownership in various decision making purposes. Benefits and Drawbacks from the perspective of the investors The most advantageous part of equity financing from the perspective of the investor is that it receives the ownership of the organisation to a certain extent and is permitted to take part in various decision making activities for the organisation. This type of investment provides maximum return to the investors. Investment in equity shares is very risky or volatile. The drawback associated with investment in equity shares, from the perspective of the investors, is that if there is no profit earnings made by the company, then it is not obligated towards repaying the contributed amount to the investors, which results in huge losses for them. Part B a) Methods of corporate funding The company that has been selected in this part of the project is Kingfisher Plc. The mode of financing in Kingfisher Plc includes a combination of both debt and equity financing. The debt financing includes long term debt, capital leases, accrued liabilities and various other long term liabilities. Another portion of financing includes equity financing where the fund is raised by means of shareholder’s equity. The data in appendix 1 shows that the debt financing of the company had reduced gradually when the data from 2009 to 2013 were analysed. Thus, it can be inferred that the company is reducing its reliance on external source of financing. It is increasing its dependence on the internal source of financing. This also reflects that the company has reduced the risk involvement in funding the operational activities which is highly impressive. The equity financing has helped the organisation in funding its expansion planning. On the other hand, the debt financing has helped it in its further growth strategies when the fund could not be raised till that extent by means of equity share issuance. The investors would be more interested to invest in equity shares as it provides maximum return on the investment. Thus, equity financing has been increased by Kingfisher Plc, whereas the debt financing has been reduced. The debt to equity ratio helps in determining the pattern of funding the business operations and the extent of risk involvement in making such investments. The table below shows the debt to equity ratios of Kingfisher Plc for consecutive five years in order to analyse the trend of the performance from the perspective of risk involvement in the investment activities. Computation of Debt to Equity Ratio 2009 2010 2011 2012 2013 Debt 2369 1461 1018 856 871 Equity 4798 4955 5460 5727 6156 Debt to Equity Ratio 0.494 0.295 0.186 0.149 0.141 The aforementioned graph also depicts how the company has gradually reduced its dependence on the external sources of financing from 2009 to 2013 (Bhattacharyya, 2011; Brigham, 2013). It also depicts that the company is generating good revenue to finance the maximum portion of the business operational activities by means of equity financing. b) Movement of share prices (Source: Bloomberg, 2013) The share price of one single share from a large number of saleable stocks of the company helps in determining its value. It is always assumed that with greater cash flow, greater is the share price of the organisation (Krushwitz and Loeffler, 2006). The share prices of Kingfisher Plc have been shown in appendix 2. The aforementioned chart shows that the share price had a rise in August and in between September to October. It has again declined gradually and the present share price of the company (as on 31st October 2013) is 377.50. c) Valuation The two types of valuation method are Net asset value method and Price earning multiple methods. Both the methods help in finding the value of the organisation. Net asset value method helps in determining the value of a company’s assets minus the value of company’s liabilities. The formula used for computation of net asset value is given below: =Total Assets – Total Liabilities Computation of valuation using Net asset value method 2013 Total Assets 9897 Total Liabilities 3741 Net asset value 6156 The net asset value method helps in valuing an organisation by means of deducting the total liabilities value from the asset figure. It is equivalent to the equity value or the book value of the organisation. Another method of valuation of the company is price to earnings multiple. The price to earnings helps in determining the fundamental value of the organisation as compared to the market value. The price to earnings multiple valuation method uses the following formula: = Share