Analysis of Accounting and Managerial Finance in Henkel AG: A Report

This report provides a comprehensive analysis of Henkel AG's accounting and managerial finance practices. It begins with an introduction to the core principles of accounting and financial management, emphasizing their importance in determining a company's value and credit rating. The report then delves into the specifics of Henkel AG, a German manufacturing company operating in consumer, industrial, and adhesive technologies. The analysis includes detailed interpretations of financial tables, such as beta values for Henkel, Unilever, and Reckitt Benckiser, exploring their debt-to-equity ratios and unlevered betas. The report calculates the cost of debt, cost of equity using the CAPM model, and enterprise value to determine the weighted average cost of capital (WACC). Furthermore, it presents projected income statements, assesses growth rates, and calculates terminal values to determine the intrinsic value of Henkel AG's shares. The report uses internal and external information to evaluate business performance and provides a thorough examination of the application of financial models and theories in corporate financing decisions.

ACCOUNTING AND
MANAGERIAL FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
QUESTION 2...................................................................................................................................6
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13
INDEX OF TABLES
Table 1: Beta of companies and their debt equity ratio...................................................................3
Table 2: Unlivered beta of firms......................................................................................................5
Table 3: Average beta of industry and corporate beta of firm.........................................................5
Table 4: Calculation of cost of debt.................................................................................................6
Table 5: Enterprise value of the firm ..............................................................................................7
Table 6: Calculation of weighted average cost of capital for the firm.............................................7
Table 7: Projected income statement ..............................................................................................8
Table 8: Growth rate of firm's cash flow.........................................................................................9
Table 9: Cost sheet ........................................................................................................................10
Table 10: Terminal value of shares................................................................................................10
Table 11: Intrinsic value................................................................................................................11
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INTRODUCTION
Accounting and financial management is referred to as the crucial business activity that
acts as an aid for the business in carrying out its operations in smooth manner. It is essential for
the firm in making determination of the its true value. Along with this it acts as an aid in
determining the credit rating of the organization in an effective manner (Netter, Stegemoller and
Wintoki, 2011). The concept of managerial finance presents that it is the branch of science that is
concerned with the managerial significance of the financial tools. It is the tool that focuses upon
assessment rather than technique.
In the present report accounting and managerial finance has been discussed in context of
Henkel AG. The company is Germany based manufacturing organization that is involved in
consumer and industrial business. The firm is categorized into three business units. Such
includes Laundry and Home care, Beauty care as well as adhesive technologies. The present
study entails to summarize the key principles, trends as well as tools in accounting and
managerial science. Further it includes assessment of the practical application of models and
theories to decide over corporate financing. Along with this the study covers usage of internal
and external information for appraisal of business performance.
QUESTION 1
Table 1: Beta of companies and their debt equity ratio
Beta Beta Debt/equity
Henkel 0.51 0.07
Uniliver 0.18 0.94
Reckitt Benckiser 0.20 0.35
Interpretation
Beta indicate the extent to which value of share change with small change in value of
variable. Value of beta always remain in range of -0, 1 and +1. If value of beta is positive then it
means that with change in index value value of shares will change positively. Means that if index
change by 10% then shares will move upward but it does not mean that share price will also
increase by 10%. positive beta is indicating that if index move upward then share price will also
go up. Similarly, if index value will decline then shares price will also decline on specific trading
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day (Papadakis, 2005). If value of beta is negative then it means that both index and shares price
are moving in inverse direction. Which means that if index value increase by 5% then share price
may decline by -2%. hence, in case of negative beta both index and shares move in different
directions. Value of beta of Henkel is 0.51 which means that with 1% change in MSCI world
index value share price of mentioned firm share will increase by 0.51% because value of beta is
0.51 and it is positive. Value of beta is 0.18 for Unilever which means that with change in index
share price will change positively. But with 1% change in MSCI world index value only 0.18%
change will be observed in share price of Unilever. Same condtiion is observed in case of Reckitt
Benchkiser whose beta value if 0.20 and its share price will change only by 0.20% with 1%
change in MSCI word index value. Hence, Henkel shares price is largely affected by movement
in index then Unliliver and Reckitt Benckiser. Deb equity ratio indicate capitals structure of the
firm. It can be seen that debt equity ratio of Henkel is very low in comparison to peer firms. This
indicate that proportion of equity is very high in capital structure of Henkel then other firms.
