Analysis of Corporate Financial Management and Capital Structure

This report provides a comprehensive analysis of corporate financial management, focusing on dividend policy and capital structure. It examines the valuation of firms, including discussions on the Miller & Modigliani theory regarding dividend irrelevance. The report delves into the capital structures of Tesco, WH Smith, and British Land Plc, analyzing their business and financial risks, financial performance, debt capacity, and optimal capital mix. It explores various models such as the Walter model, Gordon model, and Modigliani-Miller approach to dividend policy. Additionally, it compares the financial positions of Tesco and WH Smith, evaluating their equity, debt, and overall financial health. The report also assesses the risks and financial performance of British Land Plc, offering a thorough understanding of corporate finance principles.

CORPORATE FINANCIAL
MANAGEMENT
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TABLE OF CONTENTS
Introduction..........................................................................................................................................4
1) Analysts often value a firm by reviewing its dividends and the firm’s policy on dividend;
Miller & Modigliani posit that a firm’s dividend policy is irrelevant in its valuation.....................4
2) Examine capital structure of British land Plc..............................................................................8
a) Business and financial risks facing the firm................................................................................8
b) Financial performance.................................................................................................................9
c) Debt capacity of the business and sources of financing available to the firm...........................12
d) Recommendation on an optimal capital mix of the firm...........................................................13
Conclusion..........................................................................................................................................13
References..........................................................................................................................................14
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INTRODUCTION
Financial status of an entity is important in order to survive in the competitive market as this
would heal the health of the business from sudden attacks. This project is all about Tesco, WH
Smith and British Land pc organisation in discussing about the corporate structure of their business.
This corporate structure mainly includes capital structure including debt and equity as important
component that drives the overall growth of the firm. The performance will be regulated by paying
dividend in order to retain shareholders within the same entity for long time period.
1) Analysts often value a firm by reviewing its dividends and the firm’s policy on dividend; Miller
& Modigliani posit that a firm’s dividend policy is irrelevant in its valuation
Capital structure
This terminology is widely used in the corporate finance in which the efficiency of existing
capital of an entity is increases. The capital structure of enterprises is regarded as special framework
that speaks about various components used as efficient source of financing. The business
requirements will be financed using different factors such as equity as well as debt component in
order to uplift their existing market conditions (Amiraslani, Lins, Servaes and Tamayo, 2016). The
position of business can be strengthened by making significant changes in the overall capital
structure of the business enterprise as usage of various components in the business will help in
achieving desired goals and the objectives of an enterprise owner like British land Plc. The relative
proportion of equity and debt will be determined in order to bring market volatility in the existing
business. The value of an enterprise can be increases by increasing the internal value of business by
decreasing cost of capital for using variety of finance in the business.
Walter model
The efficiency of the dividend will be increase with the execution of this approach in order
to determine the deserving dividends to all the shareholders. The dividend is essential for the
shareholders in order to maintain the loyalty among all the shareholders of WH smith and Tesco plc
stakeholders to strengthen the overall business. This strength is essential in order to grab higher
market share. The current model of determination of dividend propounded by Walter is emphasises
on the value of an enterprise (Chakraborty, Baum and Liu, 2017). The primary motive of this
particular model is to show the relationship between internal rate of return and cost of capital and its
overall effect on the business value of an enterprise like Tesco and WH Smith plc.
Assumptions to be followed by an entity in order apply the current model in their business to
generate better results includes:
 100% financing through retained earning
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 Internal rate of return(r) and cost of capital (k) remains constant
 All profits are distributable
 Opening profits and dividends never change
The life of firm should be infinite
P= D+r (E-D)/K/K
P= Current market price of equity share
E= Earnings per share
D= Dividend per share
(E-D)= Retained earning
r= rate of return
K= cost of equity
Particulars WH Smith TESCO
P 1760 190.25
E 95.6 2.77
D 43.9 11.29
(E-D) 378 3265
R 72.77% 4.22%
K 7.5% 4.34%
P= D+r (E-D)/K/K 48.79 18.60
Gordon Model
It is regarded as another important method used to determine the amount of dividend
payable by an entity owner to its variety of shareholders holding adequate share in the business.
