Standard Life Plc - Sources of Finance Used, Capital Structure, Dividend Policy, Debt, and Equity - Assignment Example

Standard Life plc Report Customer Inserts His/her Name Customer Inserts Name of Tutor Customer Inserts Grade/Course (May26, 2016) Introduction: Standard Life PLC Standard Life PLC is a UK based company headquartered in Edinburgh. The company was established in the year 1825 as a life assurance company that came to be reincorporated in 1925 as a mutual assurance company. Being in the insurance industry, the company has operations around the globe. Operating in more than fifty countries of the world Standard Life PLC has a shareholding of close to 1.2million shareholders. Its customer base hit 4.5 million clients, while 25millon of its clients are connected through joint ventures in India and China. Today, the company is bigger than it was a century ago. For instance, it grew to the point of diversifying to banking and opened the Standard Life Bank PLC which was however sold to Barclays in 2010. It also opened a healthcare division since it dealt with life assurance. In nutshell, the company has grown to have mergers, acquisitions and joint ventures in addition to having stakes in different companies. In terms of its listing, Standard Life PLC was first floated in the London Stock Exchange in 2006. “In February 2015, Standard Life announced it was launching a wholly owned, UK-wide, financial advice business saying it was “responding to fundamental changes that were driving unprecedented demand for advice from customers” (). The company has been doing well from the outlook given its increase in pre-tax profits by 19% in2014 financial year. This paper is therefore an in-depth financial analysis of Standard Life PLC which will entail a broad spectrum of financial analysis tools from ratios, WACC and capital financing among others. Analysis of the sources of finance used As per the financial statements of Standard Life PLC for the last five years, two key sources of finance can be established. These are equity and debt standing at 5,898.60 million and 114.2 million respectively in the 2015 financial year. The company is listed in the London stock Exchange and thus has shareholdings by issue of ordinary shares to the public. The shareholding has been 4,950 million in the year 2014, later decreased to 4,349 million in 2015. From the aforementioned figures it is evident that shareholders could have sold out their shares or a decrease in the share market price. The share price is depicted to decrease from 3.37 to 2.84 in 2014 and 2015 respectively. The company’s short-term debt increased from 33million in 2014 to 49million in 2015. Long-term debt on the other hand was 11million in 2014 and none in 2015. From this, it can be concluded that Standard Life PLC could have replaced the long-term debt with the short-term one given the changes in figures. This is recommendable since the interest on long-term debt is normally higher than that of short-term debt hence savings for the company. On the other hand, while long-term debt gives the management adequate time to settle, short-term debts are demanding and could make the company make unworthy quick decisions. Evaluation of the capital structure The capital structure concerns the portion of the internal and external source of funds and is measured using the debt to equity ratio. Each and every company that minds about the welfare of their shareholders has to find ways of maximizing their wealth. A common way in which they maximize shareholders wealth is through the capital structure. Despite the fact that there may be an optimal capital structure a company loses its value on taking more debts unlike if it decides to take on risks. Therefore among the ways of maximizing shareholders wealth is through the adoption of the dividend policy, issuance of bonds and funding projects that have a positive Net Present Value such that the shareholders indirectly benefit through the capital gains achieved from the high value of shares. As for the case of Standard Life PLC, its financial statements depict various capital sources thus a structure containing both equity and debt as mentioned earlier. There is equity held within and outside life assurance funds which as at the year 2015 totaled to 4,002 million forming the equity attributable to ordinary shareholders of the company. Other sources of capital for Standard Life PLC include external and internal subordinated liabilities. Examination of the dividend policy undertaken According to the 2015 financial statements of Standard Life plc, the company undertook to pay both interim and final dividends. In October 2015,the company paid a 6.02p per ordinary share. The final dividend is pegged at 12.34p per each of the ordinary share held by the shareholders. Thus, the total dividend for the 2015 financial year was 18.36p per share compared to the 2014 financial year 17.03p. Analysis of how Standard Life PLC funds its day to day operations Day to day operations are funded by working capital. Working capital essentially means the amount of capital that is available in the business enterprise to cater for the short-term operations such as debtors, inventories, salaries just to mention but a few. From the balance sheet of Standard Life PLC the working capital depicts that the company is able to pay its current liabilities without any difficulty. The working capital of a company could be sourced from short-term sources such as; interests earned and account receivables or long-term sources such as capital gains and loans. However in all these, the operating cycle and the cash-conversion cycle should be up to date. The management of Standard Life PLC should properly manage the working capital to avoid the organisation having insufficient or excessive working capital. If it is in excess, it means that the organisation has idle funds that are not generating profits. On the other hand, if it is insufficient, the organisation will not be able to cater for its short-term liabilities. The management can do this