Corporate Financial Management: Adidas Financial Performance Report

This report provides a comprehensive financial analysis of Adidas, examining its corporate governance, financial performance, risk profile, and capital structure. Part A delves into Adidas's corporate governance mechanisms, dividend policy, financial performance, and capital structure optimality, culminating in a firm valuation using the discounted cash flow model. It highlights the company's commitment to regulatory compliance, transparency, and sustainable business practices. The analysis reveals strong revenue growth, improved gross profit margins, and a significant increase in net income attributable to shareholders. Risk management strategies are also discussed, emphasizing the company's proactive approach to identifying and mitigating potential risks. Furthermore, the report evaluates Adidas's capital structure, aiming to determine the optimal mix of debt and equity. Part B provides advice to a company named OEM about which market to enter. This detailed assessment aims to provide a clear understanding of Adidas's financial health and investment viability.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student
Name of the University
Author Note

1CORPORATE FINANCIAL MANAGEMENT
Executive Summary
This report consists of two main parts. Part A consists of an analysis of the financial and
sustainable performance of Adidas, a renowned apparel company. It begins with an introduction
on what the report will deal with. After which, an analysis is performed on the corporate
governance measures undertaken by the company. Further analysis is conducted on the dividend
policy, financial performance and the optimality of the capital structure of the entity. The value
of the firm is then identified using the discounted cash flow model. Part B of the report consists
of an advice a company called OEM about which market to enter.

2CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Part A...............................................................................................................................................3
Introduction......................................................................................................................................3
Corporate Governance.....................................................................................................................3
Financial Performance.....................................................................................................................4
Risk Profile......................................................................................................................................5
Optimality of Capital structure choice.............................................................................................6
Dividend policy...............................................................................................................................7
Part B.............................................................................................................................................10
References......................................................................................................................................15

3CORPORATE FINANCIAL MANAGEMENT
Part A
Introduction
An investment decision is one in which choices have to be made about the best option
available amongst a variety of choices available to the person. While it can be suggested that
profitability is an important aspect, a business should also be able to sustain the profits and the
value created by the company should be taken into consideration. The relative strength of the
company is also important as it provides an idea about the risk bearing capacity of the firm.
Dividends are an indicator of the returns provided by the firm on the investment. Hence, the
dividend policy is relevant in understanding whether an investment will provide the seller with
desired returns. The capital structure of a company is necessary as it suggests the risk profile of
the company and the likeliness of it remaining profitable. Adidas AG is a German company
involved in the design and manufacture of shoes, accessories and clothing. It was founded in
1924 and is the largest manufacturer of sportswear in Europe (Report.adidas-group.com, 2019).
As of 2018, it employs more than 50000 people in its business and is considered to be a giant in
the field of sportswear apparel. Due to its wide range of collaborations with various high profile
celebrities across the globe, the company is considered to have a significant influence on the
modern day world. Its activities are scrutinized closely by most of the authorities closely.
Corporate Governance
Corporate Governance is the combination of rules, regulations and guidelines, which are
combined together to determine how a business entity should be run. Its main objective is to
ensure that the regulatory framework and the objectives of the entity are aligned together
(Hermalin, 2014). Hence, a company should try to achieve its objectives but in a manner that
keeps the best interests of all the stakeholders in consideration. In case of Adidas, the company
has a supervisory board in place. This board is responsible constantly checking the changes
taking place within the regulatory environment. It makes sure that the entity follows the required
regulations without fail. A declaration of corporate governance is also stated in the corporate
governance report of the entity. Apart from the board, the company also has an audit committee,
the Steering committee and the general committee in place. The Finance and Investment