Hence, it can be said that Hankel is in much better condition then Unliver and Reckitt Benckiser.
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Table 2: Unlivered beta of firms
Henkel 0.48
Uniliver 0.09
Reckitt Benckiser 0.15
Interpretation
In this case unlivered beta is computed for all firms. It is beta that is computed by using
debt and equity ratio of the firm. In this table it can be seen that this ratio is again high in case of
Henkel relative to other firms like Unilever and Reckitt Benckiser. If we analyze values of beta
then it can be said that share price of Henkel will move by about 0.48% with 1% change in value
of MSCI world index (Panayides and Gong, 2002). Which means that if index plunge high by
good percentage on single day then shares of Henkel will give good return to the shareholders.
Similarly, value of beta is positive in case of Unilever and with 1% change in value of index
value of share will change by 0.09%. which means that very small change will be observed in
case of share price Unilever if market even increase by good percentage on specific trading day.
In case of Reckitt Benckiser value of beta is 0.15 which means that with 1% change in index
value share price will change by 0.15% on single day in the stock market. Hence, it can be said
that due to use of debt equity ratio in calculation value of beta significantly decline.
Table 3: Average beta of industry and corporate beta of firm
Average 0.24
Beta corporate 0.22
Interpretation
In order to compute corporate beta for Henkel average of industry beta is taken. In an
industry value of beta of most of firms remain nearby to each other. Hence, in this calculation
three firms are taken in the report. After calculation of beta of all firms their average is taken and
average beta of household and personal care industry is 0.24. This indicate that with 1% change
in MSCI world index share price of most of the firms of industry change by 0.24%. This
indicate that small percentage change happened in case of share price of household and personal
care industry companies when value of MSCI world index get changed (Seo and Hill, 2005).
Value of corporate beta of Henkel is 0.22 and this reflects that if all divisions of the Henkel are
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considered then its shares price will overall change by 0.22% if MSCI world index value will
change by 1%. This reflects that if measure risk of equity of Henkel share in single nation then
its beta may high relative to peer firms. But if we compute beta that is computed by considering
all nations shares price in which firm is listed and value of MSCI world index value then it can
be said that less then moderate change take place in shares of Henkel relative to MSCI world
index.
QUESTION 2
Table 4: Calculation of cost of debt
Interest rate on bond 1.20%
Tax rate 20.00%
Cost of debt 0.01
Interpretation
Cost of debt indicate the rate of finance cost that firm is paying to its creditors if all debts
are combined. Here, it can be said that finance cost of firm is very low. Finance cost of bonds
can be easily identified but same of bank loan can not be determined by the equity research
analysts. In such a situation bond that have same duration which is equivalent to the time period
for which debt is taken by the firm is selected by the equity research analysts. It is well known
fact that firms get deduction in income tax from the government for finance cost they pay for
loan taken from bank (Seth, 2002). Due to deduction in tax burden of finance cost reduced to
some extent on the firm. Equity research analysts does not know rate in interest on firm bank
loan and duration of bond is same to debt taken by the firm. Hence, rate of bond is taken as firm
bank loan interest rate in calculation. Tax rate is deducted in the calculation and real finance cost
that firm needs to pay after getting deduction on tax is computed. Hence, finance cost of bank
loan is very low for the firm which only 0.01%.