This model is popular method used by an enterprise owner which is externally related to the market
value of firm (Fracassi, 2016). This model is developed by Myron Gordon in order to assess the
existing financial resources in order to determine the adequate amount of dividend to retain all the
shareholders in the same entity for long period of time.
Assumptions
 All source of financing is from only equity and no other source of finance
 No external source of finance is available
 Internal rate of return (r) remains constant in the firm
 Costs of capital will also remains constant denotes by symbol K
 Corporate taxes doesn’t exists
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P0= D1/Ke-g
D1= Expected dividend
G= growth rate
Ke= discount rate
Particulars TESCO WH Smith
D1 11.29 43.9
G 7.14% 35.96%
Ke 4.34% 7.5%
P0= D1/Ke-g 9.74 41.81
Modigliani and Miller approach
This approach of ascertaining the overall amount of dividend policy is irrelevant as this will
not affect the wealth of the shareholders with the external changes takes places in the market. The
current approach of determination of dividend amount to be paid to all the shareholders needs to
emphasise on maintaining the earnings of all the shareholders.
Assumptions
Firm operates their business in the perfect capital market
There is no existence of corporate taxes that reduces the overall profit of the business enterprise
An entity have fixed investment policy
There is no kind of any uncertainty of risks exists as the business deals in perfect capital market
where dividend of the shareholders will not affect with the external market changes.
r= D+(P1+P0)/P0
= Dividends+ capital gains/Purchase price
The current approach of determination of the amount of dividend is regarded as the best suitable
approach by an entity as it reduces the prices of capital (Depoers, Jeanjean and Jérôme, 2016). The
low return shares held by an entity owner will be reduces which directly increases the higher return
shares currently falls in the pocket of the business enterprise.
Details TESCO WH Smith
D 11.29 43.9
(P1+P0) 300 247
P0 189.75 1764
r= D+(P1+P0)/P0 12.87 44.04
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Traditional approach
The conventional approach of capital structure is regarded as traditional as in this particular
theory that suggest that debt to equity ratio of an entity is sufficient when cost of capital is lower as
compared to the standards of the business. On the other side the market value of the existing
business is higher. So any external changes takes places in the financing mix such as changes takes
places in the proportion of debt of equity component will bring positive changes in the value of the
firm (Bergmann, Rotzek, Wetzel and Guenther, 2017). There are various assumptions which need to
be follow in order to improve the overall performance of an enterprise in relation to the external
market.
Assumptions
Rate of interest charged on debt remains constant for some time period
Expected rate of interest earned by shareholders on the equity shareholders remains constant
Changes occurred in the rate of interest and expected return will bring direct changes takes places in
the weighted average cost of capital of an enterprise whether showing increasing or decreasing
effect on the overall capital structure of an enterprise.
Tesco
The capital structure of Tesco includes both components of equity as well as debt in order to
form the overall capital structure of an entity. The equity capital of Tesco includes 17801 GBP and
debt capital of 14483 GBP which shows that this enterprise has higher of internal source than
compared to the external sources involved in an entity. The burden of external market is less as
internal back of financial sources of finance are there to pay off interest on the debt taken by the
firm. The average weighted average cost of capital of Tesco is 7.33% which is reflecting the long
term performance of an entity in relation to its external market threats. The growth rate is enough in
order to generate market cash flows of an entity up to 35830 GBP free cash flows produces on the
basis of this current growth rate.
WH Smith
The financial and corporate condition of WH smith is strong enough which force them in
order to take external borrowings to run their business. It can be said that basic survival is
maintained by this entity but in order to drive its overall sales growth this entity requires external
borrowings in order to increases their financial strength. The current investments are not strong
enough in order to harvest higher returns in cash to maintain its current liquidity. The assets that can
be changed into cash in the later stage can only be helpful for an entity in storing them for their
benefit (Martin, 2016). The shifting trend of an entity towards the external borrowing is to avail the
lower interest rate benefit on taking borrowings. The current benefit enjoyed by an enterprise will
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be helpful in order to increase its overall earnings by paying higher dividend to all the shareholders
who enjoyed higher shares in the business.