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Committee, the nomination committee and the mediation committee supplement the above-
mentioned committees. The audit committee plays a significant role in the running of the entity.
Apart from checking the accounting functions, it also keeps track of the annual financial
statements and the consolidated financial statements of the organization. The Corporate
Governance report provides a significant amount of information on the policies of the entity. It
suggests that the entity follows a dual board system and most of the emphasis lies on maintaining
transparency. The organization is also committed to promoting equal opportunities to both men
and women in the leadership roles related to the entity. The efforts from the company also
involve the avoiding of conflict of interest towards the organization. This means that they are not
involved in any activities, which are opposing the benefits of the organization. Transparency is
also given due importance. The company always tries to communicate the most accurate and
relevant information to the relevant stakeholders. The suggestions made by the German
Corporate Governance Code were also largely fulfilled by the company as it took all of the main
recommendations in running the entity. The entity was also included in the Dow Jones
Sustainability Index as a part of the most sustainable businesses in the world (Andrusiak, 2015).
Financial Performance
According to the 2018 annual reports of the entity, the total revenue of the brand Adidas
grew by 9% from the previous years. The main reason behind this growth was the increase in the
sales of the entity through the digital mode. Improvement also lied in the gross profit margin.
This meant that the company has been able to reduce its overall cost of production, making it
more profitable. Even though the operating expenses of the entity have also gone up, their
margin is not as much as that of the revenue. Hence, the company has been able to do well in
controlling its production. The Net Income from the operations is also going well as the entity
has shown an improvement of around 20% from the previous financial year. The net income
attributable to the shareholders has shown a major improvement as it has gone up by more than
45 percent. This means that the company is able to give huge amounts of dividend to the
shareholders. Dividends are considered the returns to the shareholders. If the net income
available is more, then the dividends paid by the company are also high. It is also an indicator of
the good financial health and performance of the company. The effective tax rate of the entity
has also gone down. This can also be attributed as a reason for the increase in the overall profits

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and net income of the company. However, as the production profitability levels of the entity have
also gone up, it can be suggested that the company can manage to remain profitable even if there
is an increase in the tax rates.
Risk Profile
The risk management team of Adidas generally aggregates all types of risks and
opportunities which are directly associated with the business. The risk owners has reported
through the executive board after assessment of risk aggregating process. To remain sustainable
and competitive, the company that is Adidas is continuously exploring its opportunities and
developing them for better outcome form the overall business process (Report.adidas-group.com,
2019). The risk and opportunity management of the company mainly provides the framework
that generally conducts the business activities in a well-controlled environment. The principles of
risk and opportunity management mainly defines the potential risk which occurs in the external
as well as the internal events of the company which are to be included in a series of event. This
might impact negatively on the ability of the company to achieve the business objectives and
financial goals of Adidas. The team of risk management has mainly summarised the risk that are
categorised as per the nature of risk such as strategic risk, operational risk, legal risk and
compliance risk (Jayawardhana, 2016). Moreover, the risk and opportunity management system
is managed by the board of executive which has been established for ensuring the comprehensive
risk management system of the business. The department of risk mainly operates and develops
the risk of the company for better mitigation process along with processing it on behalf of the
present executive board.
Adidas consist of supervisory board who are generally responsible for monitoring the
overall effectiveness of the present risk management system. The department of internal audit
generally provides the objective of assurance which points out the risk assessment process and
other compliance of the company. It also includes the risk management policy which act as a part
of regular activity of auditing and these are measured at the end of every financial year (Fournier
& Srinivasan, 2018). The risk and opportunity of the company are based on the frameworks
which deals with enterprise risk management along with internal controls that are develops by
the audit committee of Adidas. On the other hand, adopting the risk and the opportunity
management system, the committee would appropriately reflect the overall structure of corporate

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culture as well as the management culture of Adidas. Adidas has significantly impacted by their
holdings along with financing functions of the firm that faces the company in their normal course
of business The technique of pointing out the risk mainly focuses on the identification,
evaluation, handling as well as monitoring of the systematic risk and opportunities. It also
includes the main objectives that would help in supporting the business success that would
protect the company for any kind of financial risk as well as non-financial risk (Pham et al.
2014). The focus on the opportunity includes the management system that are beneficial for the
company along with mentioning the risks that are associated with the business. It also focuses on
the framework of decision making that points out the risk management policy and process tools
for meeting the requirements of the company.
Optimality of Capital structure choice
Optimal capital structure of the company provides the mixture of debts and preferred
stocks along with common stocks that mainly helps the firm in minimising the cost of capital and
maximises the overall market value. The offers from debt financing points out the lowest cost of
capital as of its certain deduction which are mainly from its taxes. Moreover, too much debt in a
business mainly increases the risk of financial loss along with risk to shareholders on the return
on equity (Hwang, Zhao & Toh, 2014). Adidas consist of certain optimal point where the
company earns their total amount of marginal profit and equal debts which are to be equal with
the marginal cost. Asymmetric information and other costs that are incurred by the company are
also unaffected by the capital structure of their business. The structure of capital is provided in
the annual report of the company which points out the financial statement as well as the structure
of capital of the company. The operating business of Adidas mainly consist of sale of
merchandise which act as the wholesale partner as well as the own retail activities (Bromiley et
al. 2015). Moreover, the own trading activities mainly results in the process of influencing the
holding functions of the company which focuses on the daily activities of the business.
The effect of currency along with the cost of transfer includes the provided services to the
customers. The result of interest and the income from the total amount of investment are
associated with the related companies which focuses on their daily activities. The capital
structure of the company includes the subscribed capital as well as the paid up capital that points
out the risk and opportunities of the business (Marcelino-Sádaba et al. 2014). This help the

