The Impact of Sugar Tax on A.G. BARR Share Price

The assignment analyzes the potential impact of a sugar tax on the share price of A.G. BARR, a leading manufacturer of branded soft drinks. It examines the company's diversified product range and extended market programs as potential mitigants against the negative effects of a sugar tax. The review of literature includes discussions on stock market volatility, learning, and the use of dividend discount models to estimate expected returns.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student
Name of the University
Authors Note
Course ID

1CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction:...............................................................................................................................2
Strategic Direction:....................................................................................................................2
Outline of its main activities:.....................................................................................................2
Key features of business strategy:..............................................................................................3
Future Business Opportunities and Risk:...................................................................................5
Financial Performance:..............................................................................................................5
Operating Performance:.............................................................................................................5
Financial Strength and Weakness:.............................................................................................6
Efficient Market Hypothesis:.....................................................................................................8
Stock Market Pricing Efficiency in A.G. Barr Plc Share Price:................................................8
Semi strong market form of market efficiency:.........................................................................9
Valuation:...................................................................................................................................9
Justification and explanation of assumptions:..........................................................................10
Usefulness and limitations of valuation methods:...................................................................11
Share pricing performance:......................................................................................................11
Conclusion:..............................................................................................................................13
Reference List:.........................................................................................................................15

2CORPORATE FINANCIAL MANAGEMENT
Introduction:
A.G. Barr Plc is the Scottish soft drink producer that is based in Cumbernauld. The
company is the producer of popular Scottish drink. Barr Plc is listed on the London Stock
Exchange and it is regarded as one of the constituent of FTSE 250 Index (Agbarr.Co.Uk,
2018). The current report is based on the determination of the strategic direction of A.G Barr
Plc by outlining the major activities undertaken with vital features of its strategy. The report
would analyse the business opportunities and risk that is faced by the company with emphasis
would be paid on operating performance.
The report to Amicable Pension Fund would include details of financial performance
over the last five years with. Reference to stock market pricing efficiency and efficient
market hypothesis would be made to assess the market efficiency of A.G. Barr plc. The report
will further cover valuation and share price performance to provide brief comment on share
performance with appropriate recommendations on investment perspective for Amicable
Pension Fund.
Strategic Direction:
Outline of its main activities:
The main business activities of A.G. Barr Plc are concerned with the production
capabilities, producing higher quality products throughout the well invested and effective
production sites. The primary business activities of A.G. Barr Plc are associated with the
sourcing of raw materials across the world to design its packaging materials to strive for
constant improvements. The company has the fleet of more than one hundred vehicles with
long standing relationships with its key distribution partners (Scott, 2015). The company
strives to render greater service to all of its customers from the biggest food service
customers to the smallest local shop. The company operates across the multiple routes in

3CORPORATE FINANCIAL MANAGEMENT
order to market its products. The major activities of the company are concerned with the
operating activities and efficient distribution networks with its direct store channel of
delivery.
Key features of business strategy:
Considering the key business features of A.G. Barr Plc, clarity of purpose and constancy
of approach results in best outcome. The key business features of A.G. Barr Plc include;
a. Strongly differentiated brands
b. Effective and flexible operations
c. Innovative based understanding of customers
d. Partnerships that derives growth
e. A.G. Barr Plc leverages the strength and commitment of its teams.
Five year trends of performance:
Particulars 2013 2014 2015 2016 2017
Revenue
£2375,95,
000
£2540,85,
000
£2609,00,
000
£2586,00,
000
£2571,00,
000
Gross Profit
£1080,04,
000
£1161,56,
000
£1199,00,
000
£1211,00,
000
£1207,00,
000
Operating Profit
£349,46,0
00
£384,81,0
00
£421,00,0
00
£421,00,0
00
£431,00,0
00
Basis Earnings per
Share £0.25 £0.27 £0.26 £0.30 £0.31
Total Dividend paid per
Share £0.11 £0.17 £0.12 £0.13 £0.14
Gross Profit Margin 45.46% 45.72% 45.96% 46.83% 46.95%
Operating Profit Margin 14.71% 15.14% 16.14% 16.28% 16.76%
Annual Percentage Growth:
Particulars
201
3 2014 2015 2016 2017
Average
Annualize
d %