CAPM Assumptions
K(e) 3.22%
RFR 2.1%
Beta 0.22
R(m) 7%
Interpretation
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In this table CAPM model which is also known as capital asset pricing model is used to
compute cost of equity for Henkel. Here, cost of equity for the firm is 3.22%. This is computed
by using firm beta and expected market return and also risk free rate of return. Market return is
7% because risk premium is 5% and risk free rate is 2%. Both rates are combined to compute
estimated market return (Brealey, 2012). Hence, by using all these variable cost of equity is
computed which is 3.22%. Risk free rate is taken 2% which means that it is a rate which shares
mostly earn if investment is make on them. Risk free rate is taken from rate of return that
government security is giving on the invested value.
Table 5: Enterprise value of the firm
Enterprise Value (EV)
Current Market Price 96
Diluted Shares 13,661
Market Capitalization 13,11,456
Long Term Liabilities 50,00,000
Less: Cash & Cash Equivalents 1,176
Enterprise Value (in lacks) 63,10,280
Interpretation
In order to compute enterprise value current market price of firm shares is taken in to
account. Issued shares are multiplied by current shares price and by doing so market
capitalization of shares are computed in the table given above. In this table long term loan of the
firm is also taken in the table and along with this cash and cash equivalents that remain at end of
the year are taken in to account to compute enterprise value of the firm (Chalevas and Tzovas,
2010). Enterprise value is indicating entire amount of fund that firm is currently having and
invested in the business. There is very high value of enterprise which indicate that firm is making
heavy amount of capital investment in its business or may do same in future time period. This
table is acting as input table which will be used to compute weighted average cost of capital for
the firm. This table will also acts as input that will be used to compute intrinsic value of the firm
shares.
Table 6: Calculation of weighted average cost of capital for the firm
Debt Equity weightage
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E/(D+E) @ Enterprise Value 20.78%
D/(D+E) @ Enterprise Value 79.22%
Interest Rate (%) 2%
Tax Rate (@) 20%
WACC Calculation
WACC 1.94%
Interpretation
Weighted average cost of capital indicate average cost of capital that is acting as finance
cost for the firm. From table given above it can be seen that cost of capital for the firm is 1.94%
which is computed by giving multiplying the weight-age of each source of capital to its cost.
Interest rate is taken 2% for the firm and it is taken without deducting as deduction from original
interest rate that is firm actually bearing in its business (Cheng, Ioannou and Serafeim, 2014).
Tax rate is taken 20% because on average basis corporate tax rate is 20% in the nation. Hence, it
can be said on the basis of calculation that if cost of equity and debt is combined then cost of
capital for the firm will be 1.94%.
Table 7: Projected income statement
2013 2014 2015 2016 2017 2018
Revenue 16355 16428 18089
19717.0
1 21491.54 23425.78
OPERATING EXPENSES
Cost of revenue total 8497 8630 9350 9947.29 10842.55 11818.38
Selling, general and admin.
Expenses, total 4975 4875 5459 5753.91 6271.77 6836.23
Depreciation
Unusual expense (income) 155 212 167 168.00 169.00 170.00
Other operating expenses,
total 29 57 4 33.82 36.86 40.18
Total operating expenses,
total 14070 14184 15444
15903.0
3 17320.18 18864.78
Operating income 2285 2244 2645 3813.98 4171.36 4561.00
Other, net -59 -47 -24 -24.00 -24.00 -24.00
INCOME TAXES,
MINORITY INTEREST
AND EXTRA ITEMS
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Net income before taxes 2172 2195 2603 3789.98 4147.36 4537.00
Provision for income taxes 547 533 635 663.77 713.20 783.16
Net income after taxes 1625 1662 1968 3126.22 3434.17 3753.83
Minority interest 36 34 47 45.15 47.00 52.14
Net income before extra.
