Financial Ratios Analysis & WACC

This assignment focuses on calculating various financial ratios for four companies: Macro Plc, M&S, Next Plc, and Inchcape. The ratios covered include current ratio, quick ratio, debt-to-equity ratio, equity ratio, solvency ratio, and the Weighted Average Cost of Capital (WACC). Students are required to apply formulas and interpret the results, gaining insights into the financial health and risk profile of each company.

Securities Analysis

Executive summary
Security analysis of the firm can be known as debts and security analysis on which the
professionals in organization can become able to make the fruitful decisions regarding capital
structure or the investments. Hence, in the present report there will be discussion based on the
various financial analysis such as HRP, working capital etc. will be measured and the results
through calculations will help business to analysis its strength. Thus, in order to have better
investments from attracting the large numbers of stakeholders there is need to improve the
operational activities in the firm such as increase in the sale or lowering down the cots of
production. Further, there will be discussion based on the various calculations such as intrinsic
value, Debt-equity ratios, equity ratio, solvency ratio and WACC which will describe the internal
ability of the firm.

TABLE OF CONTENTS
Executive summary..........................................................................................................................2
INTRODUCTION ..........................................................................................................................4
MAIN BODY .................................................................................................................................4
1. Outlining the key figures from the measurements in accordance with tables in Appendix....4
2. Discussion over the methodology for measuring such models and their relevant pros and
cons..............................................................................................................................................6
CONCLUSION ...............................................................................................................................7
REFERENCES................................................................................................................................8
APPENDIX....................................................................................................................................10

INTRODUCTION
Security analysis implies for the evaluation of tradable financial instruments which can
be classified in terms of debt and equity. By making evaluation of the securities investors can
assess the firm which is offering higher returns and thereby would become able to take profitable
investment decisions. The present report is based on the case situation of Macro Plc which is the
publicly traded general retailer and listed on London stock exchange such as FTSE 100. In this,
report will shed light on the expected holding return and net profitability aspect of Macro Plc in
against to the competitors such as kingfisher, Next Plc, M&S, ASOS and Inchcape. Besides this,
report will provide deeper insight about the financial tools such as intrinsic values, WACC and
financial leverage ratios.
MAIN BODY
1. Outlining the key figures from the measurements in accordance with tables in Appendix
HPR:
In accordance with the tables listed below there has been analysis based over
measurement of HPR which refers to the Appendix 1 that has been evaluating the effective
reasoning and the formula used for the above such calculation as:
HPR = (Income + Ending Value - Beginning Value) / Beginning Value
Net profit after tax = net profit – tax liability (Share prices of Next Plc, 2017).
Hence, while referring to Appendix 2 and 3 which shows that net margin after tax or
profitability aspect of NEXT Plc was good over others. By applying the above depicted formula,
it has found that in the period of HPR offered by Next plc to the investors is high as compared to
others (Mishra and Sharma, 2017). During the period of 2016, HPR of Macro Plc accounts for
26.97% respectively. On the basis of tabular presentation, it can be stated that HPR of Macro Plc
was also good in against to M&S, Inchcape and FTSE 100.
Intrinsic Value:
Intrinsic value of shares = D1 / r - g

However, the calculations which reflects the intrinsic value of Macro shares through
dividends has been referred to Appendix 4, 5 and 6 represents that, outcome of dividend discount
model shows intrinsic value of Macro’s shares account for £14.86 respectively which is lower as
compared to the closing price of share to a great extent (Gilbert and et.al., 2017).
Debt ratio:
Debt ratio = Total liabilities / total assets (United Kingdom Rates & Bonds, 2017)
In context with the measurement, refers to the Appendix 7, it has been identified that, in
the year of 2016, debt equity ratio of Macro Plc was lower as compared to the ideal ratio and
competitors (Afonso and Jalles, 2017). Moreover, as per the ideal ratio business unit issue 2
equities in against to 1 debt.
Equity Ratio and Solvency Ratio
Equity ratio = Total equity / total assets (Share prices of Inchcape Plc, 2017).
Solvency ratio = long term debt / shareholders equity (Share prices of M&S Plc, 2017).
By considering the equity ratio which shown in the Appendix 8 and 9 which describes
that, debt-equity ratio of Macro Plc accounted for .03:1 which shows that solvency position of
the company was not sound in 2016. Thus, for developing effectual capital structure firm should
keep in mind ideal ratio such as .5:1 while taking decision in relation to raising funds
(Kannadhasan, Goyal and Charan, 2016).
Weighted Average Cost of Capital:
As referred to the Appendix 10 there has been measurement for WACC such as:
Total market value of equity = 125*4.25 = 531.25 million
WACC = ((E / V) * Re) + [((D / V) * Rd) * (1 – T)]
Required rate of return:
Required rate of return = risk free rate + (Rm * beta value)
The calculations referred to the Appendix 11.