4CORPORATE FINANCIAL MANAGEMENT
Revenue 6.940% 2.682%
-
0.882%
-
0.580% 1.590%
Gross Profit 7.548% 3.223% 1.001%
-
0.330% 2.248%
Operating Profit
10.116
% 9.405% 0.000% 2.375% 4.284%
Basis Earnings per Share
10.061
% -3.775%
13.962
% 3.881% 4.627%
Total Dividend paid per
Share
53.358
%
-
28.284% 9.983% 8.027% 5.496%
Cash conversion cycle:
Particulars 2016 2017
Revenue £2586,00,000 £2571,00,000
Cost of Goods Sold £1375,00,000 £1364,00,000
Inventory £173,00,000 £156,00,000
Accounts Receivables £514,00,000 £527,00,000
Accounts Payables £523,00,000 £374,00,000
Inventory Turnover Period 24.42 22.15
Receivables Collection Period 72.55 74.82
Payables Deferral Period 138.83 100.08
Cash Conversion Cycle (in day) -41.87 -3.12
Financial Ratios:
Particulars 2016 2017
(in million) (in million)
Current Assets A £282.7 £286.7
Current Liabilities B £104.8 £126.7
Total Liabilities C £162.3 £174.5
Total Equity D £120.4 £112.2
Interest Expenses E £0.7 £0.9
Operating Profit F £42.1 £43.1
Current Ratio G=A/B 2.70 2.26
Debt-to-Equity Ratio H=C/D 1.35 1.56
Interest Coverage ratio I=F/E 60.14 47.89

5CORPORATE FINANCIAL MANAGEMENT
Future Business Opportunities and Risk:
In spite of the macro environment influences the business has retained its focus on the
execution of its strategy and particularly improving its internal actions. With the acquisition
of Funkin business the company remains opportunistic regarding the continuous growth
momentum of Funkin brand and business. With the changing consumer taste and preference,
the demand for great testing, lower sugar products have increased (Williams, 2014). The
company has recently announced that 90% of the brand that are owned by A.G. Barr Plc
would contain less than 5g of total sugar per 100 ml. Therefore, this could be viewed as the
positive illustration of business opportunities as how A.G. Barr Plc is responding with the
pace and commitment.
On the other hand, the principle risk and uncertainties surrounding A.G. Barr Plc is
the changes in the customer preferences, perception or purchasing behaviour (Agbarr.Co.Uk,
2018). The consumer might decide on purchasing and consuming alternative brands or make
less spending on soft drinks. Another risk faced by business is changing consumer attitudes
towards the sugar (Warren & Jones, 2018). With changing government intervention on sugar
customer made decide on purchasing and consuming alternative brands or make less
spending on sugared soft drinks. Additionally, the adverse publicity in respect to soft drinks
industry may have an adverse impact on the reputation of customer and consumer pattern.
Financial Performance:
Operating Performance:
A.G. Barr Plc has made considerable amount of progress across the business over the
last twelve months and has rendered a strong financial performance under volatile and
uneven market conditions. Financially, A.G. Barr Plc has rendered a strong business
performance with profit before the exceptional items stood £42.4m representing a rise of

6CORPORATE FINANCIAL MANAGEMENT
2.7% from the performance of previous year (Henderson et al., 2015). A.G. Barr Plc has
enjoyed better performance from the business of Funkin cocktail. The operating margin
before the exceptional items stood 16.3% during the year 2016 and positively increased to
16.8% in 2017. The free cash flow of the organization stood £28.3 million in 2016 whereas in
2017 the free cash flow of A.G. Barr Plc significantly increased to £43.2 million.
Considering the financial performance of the organization the gross margin of the
company stood 46.8% during the year 2016 and marginally rose to 46.9% in the year 2017.
The profit before tax and exceptional items of A.G. Barr Plc stood £41.3 million during 2016
which subsequently rose to £43.1 million in 2017 representing a rise of 4.4% over the prior
year. It is pleasing to identify that the company have put behind the challenges of supply
chain and system application challenges that served as the constrained in 2016 (Mullinova,
2016). Though the reported revenue felled by 0.6% however its underlying revenue from the
business improved by 1.5% that resulted in improved revenue by 1.5% driven by innovation
across IRN BRU and Rubicon brands.
Financial Strength and Weakness:
The financial strength and weakness of A.G Barr Plc is based on the diverse and
differentiated business portfolio (Davis & Lleo, 2015). Considering the strength of A.G. Barr
Plc, the company is not only concerned with the production of soft drinks but also have
moved towards cocktail mixer segment that has widened and strengthened its portfolio with
the unique and market leading brand in a rising market.
Another business strength of A.G Barr Plc is the strong balance sheet and cash
generated by the company. As a result of this the board has undertaken the decision of
returning around £30 million to its shareholders through the on-market share repurchase

