FedEx Financial Strategies Analysis

This assignment examines FedEx's effective utilization of financial strategies. It delves into their working capital approach and optimal capital structure to determine the most efficient operational level. The analysis explores how these strategies enable strategic capital decisions and contribute to FedEx's success.

BUSINESS REPORT
BRIEF

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Long Term Sources of Finance and their Risk/Return Characteristics........................................1
Relevant Theories that help determine the risk/characteristics of long-term financial sources. .3
Different Sources of Finance used by FedEx and its application to the relevant theories...........4
TASK 2............................................................................................................................................4
Working Capital Management Theories......................................................................................4
Computation and Evaluation of Ratios in the context of FedEx.................................................5
TASK 3............................................................................................................................................6
Management Theories of Capital Structure.................................................................................6
TASK 4............................................................................................................................................7
PESTLE Analysis of FedEx.........................................................................................................7
Minsky analysis of FedEx ...........................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Financing activity is an important part of a business that aims to achieve its expansionary
needs and other working capital related requirements (Freeman, 2016). This business report aims
to provide an in-depth analysis and application of various management theories that are
essentially related to Working Capital, Optimal Capital Structure as well as dividend in the
context of FedEx. In addition to this, calculation and evaluation of various ratios have been
carried out. Lastly, PESTLE and Minsky Analysis have been undertaken to understand the
external environment of FedEx and its financial capitalism.
TASK 1
Long Term Sources of Finance and their Risk/Return Characteristics
An organization may have different alternatives available to them based on the type of
business it conducts, the risk taking ability of the business in addition to the size and nature of
the organization. These alternatives can be mainly classified as Short-term and Long-Term
Sources of Finance. Short-term Sources of Financing are those which have are taken up by a
company to meet its day-to-day operations (Guariglia and Liu, 2014). These are mainly related to
the fulfilment of Working Capital Requirements. On the other hand, Long-Term Sources of
Finance are those that are, as the name suggests, utilized by a business that fulfil its capital
project requirements and carrying out operations that are of expansionary nature.
The main sources of Long-Term Finance include internal equity, market debt, convertible
debt and shares. These have been explained as under:
 Internal Equity Financing: It is mainly related to the utilization of reserves and surplus
that are present with a given entity in the form of retained earnings, excess capital
investments from parent firms and intra-firm borrowings. They are a cheap alternative
present for the company, especially in comparison to debt and external equity financing
which may be affected by taxation lot more than this source.
 Loans: Another source of finance are loans. These are financing options that are
provided by Banks and other financial institutions to fund a business' short and long-term
needs. This again forms the part of fixed liability undertaken by business which involves
interest payments of constant nature over a given period of time.
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 Market Debt: Market Debts such as Mutual Funds, Bonds, Commercial Papers,
Debentures and Certificates of Deposit help in obtaining a fixed interest rate based debt
financing from the market itself (Kahn, Martins de Melo and Pessoa de Matos, 2014)
(Lim, 2014).
 Convertible Debt: These include convertible bonds or note that have a maturity
exceeding ten years. Such bonds can be easily converted to a specific number of ordinary
shares of equivalent value at the time of maturity. Shares: One of the most common sources of long-term financing adopted by
organisations. Shares may be either equity or preferred wherein preferred require regular
payment of dividends at a fixed rate in comparison to equity shares.
Long Term Source of
Finance
Risk Return
Internal Equity Easy availability of such
resources provides a low risk
characteristic for the company.
High Returns can be expected
as these funds already belong
to the company itself, any
profit made is a return as no
additional cost is incurred to
obtain them.
Loans Fixed amount of interest paid
to the lender, hence, low risk
presence.
High returns as the company
has a definite amount of
finance which is of secured
nature.
Market Debt High Risk present as such
debts can be easily recalled for
repayment by their respective
lenders at any given point of
time.
High returns as these include
heavy funding raised by
businesses that can help in
financing expansions and
capital projects of expensive
nature easily.
Convertible Debt Risk factor is low as these
facilitate low interest
High returns as the company
does not need additional debt
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payments, provide tax
advantage for interest
payments. Although there's is a
possibility of stock dilution
present in these cases.
or equity issuance on their
part, they can always convert
them by fluctuating the rate at
which they were availed. Thus,
eliminating their obligations
altogether.
Shares High Risk involved as there is
possible dilution of ownership
and control, they are costlier
than debt financing.
High returns gained through
this financing as dividend
payments are optional that
leaves the company with
ample amount of funds for it to
utilize in future projects.
Relevant Theories that help determine the risk/characteristics of long-term financial sources
 Pecking Order: This theory relates to capital structure and there are managers can
provide preference to fund investment opportunities after using three sources such as
firstly regarding to company's retained earnings after that followed by debt than select
equity financing as a last resort. It is starting from the asymmetry of information in the
organization. With the help of these information conduct high level companies as a
complex or technical product with less accounting transparency. There are including
external and internal financing, in external financing company must incur fees regarding
to issue of external financing. In internal financing provide cheapest and more suitable
source of financing (Malmström, 2014).