Items 1589 1628 1921 3081.07 3387.17 3701.69
Total extraordinary items
Net income 1589 1628 1921 3081.07 3387.17 3701.69
Interpretation
The table above demonstrate the income statement of Henkel AG. The data has been
taken for the period of three years that is 2013, 2014, 2015. Further the forecasting of the income
statement figures for future time period has been done. This includes determination of the values
for the period of 2016, 2017 and 2018. Such plays an effective role in determination of the true
value of the organization in an effective manner (Haque, 2015). From the analysis of the table it
has been determined that there is greater increase in the revenue of the firm. Along with this the
amount of net income has also increased to significant level. This is due to the reason that firm
has effective control over its expenses which has enhanced the value of income with the
business. The net income of the firm before tax is increasing to a greater extent. Along with this
after tax value of net profit also demonstrates tremendous growth. It has been assumed that there
is 10% increase in the sales every year.
Table 8: Growth rate of firm's cash flow
Growth rate
-9.18% -0.44% 10.60% 20.02% 18.81%
Interpretation
Growth rate is referred to as the amount of enhancement that has been gained by
particular variable within specific duration of time. For investors it presents the compounded
annual growth rate of the organization's revenues, earnings, dividends as well as macro concepts
that can includes economy on whole. The above table demonstrate the growth rate of the firm.
This demonstrates that growth rate of Henkel AG is demonstrating fluctuation in all the years.
The company was initially in the situation of loss later it has overcome such situation and this
has resulted in increasing the growth rate of the organization to a greater extent (Hillier and
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et.al., 2014). It can be interpreted that growth rate of the business also depends on the economic
conditions that are prevailing in the market. It is determined that growth rate of the business has
increased with the improvement in the conditions that are prevailing in the market. This involves
increase in the demand for the products and services that has lead to increase in the growth of the
business to a significant level. It has been determined that in future course of time the growth of
the firm would enhance significantly.
Table 9: Cost sheet
Cost sheet 2013 2014 2015 2016 2017 2018
Cost of revenue total 51.69% 47.71% 51.95% 50.45% 50.45% 50.45%
Selling, general and admin.
Expenses, total 30.18% 26.95% 30.42% 29.18% 29.18% 29.18%
Depreciation 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Unusual expense (income) 0.92% 1.17% 0.95% 1.01% 1.01% 1.01%
Other operating expenses,
total 0.02% 0.32% 0.18% 0.17% 0.17% 0.17%
Total operating expenses,
total 85.38% 78.41% 86.03% 83.27% 83.27% 83.27%
Operating income 14.62% 12.41% 13.97% 13.67% 13.67% 13.67%
Provision for income taxes 3.51% 3.24% 3.34% 3.37% 3.32% 3.34%
Minority interest 0.26% 0.21% 0.22% 0.23% 0.22% 0.22%
PV at 1.94%
WACC
Present year 1 2 3 4 5
Discounting factor 0.98 0.96 0.94 0.92 0.91
PV of cash flows 1596.08 1846.41 2903.36 3129.22 3352.73
Table 10: Terminal value of shares
Terminal Value
Sum of PV of FCF for explicit forecast 12,828
WACC 1.94%
Long term growth in Revenues 19%
Present Value of terminal value (17,997)
Terminal Value as % of Total Value 348%
Interpretation
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Terminal value is referred to as the value of asset that is being anticipated on a particular
date in the future course of time. It is being utilized in multi-stage discounted cash flow analysis
as well as in studying the cash flow projections for several year period (Weighted Average Cost
of Capital, 2014). The perpetuity growth model is being utilized for determination of ongoing
free cash flows. By determination of the above table it has been examined that the intrinsic value
as percentage of total value is 348%. On the other hand the present value of terminal value is -
17997. Terminal value requires the major figure that relates with long term growth in revenues
as well as weighted average cost of capital (Michalski, 2014). From the calculation it has been
determined that weighted average cost of capital is 1.94%.
Equity Value
Enterprise Value (5,170)
- Debt 50,00,000
+ Cash 1,176
Net Debt 50,01,176
Equity Value 49,96,006
Table 11: Intrinsic value
Intrinsic Value
Equity Value 49,96,006
Diluted Shares 13,661
Intrinsic Value 366
Interpretation
Intrinsic value is referred to actual value of the organization or asset based upon the
underlying perception of its true value that includes entire aspects that relates with business in
relation with both tangible as well as intangible factors. This value might be or might not be the
current market value. The above table demonstrate the intrinsic value of Henkel AG. This is 366.