by regulating the amount of cash within the organization such that they have limited debtors as well as creditors. This can be achieved by making sure that they only purchase the stock that is to be used immediately and by also avoiding purchasing on credit. They could also make sure other current liabilities are minimal to avoid the company spending a lot by settling them. They could also ensure that the capital gains and interests earned are used efficiently to avoid accumulation of funds in the company. In a nut shell, the mangers should regulate the circulations of funds in the short-run appropriately. Seminar 8 Questions 1. How much debt (Non-Current liabilities - borrowings) does your company have? Look at the last 2 years. From the consolidated statement of financial position of Standard Life PLC, the company had non-current liabilities of £146,971 million and £148,895millon in 2014 and 2015 financial years respectively. 2. How much does Equity (Ordinary shares, reserves etc.) does your company have? Look at the last 2 years. Total equity was £4,950 million in 2014 and £4,349 million in 2015 financial year. 3. Has your company issued preference shares? If so how much? No 4. What is the capital structure of your company and have there been any changes in the last 2 years? The capital structure of Standard Life PLC comprises of equity and debt. The company’s short-term debt increased from $33million in 2014 to $49million in 2015. Long-term debt on the other hand was $ 11million in 2014 and none in 2015. Furthermore, the company loan size increased from £400 million to £811 million. 5. Choose a FTSE250 company, in the same industry as your original company, and repeat the first 4 questions. a. To do this, look at the industry your company is in. b. Type ‘FTSE250 companies’ into google. c. Click on the londonstockexchange.com result. d. Choose FTSE250 and the industry your company is in. e. Choose any one of the results. My FTSE250 Company is JRP Group plc. i. Debt (Non-Current liabilities - borrowings) of JRP Group plc From the consolidated statement of financial position of JRP Group PLC, the company had non-current liabilities of £6,681 million and £7,668.6millon in 2014 and 2015 financial years respectively ii. Equity (Ordinary shares, reserves etc.) of JRP Group plc Total equity was £852.8 million in 2014 and £814 million in 2015 financial year. iii. Has your JRP Group plc issued preference shares? If so how much? No iv. What is the capital structure of your company of JRP Group plc The company does not have debt hence the capital structure is only made up of equity. Equity decreased from £852.8 million n 2014 to £814 million in 2015. 6. How does your company compare to the FTSE250 company Despite the fact that both companies are in the same industry, Standard Life plc happens to be bigger than JRP Group plc just by looking at the figures in both of their financial statements. For instance, the shareholding of Standard Life plc is £4,349 million in 2015 while that of JRP Group plc is £814 million in 2015. Seminar 9 Questions 1. Calculate Ke using the Gordon’s Growth Model. Ke = (D1/P0 ) + g Ke = the cost of ordinary shares to the business (i.e. the required return to investors) P0 = the current market value of the share D1 = the dividend in year 1 g = the expected annual growth rate in dividends =(17.45p/389.9p)+0.04 = 8.47% a. Calculate g: Click on Fundamentals and find Dividend per Share Growth. i. Take the average of the last 5 years to give your growth rate. =6.51%+6.42%+6.52%+7.72%+7.85% =35.02%/5 =7.004% b. Calculate D1 Ke = (D1/P0 ) + g = (Ke - g) P0 =(8.74%-4%)389.9 =18.48% c. Find the current share price of your company. =389.9p 2. Calculate Kd Kd = I(1 – t) Pd =10(1 – 0.02) 113 =8.67% a. Find the net interest for the year and the non-current borrowings figure. Interest is 10% while non-current figure is £113 3. Based on your Capital structure proportions you have previously calculated Calculate the WACC for your company. WACC=Ke+ Kd +Kp =8.67% +18.48%+0 =27.15% 4. What assumptions have you made when calculating the WACC, Ke and Kd. I have assumed the interest rates to be 10% and taxation rates to be20%. 5. Find an official pre-calculated WACC figure. 14.06% 6. How does your WACC compare to one figure you found? They are different my computed is 27.15% while the official one is 1406% Seminar 10 Questions 1. Has your company paid any dividends in last 5 years? Are they interim or final dividends? Yes, both interim and final dividends. 2. What are the last 5 years of final dividends? From 2011 to 2015 respectively 13.25p, 14.10p, 15.02p, 16.18p and 17.45p 3. Is there a pattern in the dividends paid? Have they grown continuously? Yes, they have been increasing in value from 13.25p in 2011 to 17.45p in 2015. 4. What is the dividend cover ratio? It is currently at 1.5 times as per the 2015 financial statements. 5. Using the graph in the book/lecture slides, how does your cover ratio compare to the industry? If your industry isn’t shown in the graph move on to question 6. My company is in the life assurance sector and not represented in the graph. 6. How does your company’s cover ratio compare to your selected FTSE250 company in the same industry? The dividend cover ratio of JRP Group plc is -1.5 times. This is an indication that the company is not yet in a position to pay dividends to its shareholders. 7. How does your company’s cover ratio compare to a company in the same industry listed on the FTSE350? My FTSE350 Company in the same sector is Old Mutual plc. It has a dividend cover ratio of 1.56 times, which is slightly higher than that of Standard Life plc. 8. Is there a pattern to the dividend cover ratio what does it tell you? This shows the relationship between profits and dividends paid. Yes. The dividend cover ratio of standard life plc has been increasing over years from 0.98 times in 2011 to 1.5 times in 2015. 