 Static Trade Off: It is a financial theory which is based on the work of economist
modigliani and giller. The particular theory have paid tax on their debt which can help to
less risk and taking out over equity. Debt financing is cheaper than to equity financing so
company has been apply the formula of weighted average cost of capital where including
debt over equity. It can be summarised in graphical way and point out starting point of
the value of all equity regarding to financed firm. It is calculated through the particular
formula -
Value of firm = Value if all equity financed + PV (tax shield) – PV (cost of financial distress)
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Different Sources of Finance used by FedEx and its application to the relevant theories
FedEx engages in a number of services that include transportation, e-commerce and
business-related services. The main financing instruments taken up by the company include
Fixed-Rate Notes, Long-term debt excluding capital leases In 2018 and 2017, the company
exercised its long-term financing option through debt and share issuance. For instance, the
company availed a Market Debt in the form of Commercial Paper that raised its interest
expensed by $46 million in 2018 (Annual Report of FedEx, 2018). On the other hand, this
expense had increased by $176 million in 2017 due to euro debt issuance carried out in
subsequent previous year. In addition to this, acquisition efforts were also funded by an
additional issuance of 2016 debt issuance. In addition to this, senior debt of unsecured nature
was also issued in 2018 as well as 2017.
As mentioned in the Note 6 of its Annual Report of 2018 and following the Pecking
Order Theory, FedEx determines its fair values of long-term debt, as well as other financial
instruments, based on quoted market prices that may fluctuate highly due to the presence of
asymmetric information in the market. The effect of these fluctuations can be seen on the
liability side of the Balance Sheet either directly or indirectly. On the other hand, FedEx also
utilizes a five year revolving credit facility including a financial covenant that requires the
company to maintain a certain ratio of debt to consolidated earnings which ranges between 1.0
and 3.5 (Mazzucato and Semieniuk, 2017). This indicates the Strategic Trade-Off theory
application in the given organisation.
TASK 2
Working Capital Management Theories and its application thereof
Working Capital includes the amount utilized by the business in order to meets its daily
operational requirements. Essentially, it is the difference between current assets and liabilities of
a firm. A business entity may use either of the following approaches:
 Aggressive: This approach involves high risk undertaken on company's part wherein the
working capital is used to meet both temporary as well as permanent capital
requirements. Here, there is no safety net present for contingency situations. Only an
adequate amount of inventory level, account receivables and bank balance is taken into
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consideration. It is worthy to note that Trade Credit is highly reliant factor under this
strategy.
 Conservative: As the name suggests, this theory outlines a highly risk-free strategy. It
ensures that a high level of current assets and liabilities are maintained with an adequate
amount of safety cushion to minimize the effect of contingencies. Here, most priority is
given to permanent working capital which includes equity, term loans, debentures among
others.
In the context of FedEx, a permanent reinvestment strategy is undertaken, as mentioned
in its Annual Report under the head 'Liquidity Outlook' . However, the company does not prefer
this strategy for an indefinite period of time as it tends to impair their ability to meet domestic
debt and other working capital obligations. Hence, one can say that the company uses a
combination of above two approaches to address its specific working capital related issues.
Computation and Evaluation of Ratios in the context of FedEx
 Current and Liquid Ratio:
Ratio 2018 2017 2016
Current Ratio 1.39 1.59 1.5
Quick Ratio 1.22 1.46 1.35
Utilizing these ratios, one can ascertain the ratio at which FedEx's current assets and
current liabilities as well as the liquidity requirements.
 Inventory Days:
Calculation of inventory days
Inventory turnover ratio 97.71
Inventory days 4 days
Inventory days are those days that determines about the number of days in which product
was stored in the warehouses before selling. Due to this, FedEx can evaluate about the number of
days taken in the selling after the production.
 Receivable Days:
Calculation of receivable days
Receivable turnover ratio 8.14
Receivable days 45 day
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Receivable days are those days which defines about the customer's invoice is due before
the collection. Eventually, it is an better way for FedEx to properly manage its receivables so that
companies can determine about the debtors collection. As well as it is important in tracking the
receivable period of debtors time to time.
 Payable Days:
Calculation of payable days
Payable period 20 days
The payable days are those days in which companies take time to pay their bills and
invoices. Eventually, the calculation of these days is very important so that company can analyse
their efficiency in bill pay system. Less number of days shows that company's paying system is
good as well as high number of days are indicate the negative impact.
 Cash Conversion Cycle:
The Cash Conversion Cycle includes the summation of Inventory Days, Payables
Outstanding and Receivables Outstanding. Therefore, in case of FedEx, it comes to:
Cash Conversion Cycle (CCC) = (4 + 45 + 20 ) days = 69 days
This concept helps FedEx in understanding the points that would require the business to
optimize its short-term obligations effectively by reducing the number of days in the given cycle
(Papanastasopoulos, 2017).