market price/ Earnings per share = 362.70/ 0.31 Calculation of Price earnings multiple 2013 Market share price 362.7 EPS 0.31 P/E multiple 1170 The price to earnings ratio provides a comparison between the present share prices of an organisation to the earning per share available to the shareholders (Siddiqui, 2006). This method of valuation provides a guideline to the investors about the company’s performance in the future and its effect on their investment. As the price-earnings multiple of Kingfisher Plc is very high, it is expected that the investors would receive high return on their investment in the near future. Thus, this ratio is highly important for providing a guideline to the investors related to their investments. d) Raising additional capital The non-current asset value is needed to be raised by 10 percent. There are two given options: raising the amount by means of debt financing or issuing right shares to the existing shareholders (McAllister, 2009). In case of issuance of right shares to the existing investors, the investors would be provided with the shares at a discount, so that a large number of investors are interested in making such an investment. On the other hand, debt financing would result in borrowing of the entire amount from external sources. However, both the strategies will have different effect on the income statement and the balance sheet of the company. If the right shares are issued at ?10 per share for 100000 shares in order to raise a fund of ?1000000, then it would increase the shareholder’s equity by ?1000000 and purchase of new non-current assets would balance the asset side by the same figure. On the other hand, debt financing of ?1000000 would increase the long term debt by such amount on the liability side. It would be balanced by the purchase of non-current assets of same amount appearing on the asset side, but would add an additional amount of interest expenditure in the income statement of the company, which would reduce the profit to some extent. After an in-depth analysis, it can be inferred that issuance of right shares is more beneficial for Kingfisher Plc. Part C Efficient market The market where all the required information would be available to every participant at the same time and the prices would respond almost immediately to all the available information is known as the efficient market (Geltner, et al., 2013). Generally, stock markets are considered to be the most appropriate example of efficient market. In today’s world, there is no existence of riskless assets in the financial markets. It is due to this reason that it is very important to forecast whether a market is efficient or not. The efficiency associated with the market portfolio is obtained only when strong assumptions are held. These assumptions serve the purpose of making the actual world much simpler. The investors are expected to have their mean variance preferences and they seek for utilising the utility functions. It is also expected that there is no operational friction; there is no constraint on the borrowing or sales; all the assets could be traded and finally, that the investors believe in homogeneous factors. As long these assumptions would be held, the investors determine the market portfolio to be the risky part in their investment, where the optimal amount of investment is determined to be held by the investors. Reference List Besley, S. and Brigham, E. F., 2008. Principles of finance. Connecticut: Cengage Learning. Bhattacharyya, D., 2011. Management accounting. New Delhi: Pearson Education India. Bloomberg, 2013. Kingfisher Plc. [online] Available at: < http://www.bloomberg.com/quote/KGF:LN/chart> [Accessed 12 December 2013]. Brigham, E. F., 2013. Financial management: theory & practice. Connecticut: Cengage Learning. Ehrhardt, M. C., 2013. Corporate finance: A focused approach. Connecticut: Cengage Learning. Gallagher, J. T. and Andrew, J. D., 1968. Financial management; principles and practice. New York: Freeload Press, Inc. Geltner, Miller, Clayton and Eichholtz, 2013. Commercial real estate analysis and investments. Connecticut: Cengage South-Western. Krushwitz, L. and Loeffler, A., 2006. Discounted cash flow: A theory of the valuation of firms. New Jersey: John Wiley & Sons. McAllister, E.W., 2009. Pipeline rules of thumb handbook: A manual of quick, accurate solutions to everyday pipeline engineering problems. Oxford: Gulf Professional Publishing. Megginson, W. L. and Smart, S. B., 2008. Introduction to corporate finance. Connecticut: Cengage Learning. Siddiqui, S. A., 2006. Managerial