9. What is the formula showing the relationship between the Expected future dividend and the current share price of the company? P0 = D1 K0 – g Where; P0 = Current Share price D1 = expected dividend G = growth K0 = expected return of the share 10. What does this formula tell you? It shows that the expected future dividend is affected by a number of factors among them, the current share price. Thus, increasing the market share price would mean a subsequent increase in the future dividend. Other factors are growth rate and the return of shares. Seminar 11 Questions 1. What current assets and liabilities does your company hold? Examine the most recent 2 years. Current assets depicted in the statement of financial position are cash in the bank and at hand, trade and other receivables among others. Current liabilities include deposits received from reinsurers, taxation, third party interest in consolidated funds and participating contract abilities among others. 2. Calculate the current ratio and acid test ratio for the last 2 years. 2014 Current ratio=total current assets/total current liabilities =48908/50033 =0.97 2015 Current ratio=total current assets/total current liabilities =18316/22111 =0.83 2014 acid test ratio= (cash+ accounts receivable+ short-term investments)/current liabilities =10617+38219+0 50033 =0.97 2015 acid test ratio= (cash+ accounts receivable+ short-term investments)/current liabilities =9640+8676+0 22111 =0.83 3. What is your company’s net working capital for the last 2 years? =current assets-current liabilities 2014 FY =48908-50033 =-1125 2015FY=18316-22111 =-3795 4. Using your FTSE250 company repeat questions 1 to 3. Computation of JRP Group plc ratios i. JRP Group holds the following current assets (cash at hand and in the bank and trade and other receivables) Current liabilities include short term borrowings ii. 2014 Current ratio=total current assets/total current liabilities =3780/6681 =0.57 2015 Current ratio=total current assets/total current liabilities =2678/7668 =0.35 2014 acid test ratio= (cash+ accounts receivable+ short-term investments)/current liabilities =54.4+3726+0 6681 =0.56 2015 acid test ratio= (cash+ accounts receivable+ short-term investments)/current liabilities =58.8+2619+0 7668 =0.35 iii. Working capital= current assets-current liabilities 2014 FY =3780-6681 =-2901 2015FY=2678-7668 =-4990 5. Compare each element of your company’s working capital to the previous year and suggest reasons for any changes that may have occurred. From the computation of Standard Life plc working capital it is evident that the company does not have money to cater for its day to day operations. This can be evidenced by the negative values of the working capital computation meaning that it is not able to pay its current liabilities and have a balance for day to day operations. This is the case for both the last two years with the problem persevering in 2015 financial year given a higher negative figure than that of 2014. The liquidity of a company concerns the adequacy of the current assets in meeting the current liabilities. Current ratio should be at least +1 for a hence company and hence a higher of the ratio is preferred. Creditors to the company are the most interested stakeholders to the ratio because it demonstrates whether it is save to continue vending supplies on credit. The employees would also be interested about the liquidity because it determines whether their wages and salaries will be paid effectively. Suggestions for any future improvements to the financial situation the company Accounting information is of great essentiality to any form of business organisation. This is because it is primarily used by the management to evaluate the progress and success of the organisation. Accounting information has to have four basic qualitative characteristics which include; reliability, comparability, relevancy and consistency. The financial statements as prepared by the management may not be of use to the stakeholders because the data provided is raw in nature. The statements requiring the analysis include the balance sheet, income statement, and the cash flow and the approaches used include the trend and ratio analysis for the last three years. Trend analysis looks at the key components of each of the financial statements (cash flow statement, statement of income and expenditure and statement of financial position) and how they change over the years. From the ratio analysis of the current ratio, acid test ratio and the working capital, it is evident that the company is not in a position to meet short-term obligations given its either low current assets base or high liabilities in the short-term. It is therefore recommendable that the management of Standard Life plc controls its current assets with regard to the current liabilities. The management can do this by regulating the amount of cash within the organisation such that they have limited debtors as well as creditors. This can be achieved by making sure that they only purchase the stock that is to be used immediately and by also avoiding purchasing on credit. They could also make sure other current liabilities are minimal to avoid the company spending a lot by settling them. They could also ensure that the capital gains and interests earned are used efficiently to avoid accumulation of funds in the company (Needles and Powers, 2013) . In a nut shell, the mangers should regulate the circulations of funds in the short-run appropriately. It is clear that with the above-discussed trend, the financial performance of Standard Life plc can be adversely affected in the future. However, the management should take up the measure to ensure that the operations regarding effectiveness and efficiency are maintained at preferred levels. Reference List Needles, B. E., & Powers, M. (2013). Principles of financial accounting. Mason [Ohio] : South-Western Cengage Learning. London exchange Links http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?fourWayKey=GB00BVFD7Q58GBGBXSET1 http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?fourWayKey=GB00BCRX1J15GBGBXSTMM http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?fourWayKey=GB00B77J0862GBGBXSET1 Read More