Comparison among both the firms
The comparison among both the enterprise will be done on the basis of various factors
which have come across in the assessment of singular companies and their overall corporate
structure:
Components- On the basis of financing mix which becomes adequate by using appropriate
financing mix with the help of equity or debt component used by an enterprise owner in order
balance their entity in the external market. On the contrary, WH Smith have only utilises debt
component which indirectly maximises the earnings of an enterprise by availing the benefit of lower
interest cuts.
Risk- In terms of risks, Tesco has lesser risk as compared to the risk taken by WH Smith by solely
relying on the debt factor of the business. It has been proved that higher the risk higher will be the
final outcome generated by an entity in the near future (Goel, 2017). The ultimate advantage
generated by an enterprise is related with the market value created in front of all the external buyers
who becomes part of the business enterprise in the near future for the beneficial of an enterprise
owner.
2) Examine capital structure of British land Plc
a) Business and financial risks facing the firm
Risk is regarded as that component which will determine the success or failure of an
enterprise in the business tenure. The uncertain situations occurred in the business just to analyse
the existing financial resources of an entity that helps in enhancing the current resources. Risks are
essential for every business as this inspires an entity in order to challenge their capabilities to gain
competitive position in the external market. There are various kind of risks currently faced by
British land place due to the reason proper risk management principles have adopted by an entity
owner. The economic outlook is the major risk faced by an entity as the economic status of the firm
is weak which is creating bad image in the eyes of all the customers who thinks company is not able
to grab higher market opportunities. The political instability in the external market is creating
another burden in taking market opportunities which ruin the transparent position of an enterprise
maintained by the business in the external market. Due to decreasing image of the brand in front of
the external entities the demand of property investors is gradually decreases which decrease the
overall strength of an enterprise (Khan, Sajid, Waseem and Shehzad, 2016). The deficiency in the
investment strategy increases the risks of uncertainty that will ruin the current market status enjoyed
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by the firm and transform all of them into huge loss of the firm.
b) Financial performance
Particulars Formula 2015 2016
Revenue 556 590
NP 1765 1364
NP ratio NP/Sales*100 3.17 2.31
Operating profit 1789 1331
OP Ratio OP/Net sales*100 3.21 2.25
Total assets 13001 13875
Return on assets
Total
assets/turnover*100 23.38 23.51
NP ratio
0
0.5
1
1.5
2
2.5
3
3.5 3.17
2.31
2015
2016
Interpretations
Net profit is also termed as corporate profit which helps in reflecting the ability of an
enterprise in front of all the competitors. The good image of the business will be formed with the
increasing or decreasing amount of net profit generated by the business in a particular year. The net
profit is determined by an enterprise owner after excluding all the expenses from the operating
profit incurred in an enterprise (Goel, 2017). It can be inferred from the above figure that net profit
generated by an enterprise is increasing over the years which shows the less imposition of taxation
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incurred on an enterprise. The existing ability of an entity is strong enough in order to handle the
heavy pressure imposes on an enterprise.
OP Ratio
0
0.5
1
1.5
2
2.5
3
3.5 3.22
2.26
2015
2016
Interpretations
The overall business segment of British land Plc is classified into two segments such as
operating and non-operating business parts. The profit produces by an enterprise owner after
operating their business om the basis of various services offered by them to satisfy the higher
expectations of different clients. The profit generated by an enterprise owner after excluding
expenses from the gross profit of an entity are termed as operating profit which extracts the non-
operating profit it of the profit generated by the form (Pratheepkanth, Hettihewa and Wright, 2016).
This profit generated by an enterprise is regarded as profit produces by an enterprise by delivering
daily routine services to its clients. This profit is increases from one period to another which reflects
that company has applied lots of efforts in uplifting their current business conditions.
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Return on assets
23.3
23.35
23.4
23.45
23.5
23.55
23.38
23.52
2015
2016
Interpretations
Generation of return is regarded as primary objective of the business owner of British land
plc in operating their business in the external market. Every business aims to earn profit by applying
initial investment in the business to grab higher market opportunities. The profit can be enhanced by
the firm by focuses on the internal strengths and recognizes their special talent. The core
competencies of an entity are analyses in order to make competitive advantage over its competitors
who intends to suppress the values of the business enterprise. The business assets of an enterprise
are used to generate higher business return in order to meet all losses generated in the business of
British land Plc (Montenegro, 2016). The efforts made by the owner in improving the current
condition is the basic reason behind the increasing returns generated by the business over the years.