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company for future development as it reflects the assets as well as the capital structure of the
company. Adidas has significantly impacted by their holdings along with financing functions of
the firm that faces the company in their normal course of business. As the annual report of
Adidas has been disclosed by the company, it can be seen that 46 % of the total assets mainly
consist of the shares that are already affiliated in the market (Giannakis & Papadopoulos, 2016).
Accounts that are associated with intercompany represents another 26 % of total assets which
points out the 46 % of liabilities and equity in the financial year 2018. The statement of financial
position of the company also help in pointing out the optimal choice of capital structure. It can
also be seen that Adidas has decreased their total amount of shareholders’ equity from € 2704
million in the year 2017 to € 2634 million in the year 2018 (Report.adidas-group.com, 2019).
Moreover, the provision has also increased from € 624 million in the year 2017 to € 699 million
in the year 2018.
Dividend policy
Dividends policies are the most crucial decisions that is taken by the company. There are
many factors that directly or indirectly affects the dividend policy of any company, these factors
include different types of dividend theories and also buy back of shares. The dividend policies
are structured as per the need of the companies. In the modern days the share buyback are
become more relevant than the dividend policy. The dividend policy of an organisation is the
plan that is followed to take decisions about the sum of the dividend that is to be paid and the
time on which such dividend will be declared. There are many factors that form the structure of
the dividend policy of the company. Some of the major factors that create impact on the dividend
policy are investment opportunities, estimated volatility of the earning capacity in the coming
days, tax regulations, floatation cost, and several other legal restrictions affect the dividend
policy of any company. There several theories and model on dividend policy these are
Modigliani miller theory, Gordon’s theory on divine policy and Walters’s theory on dividend
policy (Magalhães 2018).
There are mainly three types of dividend policies which are enumerated below:
Stable dividend policy
Constant dividend policy

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Residual dividend policy
Stable dividend policy
Under this policy the companies used to pay dividend at a fixed rate and that does not
fluctuate even due to volatility in the earning capacity. The stable dividend policy is considered
as the most popular type o dividend policy (Lagnese 2017).
Constant dividend policy
When dividend is paid on a particular rate over the earnings of the company that kind of
dividend policy is known as constant dividend policy.
Residual dividend policy
Under this dividend policy the company declares dividend from the sum that is left after
the finances for the capital expenditure of the present period that are deducted from the internally
generated funds of the organisation.
Dividend policy of adidas for the financial year 2018.With response to the improvement in the
financial performance in the financial year 2018 the company decided to increase its dividend
rate by 29% in comparison to the previous year 2017. The rate of dividend declared in the year
201 is going to be €3.35 per share to every shareholder. As per the approval of the directors the
company will pay its dividend on May 14 2019 (Santos 2017).
Discounted Cash Flows
The dividend discount model has been well applied in order to value the share based on the
dividends paid by the company. The key factors that has been applied for the purpose of
valuation of the share was estimating the growth rates, dividends paid and the required return or
the discount factor that has been applied for the purpose of valuation of shares. The required rate
of return has been computed with the help of the Capital Asset Pricing Model whereby key
estimates like the return generated on the market index, beta of the stock that was calculated with

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the help of regressing the stock returns over the index. At the same time the formula that was
applied for the purpose of computation of the required return on equity was rf+(rm-rf)*beta. The
computed required rate of return on equity was calculated to be around 4.19% which is well
shown below:
Capital Asset Pricing Model
Particulars Factors
Risk Free Rate (rf) 1.10%
Return on Market (rm) 5.69%
Beta (b) 0.67
Required Return on Equity (Ke)
Rf+(Rm-
rf)*beta
Required Return on Equity (Ke) 4.19%
The dividends have been forecasted by applying the average growth rate functions and the
dividends was increased with the rate based on the stated average growth rates. On the other
hand, the terminal growth rate has been calculated with the help of the formula (D5/Re-g) as
shown below:

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Dividend Discounted Model
Particulars
Year
0 1 2 3 4 5
Terminal
Value
Dividends 3.35
3.4
7
3.5
9
3.7
1
3.8
4
3.9
8 235.06
Required Return Discount Factor 1.00
0.9
6
0.9
2
0.8
8
0.8
5
0.8
1 0.81
Discounted Value
3.3
3
3.3
1
3.2
8
3.2
6
3.2
4 191.42
Total Value 207.84
Current Share Price 261.25
Part B
The analysis of the Super Tyre Project has been well done with the various revenue sources that
is available with the company that will be flowing from the Original Equipment Manufacturer
(OEM) Market and with the Replacement Market. On the other hand, the variable costs that will
be associated with the project investment that will be incurred in each of the project divisions has
been well encountered. The sales price of the company has been well increased with the help of
the average inflation rate and the additional 1% increase that is expected by the company. In total
of 4% increase has been applied to the increase in the sales price of the company on a per unit
basis (Chittenden and Derregia 2015). The initial investment that will be done in the project will
be €200 million that would be invested for the purchase of the machinery and the same would be
depreciated by using the straight line method of depreciation in the books of accounts for the
company. The salvage value of the machinery will be around €50 Million. The initial working
capital will be around €10 Million and the requirement of the working capital in the subsequent
years of operations will be around 15% of the total sales done by the company. In order to well

11CORPORATE FINANCIAL MANAGEMENT
account for the depreciation tax shield that would be associated with the expenses the
depreciation expenses will be taken on a pre-tax basis in order to get the depreciation tax shield
and at the same time (Sari and Kahraman 2015). The working capital that would be invested by
the business would be recovered at the end of year 4 that is at the end of year whereby the
recovery of working capital would be added in the final year cash flows. The taxation rate that
has been applied in order to tax the earnings of the cash flows has been around 40% and the
same has been well incorporated in the analysis done. The discounted cash flows has been well
determined for the company taking the appropriate discount rate that is 15% that is applied to the
yearly cash flows that has been generated by the project (Rossi 2015). The net present value of
the project was determined to be around €94.82 Million and the same has been well applied for
the purpose of computation of the overall profitability of the company. The internal rate of return
that has been generated by the project is around 13.54% stating the amount of profitability in
percentage terms. On the other hand the payback period justifying the time taken by the project
in returning the total capital invested was around 2.90 Years, which has been better done with the
help of the cash flows generated and the amount recovered in each of the stated period (Su et al.,
2018).
Payback Period Year 0 Year 1 Year 2 Year 3 Year 4
Cash Flows
(210,000,
000)
43,500
,000
84,789,
600
90,400,
808
250,886,
950
Amount Recovered
(210,000,
000)
(166,500,
000)
(81,710,4
00)
8,690,
408
259,577,
358
Time Taken for Recovery 0 1 2 0.90
Payback Period 2.90

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Net Present Value Analysis
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Initial Investment -200,000,000 50,000,000
Working Capital
(10,000,
000)
(33,000,
000)
(35,006,4
00)
(37,134,7
89)
(39,392,
584)
Selling Price Per Tyre
(OEM) 50 52 54 56
Production Per Year 3000000 3060000 3121200 3183624
Total Sales 150000000 159120000 168794496 179057201
Variable Cost Per Tyre 30 31 32 34
Units 3000000 3060000 3121200 3183624
Total Cost 90000000 95472000 101276698 107434321
Net Cash Flows 60000000 63648000 67517798 71622881
Selling Price Per Tyre
(REM) 70 73 76 79
Units 1000000 1020000 1040400 1061208
Total Sales 70000000 74256000 78770765 83560027
Variable Cost Per Tyre 30 31 32 34
Units 1000000 1020000 1040400 1061208
Total Costs 30000000 31824000 33758899 35811440
Marketing Cost 30000000 0 0 0

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Total Costs 60000000 31824000 33758899 35811440
Total Sales Cash Flows 220000000 233376000 247565261 262617229
Total Costs 150000000 127296000 135035597 143245761
Gross Cash Flows 70000000 106080000 112529664 119371468
Less: Depreciation -37500000 -37500000 -37500000 -37500000
Profit Before Tax 32500000 68580000 75029664 81871468
Taxation @ 40% 13000000 27432000 30011866 32748587
Profit After Tax 19500000 41148000 45017798 49122881
Add: Depreciation 57000000 78648000 82517798 86622881
Investment in Working
Capital
(10,000,
000)
(33,000,
000)
(35,006,4
00)
(37,134,7
89)
(39,392,
584)
Recovery of Working
Capital
154,533,
773
Cash Flows
(210,000,
000)
43,500,
000
84,789,
600
90,400,
808
250,886,
950
Discount Factor @15% 1.00 0.87 0.76 0.66 0.57
Discounted Cash Flows
(210,000,
000)
37,826,
087
64,113,
119
59,439,
998
143,445,
428
Net Present Value
94,824,
633
Internal Rate of Return 13.54%

14CORPORATE FINANCIAL MANAGEMENT

15CORPORATE FINANCIAL MANAGEMENT
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