7CORPORATE FINANCIAL MANAGEMENT
programme (Agbarr.Co.Uk, 2018). Furthermore, the company has dedicated group of people
that have contributed to the success of the business testament.
With the increasing amount of growth in the net asset the balance sheet of the
company is significantly gaining strength (Barberis et al., 2015). The strong balance sheet
enables the business to access the cost effective and flexible debt facilities to offer optionality
as this would enable the company in making sure they have the agility of taking advantage of
opportunities that is identified.
The company has robust risk management structure of assessing risk. The risk
management framework sets out the systematic approach of managing risk (Kahn &
Lemmon, 2014). The strength of the company is vested in re-assessment of risk by mitigating
the controls implemented. The strength of the company is the wide variety of products
offered by its wide range of brands. A.G Barr Plc provides its customers with products from
varied brands through variety of trade channels and customers.
There are certain significant amount of failings or weaknesses identified during
financial year. A.G. Barr Plc to some extent faces the failure of maintaining the appropriate
customer relationships. This may enable the company to faces certain reduction in the base of
customer that can have the adverse impact on the sales of A.G. Barr Plc with decline in
operating profit (Fernandez, 2015). Additionally, it is identified that there is an inability of
protecting the group intellectual property rights. The failure of the company could be
considered as the weakness as this could result in lower value intellectual property rights with
loss of brand value.
Furthermore, the analysis from the computed ratio states that current ratio reported by
the firm stood 2.70 while in the subsequent year declined to 2.26. Additionally, the debt to
equity ratio of the organization stood 1.35 in the year 2016 which subsequently increased to

8CORPORATE FINANCIAL MANAGEMENT
1.56 in the year 2017 (Reid & Myddelton, 2017). This represents that the company has been
undertaking higher amount of debt and could potentially result in increase in increase in
operational risk of the organization.
Efficient Market Hypothesis:
Stock Market Pricing Efficiency in A.G. Barr Plc Share Price:
The efficient market hypothesis can be regarded as the investment theory that defines
that it is not possible to beat the market because stock market efficiency reflects the presence
of share price to incorporate and reflect all the necessary information (Zabarankin et al.,
2014). As evident recent imposition of sugar tax in UK could be viewed as semi-strong
information. Stocks are regularly traded at their fair value on stock exchanges that makes it
not possible for the investors to either purchase undervalued stocks or selling the stocks at the
inflated price. The government announcement of sugar tax could be viewed as semi strong
since the information that is obtained to predict the stock performance may well be reflected
in the stock price.
The information of increased sugar tax may enable the company to accelerate the long
standing sugar soft drinks programme would enable the company to capitalize on the price
trends of the tradable security in the market (Agbarr.Co.Uk, 2018). The central engine behind
the change in price of A.G Barr plc is the arrival of the new information. As a result of this,
the current prices of the securities provide all the necessary information from the external
sources and consequently there is no reason behind believing that the prices are very high or
too low (Blitz et al., 2015). In respect of A.G. Barr Plc, the new piece of information reflects
the existence of efficient market for the investors to profit from the new information.

9CORPORATE FINANCIAL MANAGEMENT
Semi strong market form of market efficiency:
Semi strong form of efficiency is considered as the efficiency market hypothesis
which implies that all the public information is computed into the stock present share price.
This represents that neither the fundamental nor the technical analysis could be used to attain
the superior gains (Fernandez, 2017). The semi strong market efficiency provides information
on the public available benefit that the investors are looking to earn through the abnormal
returns on the investments.
Similarly in case of A.G.Barr Plc the information of government implementation of
sugar tax suggest only the information for the benefit of investors to generate the abnormal
returns on the investors. The information obtained by A. G. Barr Plc is accounted into the
stock price and the stock price can be classified as semi strong since the information available
is obtained from the external sources (Adam et al., 2016). The stock of A. G. Barr Plc can
benefit the investors that are seeking abnormal returns on investments.
Valuation:
Net asset Value Per Share:
Particulars Amount
Total Assets £2867,00,000
Total Liabilities £1745,00,000
Net Assets £1122,00,000
Nos. of Shares 115714487
Fair Value per share under Net Asset Value Model £0.97
Dividend Discount Model (CAPM):
Particulars 2017