economics and financial analysis. New Delhi: New Age International. Wyatt, I., 2009. The small-cap investor: Secrets to winning big with small-cap stocks. New Jersey: John Wiley & Sons. Appendix: Share price movements of Kingfisher Plc Date Open High Low Close 31-Oct-13 381.3 381.6 376.3 377.5 30-Oct-13 376.7 383.6 376.06 380.6 29-Oct-13 373.1 376.8 366.6 375.1 28-Oct-13 371.9 373.3 365.13 371.3 25-Oct-13 367.8 370.1 364.3 370.1 24-Oct-13 375.3 377.8 366.8 367.9 23-Oct-13 374.3 377.6 371.4 373 22-Oct-13 377.2 377.4 371.4 373.8 21-Oct-13 380.3 383.2 375.3 377.5 18-Oct-13 382.4 385.7 381.6 385.2 17-Oct-13 378.4 379.7 373.6 379.4 16-Oct-13 377.4 380.3 374.4 379.6 15-Oct-13 375.6 379.6 375.3 379 14-Oct-13 369.5 375.3 369.2 373.8 11-Oct-13 373.3 373.3 369.2 370.2 10-Oct-13 365.9 370.5 363.5 370.5 9-Oct-13 357.7 368.6 357.7 364.8 9-Oct-13 3.12 Dividend       8-Oct-13 367.3 367.4 358.8 361.2 7-Oct-13 367 369.3 359.3 368 4-Oct-13 376.4 378.3 368.7 369 3-Oct-13 375.8 380.7 375.8 380 2-Oct-13 388 390.1 374.9 376.9 1-Oct-13 390.1 392.1 384.5 389.5 30-Sep-13 384 388.7 383.3 385.9 27-Sep-13 391.8 392.5 385.5 387.5 26-Sep-13 393.4 395.2 390.1 390.4 25-Sep-13 395.3 395.5 391.4 391.8 24-Sep-13 391.7 399.8 390.3 395.5 23-Sep-13 402.2 402.2 391.4 392.1 20-Sep-13 400.9 401.4 397.8 398.7 19-Sep-13 404.4 406.3 399.7 400 18-Sep-13 403.6 403.6 398.5 400.4 17-Sep-13 404.3 406.9 397.2 402.3 16-Sep-13 402.7 406.5 402.3 405.6 13-Sep-13 397.3 405.9 397 400 12-Sep-13 413.1 413.1 399.6 405 11-Sep-13 415 417.7 405 408.5 10-Sep-13 416.2 421.6 413.3 420 9-Sep-13 407.1 413.8 405.4 413.2 6-Sep-13 398 406.4 397 406.4 5-Sep-13 396.5 405.8 395.2 405.8 4-Sep-13 396.4 396.9 393.6 394.5 3-Sep-13 395.6 396.6 391.3 396 2-Sep-13 388.3 395.5 388.2 395.2 30-Aug-13 389.5 390.5 384.7 385 29-Aug-13 387.6 389.6 384.42 388.2 28-Aug-13 386.1 387.9 384.9 387.2 27-Aug-13 393.3 393.5 387.8 387.8 26-Aug-13 393.4 393.4 393.4 393.4 23-Aug-13 389.2 395.7 388.2 393.4 22-Aug-13 384.9 391.2 384.9 387.4 21-Aug-13 387.2 390.6 384.8 385.1 20-Aug-13 385.3 386.3 378.9 385.8 19-Aug-13 386.7 389.9 385.7 388.7 16-Aug-13 382.8 386 382.8 385.8 15-Aug-13 393.1 394 380 382.6 14-Aug-13 394.1 396.3 391 394.3 13-Aug-13 386.6 393 384.5 393 12-Aug-13 389.9 390 383.3 386.7 9-Aug-13 390.3 391.76 387.2 388.8 8-Aug-13 392 392.1 387.7 390.5 7-Aug-13 397.9 402 390.3 390.7 6-Aug-13 404.2 405.9 395.3 397.9 5-Aug-13 404.6 406.2 401.4 403.3 2-Aug-13 405 405.1 403.05 404.3 1-Aug-13 399.6 404.9 396.5 404.9 31-Jul-13 391.2 399.5 389.9 397.5 30-Jul-13 388.2 392.8 386.6 391 29-Jul-13 388 390.7 385.2 387.2 26-Jul-13 394.1 394.5 386.1 386.7 25-Jul-13 395.9 398 389.9 392 24-Jul-13 383.7 401.1 381.9 396.6 23-Jul-13 392.4 393.5 383.9 384.8 22-Jul-13 393.9 396.4 389 389.1 19-Jul-13 393.8 397.2 390.2 391.9 18-Jul-13 384.2 394.6 382.3 392.9 17-Jul-13 388.1 389.1 380.8 385.8 16-Jul-13 382.3 391.9 382.3 383.7 15-Jul-13 380.1 381.6 376.6 379 12-Jul-13 380.2 382.2 376 378.5 11-Jul-13 377.6 379.9 372.4 377.7 10-Jul-13 375.4 377.7 368.2 373.6 9-Jul-13 375.9 381.1 372.6 375.4 8-Jul-13 370.2 378.8 368.91 372.5 5-Jul-13 367.8 372.5 362.6 366.8 4-Jul-13 357.9 369.3 356.2 368.6 3-Jul-13 349.7 355.2 348.2 355 2-Jul-13 352.8 354.1 345.6 352.6 1-Jul-13 346.8 353.3 346.7 351.7 28-Jun-13 342.8 346.5 342.2 343 27-Jun-13 341.8 345.3 341.1 344 26-Jun-13 337.5 343.4 336.5 342.1 25-Jun-13 334.4 340.7 332.3 336.5 24-Jun-13 331.4 334.6 330.4 332.5 21-Jun-13 338.9 342.1 332.5 332.5 20-Jun-13 344.2 348 335.9 337.3 19-Jun-13 358.1 358.1 348.1 348.6 18-Jun-13 352.7 355.1 349.6 355.1 17-Jun-13 352.5 355 350.2 353.7 14-Jun-13 344.7 352.7 342.4 352.1 13-Jun-13 338.7 343.7 333.79 342.8 12-Jun-13 346.3 347.1 341.9 342.1 11-Jun-13 352.2 353.7 341.2 345.1 10-Jun-13 347 355.2 346.5 352.9 7-Jun-13 337.8 348.1 336.5 346.7 6-Jun-13 346.3 346.7 336.7 336.8 5-Jun-13 349.9 350.3 344.6 345.8 4-Jun-13 350 354.5 348.4 351.3 3-Jun-13 346 354.2 343.1 348.2 31-May-13 347.8 348.2 341.6 345.6 30-May-13 315 349.7 313 349.7 29-May-13 328 329.3 325.1 327.8 28-May-13 328.3 333.3 327.8 330 27-May-13 327 327 327 327 24-May-13 328.5 330.8 324.9 327 23-May-13 328.8 329.4 324.9 327.4 22-May-13 332.8 336.4 330.3 335.5 21-May-13 329.3 333.2 328.8 333.2 20-May-13 330.4 332.7 329.3 330.5 17-May-13 328.5 330.7 327 330.6 16-May-13 326.4 329.9 323.7 329.1 15-May-13 325.5 327.6 324.1 326.7 14-May-13 331.4 331.5 322.8 325.5 13-May-13 329.5 331.2 327.9 330.6 10-May-13 321.8 329.5 319.8 329.5 9-May-13 320 320.8 317.4 320.8 8-May-13 319.4 322.2 319.4 321.3 8-May-13 6.37 Dividend       7-May-13 339.5 339.5 322.7 324.6 6-May-13 329.7 329.7 329.7 329.7 3-May-13 322.7 330.63 319.8 329.7 Read More