Investment Decisions at Dixions Retail Plc - Coursework Example

Investment Decisions at Dixions Retail Plc a) Investment decisions are made in order to ensure that the firm’s assets are utilized in most productive manner and that they provide the returns required by the shareholders. Dixions Retail Plc (firm) is one of the leading retail chains providing electronic products across different countries. Its investment activities and changes over the period of last few years indicate following picture: In Millions Year 2006 2007 2008 2009 2010 Total Non Current Assets 2025.7 1909.6 1814.2 1955.7 2042 Total Called up Share Capital 45.6 46.1 44.3 44.3 90.2 Total Non Current Borrowing 301.1 290.4 294.6 322.5 321.4 These figures indicate that the firm has been able to increase its investment activities only recently i.e. it’s called up capital and total non-current borrowing almost remained same during the period. A look at the cash flow statement of the firm suggests that the firm has recently invested into purchase of property plant and equipments besides purchasing the subsidiaries. This shows that the firm has engaged itself into acquisitions of new businesses in the recent past. What is also significant to note that firm’s total non current borrowing has increased suggesting that the overall risk profile of the firm may have increased in the recent past. This is also evident from the decline in the share prices of the firm wherein the firm’s share prices have declined owing to the low growth in sales as well as higher debt used in financing the overall capital structure of the firm. b) The above table also provides an indicating of the overall capital structure of the firm however, a further analysis would provide a further clarification on the overall capital structure of the firm and how it has changed over the period of time. In Millions Year 2006 2007 2008 2009 2010 Total Equity 1423.7 1304.3 853.5 584.9 875.1 Total Debt 2695.9 1869.4 3003.3 3074 2840.7 Total Capita 4119.6 3173.7 3856.8 3658.9 3715.8 Equity as % of total capital 34.56% 41.10% 22.13% 15.99% 23.55% Debt as % of total capital 65.44% 58.90% 77.87% 84.01% 76.45% The above table indicates that the firm’s reliance on debt has increased during the recent past. Since 2008 to 2010, debt as percentage of total capital has increased however, this change may be due to the fact that firm’s profitability has not remained satisfactory during this period owing to economic crisis. Losses in 2009 was probably the main reason for the changes in the equation because as such firm has not invested heavily in the recent past and changes in its capital structure is mostly due to losses it incurred. c) Firm has no paid any dividends during 2009 and 2009 however, it continued to paid dividends from 2006 to 2008. 1 Lack of dividend payments may be attributed to the losses which firm has incurred during the recent past and its unsatisfactory performance. These policy areas are related with each other because if the firm is not able to pay dividends consistently it may not be able to raise the funding from capital markets and resultantly it has to look for other more expensive sources of debts to finance its expansion. In this situation, this has exactly happened as the firm is relying heavily on the debt and its internally generated equity to finance its future expansion and make new strategic investments in order to ensure that it can face the future challenges easily. Task-2 Year 3/5/2008 2/5/2009 1/5/2010 Market Price 0.6925 0.4125 0.331 No of Shares in Issue 1772.442 1772.442 3609.937 Dividends Paid 5.54 0 0 Market Value 1,227.42 731.13 1,194.89 Book value of shares 853.50 584.90 875.10 Market value added 373.92 146.23 319.79 Market book value Ratio 1.44 1.25 1.37 Return on Equity   9.80% 6.55% Task 3 a) The firm’s capital structure indicates that it is heavily reliant on the external debt therefore its overall riskiness may increase if the same patterns continue to exist. Though the firm’s market book value ratio has improved during 2010 however, it still requires consistency in its performance and further rationalize its capital structure in order to ensure that its overall debt profile is within the acceptable range. Higher debt levels though may provide tax and other advantages to the firm however, a consistently higher level of debt may ultimately increase the risk for the firm and the overall investment prospects may not remain good.(Atrill, 2009) b) Return on equity has declined during 2010 indicating the managers may not have been entirely successful in generating the value for the shareholders. Further, the firm has not paid any dividends during the recent past thus further dampening the spirit of the investors. In order to generate value, it is critical for the firm’s managers to ensure that they generate enough wealth for the existing shareholders which can serve as a signal for external shareholders to buy firm’s stocks and ultimately result into the increase in the share prices of the firm. c) The recent trends in the share prices indicate that the firm may have been falling victim of the current economic situation prevailing in the country. Since 2007, UK is going through recession and overall consumer spending has declined since than. This decline in the consumer spending therefore may have contributed towards the low sales growth as well as low growth in profitability of the firm. Apart from the low growth in both the sales and profitability, it seems that the firm has not been able to manage its debt properly. Higher debt levels may ultimately serve as a signal to the external investors that the firm may be finding it hard to raise external equity to fund its expansion. Apart from this, firm has not shown any kind of expansion in recent past and lack of the expansion may also have served as a strong signal for the shareholders. It is critical to note that making strategic investments provides external stimulus to the shareholders to start looking into the firm’s future prospects from a more positive outlook. References P. Atrill (2009) Financial Management for Decision Makers, FT/Prentice Hall, p89 Read More