The intrinsic value is being determined by taking into account to factors that includes equity
value as well as diluted shares. In real terms that intrinsic value of the firm is much lower. Thus
it can be determined that the intrinsic value of the undervalued (Ross, Westerfield and Jordan,
2008). Such has huge impact on the goodwill of the organization in the market. The value of the
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firm in the stock market is lower as the condition of the economy in unsound. Due to this the
investors are makes sales of the shares. This has huge impact on the value of shares. Though
there is greater increase in the profitability of the organization but it intrinsic value of shares is
lower due to decrease in the trust among the customers.
Marginal tax rate
Marginal tax rate is zero because firm does not earn extra amount of revenue that firm
earn above limit that is determined by the German government. Marginal tax is imposed on the
firm when it earn a very high amount of revenue in its business. Henkel is not crossing that limit
of revenue and due to this reason marginal rate of tax is not imposed on the firm. This is
confirmed from the fact that there is no line about marginal tax in the firm annual report. Firm
revenue is below 8000 level of revenue and it is exempt from paying marginal rate of income tax
on earned revenue.
CONCLUSION
On the basis of above discussion it is concluded that it is very difficult task to compute
actual intrinsic value of the company shares price. This is because in calculation of intrinsic
value of the company shares it is very difficult task to take accurate value of all inputs
accurately. For example it is very hard task to estimate accurate rate of growth of the market in
future time period. Hence, by suppose market growth rate is taken 10% whereas in future it
increase merely by 2% then intrinsic value of shares that is shown by DCF model will prove
inaccurate. Hence, it is very important to use reliable facts and figures in the DCF model for
valuing a firm and to compute its intrinsic value. In this regard research analysts can take figures
in the discounted cash flow model after doing detail discussion with some one. This model also
help in measuring risk that is related to investment in company shares by computing value of
beta which is taken as input in computing weighted average cost of capital for the firm. Hence, it
can be said that inputs used in discounted cash flow model help in evaluating firm from many
sides. Thus, this model have due importance for researchers in evaluation of business firm.
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REFERENCES
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Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to
finance. Strategic Management Journal. 35(1). pp.1-23.
Haque, F., 2015. Corporate governance and equity finance: an emerging economy perspective.
Journal of Financial Econonic Policy. 7 (3). pp.233 – 250.
Hillier, D. and et.al., 2014. Fundamentals of corporate finance. McGraw-Hill.
Michalski, G., 2014. Value-Based Working Capital Management: Determining Liquid Asset
Levels in Entrepreneurial Environments. Palgrave Macmillan.
Netter, J., Stegemoller, M and Wintoki, M. B., 2011. Implications of data screens on merger and
acquisition analysis: A large sample study of mergers and acquisitions from 1992 to 2009.
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Panayides, P. M and Gong, X., 2002. The stock market reaction to merger and acquisition
announcements in liner shipping. International journal of maritime economics. 4(1). pp. 55-
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Papadakis, V. M., 2005. The role of broader context and the communication program in merger
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Ross, S. A., Westerfield, R. and Jordan, B. D., 2008. Fundamentals of corporate finance. Tata
McGraw-Hill Education.
Seo, M. G and Hill, N. S., 2005. Understanding the human side of merger and acquisition an
integrative framework. The Journal of Applied Behavioral Science. 41(4). pp. 422-443.
Seth, A., 2002. Value creation in acquisitions: A re-examination of performance issues. Mergers
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Online
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Weighted Average Cost of Capital, 2014. [Pdf]. Available through:
<http://www.enme.umd.edu/ESCML/CostBook2/AppendixB-WACC.pdf>. [Accessed on 19th
April 2016].
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