10CORPORATE FINANCIAL MANAGEMENT
Dividend Paid per share £0.14
Dividend Growth Rate 5.50%
Cost of Capital 5.36%
Fair Value of Shares under Dividend Discount Model -£108.00
Net Asset Value DDM
Fair Value per Share £0.97 -£108.00
Market Value per Share £521.00 £521.00
Remarks Overvalued Overvalued
Justification and explanation of assumptions:
As evident from the computations performed above an assumption can be bought
forward by stating that computation under the dividend discount model for A.G. Barr Plc is
performed based on the total dividend paid by the company over the last five years.
Evidently, the computations performed represents that the market value of shares under the
dividend discount model is overvalued (Hatemi & El-Khatib, 2018). Furthermore, on
considering the value derived under the net asset value it is also found that the fair value of
the share prices stood £0.97 whereas the market value per share stood £521.00. Therefore, it
can be stated that the both under the net asset value and dividend discount model the market
value of share is overvalued.
Investing in the shares of A.G. Barr Plc for the potential investors might not seem to
be a feasible. However, given the consistency of dividend paid to the shareholders over the
period of five years it can be stated the investing in the shares of A.G. Barr Plc could be
feasible options as the food and beverage company though the other market players provide
higher amount of dividend to shareholders.

11CORPORATE FINANCIAL MANAGEMENT
Usefulness and limitations of valuation methods:
The dividend discount model is regarded as the useful method of valuing the stock of
the company depending upon the theory that the stock of the company is worth the sum of all
the value of the future dividend payments (Lazzati & Menichini, 2015). The dividend
discount model is useful in determining the intrinsic value of the stock and excludes the
present value of the conditions. The model is useful in equating the value of the present value
of shares future dividends.
The net asset value per share method is the useful form of business valuation which
emphases on the organizations net asset value or the fair market value of its total assets after
subtracting the total liabilities in order to ascertain the amount of cost to recreate the business.
The net asset method is best used in creating the financial picture of the organization through
the information on the balance sheet.
Considering the limitations of the Dividend discount model it fails to take into the
consideration the non-dividend factors namely the brand loyalty and ownership of the
intangible assets (Jordan, 2014). As all of this increases the value of the company.
Furthermore, the model is reliant on the assumption that growth rate is constant and stable
which in actual world is instable.
On the other hand, under the net asset value method it is difficult to determine the
value of intangible assets namely the property rights. Furthermore, the statement of financial
position might prematurely value the assets due to the presence of depreciation.
Share pricing performance:
Computation of PE Ratio:
Particulars Amount
Market Value per share £521.00

12CORPORATE FINANCIAL MANAGEMENT
EPS £0.31
Dividend Paid per share £0.14
P/E Ratio 1692.66
Dividend Yield Rate 0.028%
As evident A.G Barr has pleased its shareholders over the period of last ten years and
has paid out an average dividend of around 2.35% on the yearly basis. The stock presently
yields around 2.3% with the market cap of around $946 million (Agbarr.Co.Uk, 2018).
Taking into the considerations the stock price movement of A.G Barr Plc it can be stated that
stock price of the company has been in accordance with the FTSE and has reported lower
amount of volatility in respect to the FTSE index (Cornell, 2015). As an investment prospect
for Amicable Pension Fund investing in the shares of A.G Barr Plc can be viewed as the
feasible prospect with the company providing an annualised divided of around 2.35% each
year to its investors over the past ten years.
2/1/2016
2/15/2016
2/29/2016
3/14/2016
3/28/2016
4/11/2016
4/25/2016
5/9/2016
5/23/2016
6/6/2016
6/20/2016
7/4/2016
7/18/2016
8/1/2016
8/15/2016
8/29/2016
9/12/2016
9/26/2016
10/10/2016
10/24/2016
11/7/2016
11/21/2016
12/5/2016
12/19/2016
1/2/2017
1/16/2017
1/30/2017
2/13/2017
2/27/2017
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Return Rates
Stock Price FTSE
Figure 1: Figure reflecting return rates
(Source: As Created by Author)