The returns will be generated by an entity owner with the passage of time as their basic advantage is
to reduce all its weaknesses.
Particulars Formula 2015 2016
Current assets 402 472
Current liabilities 372 310
Current ratio CA/CL 1.0806451613 1.5225806452
Inventory 274 325
Quick assets
Current assets-
Inventory 128 147
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Acid test ratio QA/Current liabilities 0.3440860215 0.4741935484
Interpretations
This is regarded as basic ratio helps an entity owner in maintaining their liquidity
performance. The word liquidity denotes that how much cash is available in the business in order to
meet the short term obligations on the business in relation to its external market. Current ratio is an
approach used to evaluate the proportion between current assets and current liabilities incurred in
the same entity (WH Smith should borrow to thrive, 2013). Current assets are maximizes to pay off
short term liabilities exists in the business of British land Plc. Trade creditors are important source
of short term obligations in form of current liabilities imposes in an entity which needs to e
eliminated in order to safeguard the business assets from the external threats. The performance of
British land place is increasing which shows the higher contribution of current assets in meeting
available current liabilities incurred in the business enterprise.
Acid test ratio
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2015 2016
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.08064516129032
1.52258064516129
Current ratio

Interpretations
Acid test ratios is recognizes with another name of quick ratio is used in evaluating the business
performance of an entity. The acid test ratio is that approach used to determine the liquidity of na
entity owner in order to pay off its existing liabilities imposed on their business from its external
environment. In this approach inventory is excluded from the current assets of the business as
inventories are not easily converted into cash easily in order to maintain the liquidity of the British
plc. The results of the current analysis shows that British land place has increasing quick ratios that
showcases the ability of the business in generating higher results over the period.
c) Debt capacity of the business and sources of financing available to the firm
It has been noticed by assessing the annual reports of British Land Plc that this entity has
taken higher debts as compared to the equity capital which increases their dependence on the
external sources of finance especially of debt component. Apart from thinking wrong side about the
use of debt component the best part about this is that it is regarded as the cheapest sources of
financing as under this an entity are required to pay only interest to the lender for taking debt from
them and nothing else.
Various sources of finance available to an entity after analysing its capacity of taking debt as major
financial component includes debentures, bank loan, trade credit, cash credit, bank overdraft. These
sources of finance are available to an entity in order to fulfil their short term as well as long term
business requirements which would help in uplifting their current market status.
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Acid test ratio
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.344086021505376
0.474193548387097
2015
2016

d) Recommendation on an optimal capital mix of the firm
It can be recommended to British land Plc to re frame their overall capital structure in order
to ensure its higher productivity as this would help in accomplishing all the desired aims and
objectives. The current capital structure of an entity is not sufficient enough to meet the current
business requirements and only achieves few targets. The current dependence on the debt
component should be decreases by adding another important financial component in for of equity.
Using equity will balances the overall capital structure in order to generate higher returns in the
business (Capital structure theory, 2017). Various capital structure theories can be used in order to
enhance the skills and the capabilities of an entity in order to utilise all the financial resources for
earning the ultimate goal of the business. The desired aims and targets of an entity will help in
creating good image of the business in the external market which in turn created unique market
status of the business.
CONCLUSION
It can be concluded from the above assignment that designing of good corporate structure is
essential in order to remain competitive in the market. This project report emphasises on the
business performance of three enterprises such as Tesco plc, WH Smith and British land Plc which
both fall under the same business situations. The major emphasise of this report is on the selection
of various financial sources in order to prepare their adequate capital structure in order to deserving
dividend amounts to all the available shareholders of the business enterprise in relation to its market
rivals.
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REFERENCES
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Online
Capital structure theory, 2017. Available through: < https://efinancemanagement.com/financial-
leverage/capital-structure-theory-traditional-approach > [Accessed on 31st March 2017].
WH Smith should borrow to thrive, 2013. Available through: <
http://www.telegraph.co.uk/finance/2857508/WH-Smith-should-borrow-to-thrive.html >
[Accessed on 31st March 2017].
British Land Co Plc, 2017. Available through: <http://financials.morningstar.com/ratios/r.html?
t=BTLCY> [Accessed on 3rd April 2017].
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