2. Discussion over the methodology for measuring such models and their relevant pros and cons
Methodology Advantages Disadvantages
HPR  It helps in comparing
the yields and portfolio
over the given period.
 It will be helpful in
gathering the large
amount of profits.
 The time value of
money will not be
considered by such
method.
 Such measurement
brings the inaccurate
time which will be no
longer than a year.
Intrinsic Value  It will be measured
over the assets value of
the firm as well as
which includes in
aspects of business.
 It includes
measurement of all
tangible and intangible
factors in the assets.
 The sale of assets may
be below or upper than
the market value but
will be sold at the
intrinsic value.
 They only consider the
true value of liabilities
and assets by the
company's accountant.
Financial leverage ratios  It facilitates the
powerful access to the
capital of the business
 Bring Idle acquisition
of the accounts
(Financial leverage
ratios, 2017).
 In considering the
finance it will be risky
tool (Kini, Shenoy and
Subramaniam, 2017).
 It is very expensive as
well as complex for
measuring.

Weighted Average Cost and
capital
 This technique is very
easy and simple and
having less complexity
which in turn
convenient for
accounting
professionals to make
analysis over the
capital funds of the
firm (Evaluating New
Projects with Weighted
Average Cost of
Capital (WACC),
2017).
 It applies the single
rates for all the projects
as well as beneficial in
prompt decision
making with the help
of adequate results.
 It will be difficult for
the managers in
maintaining the capital
structure of the firm as
well as affects the
retained earnings.
 No strong decision can
be made such as non
profitable projects were
performed in spite of
good and profitable
projects.
 Due to not specific data
there will be obstacles
in attaining the market
cost of capital.
CONCLUSION
From the above report, it has been concluded that required rate of return offered by
Macro Plc is lower as compared to the rival firm such as M&S & Inchcape. Besides this, it can
be inferred that capital or financial structure of Macro Plc is not sound. Thus, for developing
suitable structure and enhance the profitability of firm Macro Plc is required to comply with idea
ratio. Further the report has evaluated the various models or techniques o the basis of their
advantages and disadvantages. Hence, this in turn reflects the lights on the uses of such
techniques in analyzing the financial stability of the business.

REFERENCES
Books and Journals
Afonso, A. and Jalles, J. T., 2017. Sovereign debt effects and composition: evidence from time-
varying estimates.
Gilbert, T. and et.al., 2017. Is the intrinsic value of a macroeconomic news announcement
related to its asset price impact?. Journal of Monetary Economics. 92. pp.78-95.
Kannadhasan, M., Goyal, V. and Charan, P., 2016. The Role of Financial Performance as a
Moderator on the Relationship Between Financial Leverage and Shareholders Return.
Journal of Modern Accounting and Auditing. 12(7). pp.379-387.
Kini, O., Shenoy, J. and Subramaniam, V., 2017. Impact of financial leverage on the incidence
and severity of product failures: Evidence from product recalls. The Review of Financial
Studies. 30(5). pp.1790-1829.
Lin, C., Schmid, T. and Xuan, Y., 2016. Employee representation and financial leverage.
Mishra, P. and Sharma, H. P., 2017. Nexus amongst Holding Period, Returns and Risk for
Mutual Funds (A Case from India). The Journal of Accounting and Management. 6(3).
Online
Financial leverage ratios. 2017. [Online]. Available through:
<https://www.myaccountingcourse.com/financial-ratios/financial-leverage-ratios >.
[Accessed on 29th October 2017].
Share prices of Inchcape Plc. 2017. [Online]. Available through: <
https://uk.finance.yahoo.com/quote/INCH.L/>. [Accessed on 29th October 2017].
Share prices of M&S Plc. 2017. [Online]. Available through: <
https://finance.yahoo.com/quote/mks.l?ltr=1>. [Accessed on 29th October 2017].
Share prices of Next Plc. 2017. [Online]. Available through: <
https://uk.finance.yahoo.com/quote/NXT.L/ >. [Accessed on 29th October 2017].