13CORPORATE FINANCIAL MANAGEMENT
1 12 23 34 45 56 67 78 89 100 111 122 133 144 155 166 177 188 199 210 221 232 243 254 265
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
6000.00
7000.00
8000.00
Stock Price Movement
Stock Price FTSE
Figure 2: Figure representing stock price movement
(Source: As Created by Author)
The pay-out ratio of the A.G Barr Plc is around 44% which represents that the
dividend is sufficiently covered by the earnings of the organization. Taking into the context
the three-year analysis it is anticipated that the dividend per share is approximately around
£0.169 with the EPS of the company increasing to around £0.35. This is assumed that the
company is able to constantly pay-out the dividend with the anticipated future pay-out ratio
of around 49%. The Amicable Pension Fund can be relied upon for its dividend stocks (Sabir
et al., 2016). In case of A.G. Barr Plc they have the increased dividend per share from £0.06
to £0.14 over the last ten years. The company has been constantly paying out during this time
given that the dividend are increasing. Consequently A.G. Barr is regarded as the attractive
for investment and with the attractive yield of 2.3% could be considered as higher for the
food and beverage stock.
Conclusion:
On a conclusive note an assertion can be bought forward by stating that making an
investment in the stock of A. G. Barr Plc could be viewed as a viable option for Amicable

14CORPORATE FINANCIAL MANAGEMENT
Pension Fund. Furthermore, the company is competing with the market pace and
commitment. Furthermore, the stock price of company is within the standard of FTSE with
better dividend pay-ratio to the investors over the period of five years. Though, the
imposition of sugar tax could be viewed as risk for the company however the wide range
branded products and extended market programs would make sure in attaining optimum
outcome for the organization.

15CORPORATE FINANCIAL MANAGEMENT
Reference List:
"Investors | A.G. BARR Share Information". 2018. Agbarr.Co.Uk.
https://www.agbarr.co.uk/investors/.
Adam, K., Marcet, A., & Nicolini, J. P. (2016). Stock market volatility and learning. The
Journal of Finance, 71(1), 33-82.
Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2015). X-CAPM: An extrapolative
capital asset pricing model. Journal of financial economics, 115(1), 1-24.
Blitz, D., Falkenstein, E., & van Vliet, P. (2015). Practical Applications of Explanations for
the Volatility Effect: An Overview Based on the CAPM Assumptions. Practical
Applications, 2(3), 1-4.
Cornell, B. (2015). Using Dividend Discount Models to Estimate Expected Returns. The
Journal of Investing, 24(1), 48-51.
Fernandez, P. (2015). CAPM: an absurd model. Business Valuation Review, 34(1), 4-23.
Fernandez, P. (2017). The Capital Asset Pricing Model. In Economic Ideas You Should
Forget (pp. 47-49). Springer, Cham.
HA Davis, M., & Lleo, S. (2015). Risk-Sensitive Investment Management.
Hatemi-J, A., & El-Khatib, Y. (2018). The Dividend Discount Model with Multiple Growth
Rates of Any Order for Stock Evaluation. arXiv preprint arXiv:1802.08987.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial
accounting. Pearson Higher Education AU.
Jordan, B. (2014). Fundamentals of investments. McGraw-Hill Higher Education.

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Kahn, R. N., & Lemmon, M. (2014). The Asset Manager’s Dilemma: How Strategic Beta Is
Disrupting the Investment Management Industry. Working paper, BlackRock.
Lazzati, N., & Menichini, A. A. (2015). A dynamic approach to the dividend discount
model. Review of Pacific Basin Financial Markets and Policies, 18(03), 1550018.
Mullinova, S. (2016). Use of the principles of IFRS (IAS) 39" Financial instruments:
recognition and assessment" for bank financial accounting. Modern European
Researches, (1), 60-64.
Reid, W., & Myddelton, D. R. (2017). The meaning of company accounts. Routledge.
Sabir, S. A., Sheikh, S. M., & Meo, M. S. A. (2016). Investigating Stock Price Volatility: Do
Conventional Models Have Some Explanatory Power?. Oman Chapter of Arabian
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Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.
Zabarankin, M., Pavlikov, K., & Uryasev, S. (2014). Capital asset pricing model (CAPM)
with drawdown measure. European Journal of Operational Research, 234(2), 508-
517.

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