TASK 3
Management Theories of Capital Structure
 Dividend irrelevance theory – The particular theory based on the capital structure and
concerning for dividend policy in enterprises. It comes from modigliani – miller's capital
irrelevance model, which works under specific market conditions – no taxes, no
transactions costs and no flotation cost. The theory indicate that a FedEx's declaration and
payment of dividend should have little to no impact on stock price. If theory holds true it
means dividend can not add value of a company's stock price (Qian and Yeung, 2015).
 Clientele effect theory – It can explain the movement into FedEx's stock price on the
basis of goals and demands if their investors. The clientele theory can consider as
investment theory in reference to price of a security and affected to certain shareholders
when they can change their policies regarding to fund. The theory evaluated to notion of
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certain investors are attracted to a company's stock as per their policies. The clientele can
effect to those investors which can attract by companies policies and adjust their stock as
per requirement.
 Birds in the hand theory – The particular theory related to investors and prefer
dividends from stock to potential capital gains due inherent uncertainty and it is related
with capital gains. The theory can based on the different assumptions that are – FedEx
can finance only equity and there is no corporate taxes, the retention ratio is constant,
only source of finance is retained earnings but any other sources of finance is not
available.
 Signalling theory - The particular theory based on the economics because there are
assumes that there are two parties which can gather different information. There are one
arty can select the way of communication and another party can interpret the signal.
Signalling theory holds large position in the various management literature where consist
of management, entrepreneurship and human resource management. It can handle
fundamental problems regarding to communication and set another agent of the signaller.
Many times it can applies to solve conflicts in which at least some truth is transmitted and
provided appropriate signals.
TASK 4
PESTLE Analysis of FedEx
Pestle analysis of Fed-ex – It is a global leader in the courier and shipping services and
show financial performance regarding to grown excellent in recent years. There are mentioned
PESTLE analysis of fedex - Political – FedEx is a global business which can conduct 220 countries and territories and
their main market can establish in US. The market mainly affected by political instability.
Trade war between US and china shows negative effect at their international business. Economical – Economic fluctuations major affect to markets which is part of US as well
as it is affected to their revenues. There are competition is major effect and economic
growth stability lead to higher revenue and income.
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 Social – The company has been investing into social responsibility and community
engagement. The forces of social cultural have grown important and FedEx can manage
social image in very good way. Technological – The technology maintained string focus on technology and there are
180000 motor vehicles that pick up and drop off couriers every day and after investment
they getting benefits. Legal – Compliance is essential and increased compliance as a burden and it is important
regarding to UK market and FedEx regulatory structure UK is expected to significant
changes in next years.
 Environmental – Last few years it has made impressive gains which can down to
distribution networks in terms of sustainability. It is building various facilities in FedEx
and produce to solar energy to less consumption of non renewable energy in the system.
Minsky analysis of FedEx
It is the evolution of the one assortment of capitalism financial capitalism which can
develop in the ninth century and dominant form of capitalism in the developed countries. The
approach of Minsky apply in FedEx company to analysis financial market and in order to gain
access and power regarding to financial information (Wang, and Hua, 2014). There are financial
capitalism emerged from world war second with some new institution that made it stronger than
even before.
CONCLUSION
From the above report it can be inferred that FedEx has effectively used a combination of
working capital approach as well as optimal capital structure related strategies in order to
ascertain the most efficient level of operating. These strategies help the business in exercising
strategic actions to make important capital related decisions.
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REFERENCES
Books and Journal
Freeman, M., 2016. Sources of terrorist financing: theory and typology. In Financing
Terrorism (pp. 17-36). Routledge.
Guariglia, A. and Liu, P., 2014. To what extent do financing constraints affect Chinese firms'
innovation activities?. International Review of Financial Analysis. 36. pp.223-240.
Kahn, M., Martins de Melo, L. and Pessoa de Matos, M. G., 2014. Financing innovation. IDRC,
Ottawa, ON, CA.
Lim, S. C., 2014. The information content of disaggregated accounting profitability: operating
activities versus financing activities. Review of Quantitative Finance and Accounting.
43(1). pp.75-96.
Malmström, M., 2014. Typologies of bootstrap financing behavior in small ventures. Venture
Capital. 16(1). pp.27-50.
Mazzucato, M. and Semieniuk, G., 2017. Public financing of innovation: new questions. Oxford
Review of Economic Policy. 33(1). pp.24-48.
Papanastasopoulos, G., 2017. Accrual anomaly and corporate financing activities. Finance
research letters. 20. pp.125-129.
Qian, M. and Yeung, B. Y., 2015. Bank financing and corporate governance. Journal of
Corporate Finance. 32. pp.258-270.
Wang, Y. and Hua, R., 2014, October. Guiding the healthy development of the P2P industry and
promoting SME financing. In 2014 International Conference on Management of e-
Commerce and e-Government (pp. 318-322). IEEE.
Online:
Annual Report of FedEx. 2018. [Online]. Available Through:
<http://s1.q4cdn.com/714383399/files/oar/2018/AnnualReport2018/assets/pdf/FedEx-
Annual-Report-2018.pdf?
utm_source=InvestorRelations&utm_medium=Referral&utm_campaign=AnnualReport
2018&utm_content=FinancialInformationAnnualReports>
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