United Kingdom Rates & Bonds. 2017. [Online]. Available through:
<https://www.bloomberg.com/markets/rates-bonds/government-bonds/uk >. [Accessed on
29th October 2017].
Evaluating New Projects with Weighted Average Cost of Capital (WACC). 2017. [Online].
Available through: <https://efinancemanagement.com/investment-decisions/evaluating-
new-projects-with-weighted-average-cost-of-capital-wacc >. [Accessed on 29th October
2017].

APPENDIX
1.
Net profit after tax 98
Closing price 17.85
Opening price 14.37
Dividend 0.78
Closing price + dividend 18.63
(Closing price + dividend) - opening price 4.26
Holding period return 26.97%
2.
Net
pro
fit
aft
er
tax Closing price
Open
ing
price
Divid
end
Closi
ng
price
+
divid
end
(Closi
ng
price
+
divide
nd) -
openi
ng
price
Holdi
ng
perio
d
retur
n
Next 667
4849.01 (Share prices of
Next Plc, 2017) 7290 1.05
4850.
06
-
2439.
9
-
33.47
%
Marks and
Spencer Group 407
339.11 (Share prices of
M&S Plc, 2017)
452.4
0 0.07
339.1
8
-
113.2
2
-
25.03
%
Inchcape 184 688.2 (Share prices of 785 0.14 688.3 - -

Inchcape Plc, 2017) 8
96.62
1
12.31
%
FTSE 100 7,142.83
6,274
.05
7,142
.83
868.7
8
13.85
%
3.
Mean or average
return
Standard
deviation Co-variance
Macro Plc 16.11 2.47 0.0016
Next 5230.7
651.0
Marks and Spencer Group 347.5 36.6
Inchcape
661.9
31.1
FTSE 100
6,473.5
406.2
4.
Year
Dividend per
share (in £) Discounting factor @ 2%
Present
value of
dividend
1 0.78 0.98039 3.88
2 0.784 0.96117 3.77

3 0.784 0.94232 3.66
4 0.78 0.92385 3.55
Intrinsic value per share 14.86
5.
Particulars Figures
Par value £100
Maturity 5 years
coupon rate 4%
yield to maturity (5-year annual-coupon
government bonds)
3%
6.
Year
Interest amount
per bond (in £)
Discounting factor @ 3% (United
Kingdom Rates & Bonds, 2017)
Present value
of interest
1 4 0.971 3.88
2 4 0.943 3.77
3 4 0.915 3.66
4 4 0.888 3.55
5 4 0.863 3.45
Intrinsic value per bond 18.32

7.
Particulars Formula Total liabilities Total assets Outcome
Debt ratio =
Total liabilities /
total assets
Next Plc 2018 2330 .87
M&S 8476 5031 1.68
Inchcape 3037 4381 .69
8.
Particulars Formula Total equity Total assets Outcome
Equity ratio =
Total equity /
total assets
(Financial
leverage ratios,
2017)
Next Plc 312 2330 .13
M&S 3445 5031 .68
Inchcape 1344 4381 .31
9.
Particulars Formula Long term
debt
Shareholders’
equity
Outcome
Macro Plc Solvency ratio =
long term debt /
shareholders
equity
4 125 0.03
Next Plc 615 312 1.97
M&S 1727 3445 .50
Inchcape 289 1344 .22
10.
Particulars Figures
Market value of the company's equity (E) 125 million

Market value of the company's debt (D) 4 million
Total Market Value of the company (E + D) 129 million
Cost of equity (Re) 2%
Cost of debt (Rd) 4%
Tax rate 30%
WACC ((125 / 129) * 0.02) + [((4 / 129) * .04) * (1 -
.30)]
WACC .019 + 0009]
= .0199 or 2%
11.
Companies /
particulars
Beta RFR R(M) Required rate of
return (in %)
Macro Plc 0.8 2% 2.5 2.02
M&S 1.02 2% 2.8 2.87
Next Plc 0.75 2% 2.5 1.90
Inchcape 1.23 2% 3 3.10