Financial Management Report: Auto Trader Finance in COVID-19 Era

This report provides a financial analysis of Auto Trader's strategies during the COVID-19 pandemic. It begins by evaluating how Auto Trader raised £200 million in finance through equity, comparing it with other methods like bank loans, crowdfunding, and bootstrapping, highlighting their advantages and disadvantages. The report then examines the impact of COVID-19 on working capital, short-term, medium-term, and long-term finance, discussing mitigation strategies such as improving accounts receivable and inventory management, as well as investment strategies. Finally, the report assesses the proposal of Dave Ellis to cancel dividends, exploring the implications for investors and referencing the Modigliani and Miller theory, which suggests that dividend policy does not affect the share price, and the value of the firm is determined by its earning power and investment decisions. The report concludes by summarizing the key findings and providing insights into Auto Trader's financial resilience during the crisis.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
MAIN BODY..................................................................................................................................1
a) Evaluating how Auto trader has raised £200m of finance and comparing it with other
methods available........................................................................................................................1
b) Examining the mitigation impact of the COVID associated with working capital and short
term finance and medium and Long Term Finance.....................................................................2
c) Evaluating the proposal of Dave Ellis for cancelling the dividend in respect to implications
for the investors with reference to Modigliani and Miller...........................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Financial management is considered to be as one of the prominent activity which is
considered to be significant in planning, organizing, directing, controlling and effectively
monitor the key financial resources of the company (Tonkiss, 2016). It is useful in analysing the
money and investment to make appropriate set of decision. This study will highlight on
discussing ways through which Auto trader has raised £200m of finance and comparing it with
other methods available. This study also consider the mitigation impact of the COVID associated
with working capital and short term finance and medium and Long Term Finance. Furthermore,
this study also alternative views of dividend with respect to implication for investor. Auto trader
company is a public British automotive which was founded in the year 1975. This company
mainly deals in vehicle advertisement and mainly specializes in second hand and new
automotive sales.
MAIN BODY
a) Evaluating how Auto trader has raised £200m of finance and comparing it with other methods
available.
At the time of COVID- 19, consumers tend to abandon the public transport. Auto trader
company is considered to have the largest marketplace within the UK for the new as well as the
used cars. The internet car auto trader group has raised £200 million of the fresh shares to
bolster up the finances of the company. The car industry has grind to a halt and factories at a
standstill. The FTSE 100 group will sell 46 million shares which are of worth £200 million at the
current share price of 423 p which accounts for 5% of the company's equity. The company can
significantly earn money with the help of shares because it earns money from capital
appreciation. Raising funds by issuing of fresh shares to the shareholders is considered to be
significant in raising fresh capital in order to pursue new projects, pay of debts and improve the
operations of the Auto trader company in tough time of COVID-19. The UK online car
marketplace i.e., Auto trader has been selling up to 46.5 million of shares which in turn are worth
5% of the share capital. This is one of the key significant attempt which is useful in raising cash
in order to strengthen the balance sheet at the time of coronavirus crisis (Auto Trader raises
equity to tackle coronavirus crisis, 2020). However, equity raise will be allowing the Auto trader
group to resume the existing capital return policy at the earliest and gain high degree of relevant
opportunity at the time of COVID-19 pandemic. One of the key significant benefit associated
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with the raising funds through equity is that, it is less risky as there is no fixed monthly loan
payment and other credit problems. The equity financing is considered to be significant for the
Auto trader group because it does not have to take funds out of business. Another major benefit
related with the equity financing is that, there seems to be no obligation to repay the money.
Another key significant way which is useful in raising fund is bank loan. It is referred to
as the amount of money which has been taken by the lender and specified set of interest along
with the principal amount has to be paid to the bank over a certain period of time (Buckle and
Thompson, 2020). It is one of the key significant way in raising fund and tends to provide
biggest support the Auto trader group to improve the business functions at the time of COVID-
19 pandemic. Bank loan tends to have cheapest interest rate and provides the set of flexibility
upon how to spend the money in order to improve the business functions. Hence, raising fund
through the bank is considered to be as one of the most prominent and easy approach which is
useful in quickly raising funds for the company and improve the operations of the Auto trader
group.
Crowdfunding in turn are considered to be as one of the key prominent measure which is
useful in raising fund for the Auto trader group. This is one of the prominent measure which is
useful in pooling up of the money from large number of individuals through the organization to
effectively carry out the operations of the business (Swamy, 2017). Contributions within the
crowdfunding tends to usually take place in the form of donations or trading of equity for raising
the capital funds.
Bootstrapping is another significant measure which is useful in raising fund for the Auto
trader group. This is significant in raising fund by building the business with own set of
resources from the scratch (Tacon and Walters, 2016). It is significant in relying on the own set
of revenues and savings in order to operate and expand the business operations especially at the
time of COVID-19 pandemic. It is considered to be useful in effectively demonstrating the
determination and commitment for the company.
b) Examining the mitigation impact of the COVID associated with working capital and short
term finance and medium and Long Term Finance.
 Working capital and short term finance
Working capital and short term finance is referred to as the current asset and current liabilities of
the organization. This is useful in analysing the financial position of the company by determining
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the amount by which current asset of the company exceeds its current liabilities. The COVID-19
pandemic has disrupted the way business works and leads to low degree of operational
performance and productivity within the Auto trade group. Earning additional set of profits is
considered to be as one of the most effective way which is useful in improving the working
capital of the company (Berry, 2016). The auto trader group can improve the working capital by
ensuring that, current assets of the company is useful in increasing the liquidity of the
organization. The working capital of the company is useful in improving the accounts receivable
collection and payable. The company must also significantly focus on reducing the expenses of
the auto trade group. Analysing the credit risk and reviewing the tax opportunities is one of the
key prominent way which is useful in improving the working capital and short term finances of
the auto trader group. Borrowing money on the long term basis helps the financial manager of
the company to retain funds for the longer period of time and meet the short term needs and
obligations of the company (Chishti, 2016). Selling long term assets for the cash is also one of
the key prominent measure which is useful in improving the working capital and short term
finances of the auto trader group. Better management of the inventory and account receivable of
the company is highly relevant in increasing the cash and liquidity of the company. This way the
company will have the benefit to maintain significant level of cash for the business. Issuance of
the equity stick is one of the key relevant measure which is highly relevant and significant in
improving the working capital and short term finance of the company. This improves the
business operations and attain higher business efficiency. Converting certain current assets into
cash is useful in carrying out the business operations at this time of COVID-19 pandemic.
However, a positive working capital is always considered to be better because it states that, the
company has the capability to meet its short term obligation. This way, it helps the auto trade
group to improve the day to to day operations of company and improving the financial position
at this time of COVID-19.
 Medium and Long Term Finance
It could be seen that the virus is having significant impact over all the sectors of
economy. It is hard to analyse the actual impact of the virus over economy and its different
sectors but the consequences are long term. It is a complex task for every organisation to
determine the steps to take for mitigating the impact of virus over the business. However it is
essential for the business to take steps that successfully lead the organisation from this crisis.
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Liquidity and financial management has become very crucial for the organisation as the business
operations are stopped or reduced causing the cash flow to dry up.
For mitigating the impact of Corona over medium term and long term finance of the
organisation it has to plan the investment strategies accordingly. The projects should be started at
lower levels and to start for revenue generating activities that will help to generate adequate cash
flows. The additional funds have to be invested in the banks or other short term platforms for
earning the returns that will be used for businesss (Chen, Song and Goergen, 2019). It will be
required to make allocation of resources after proper study of the factors to mitigate the impact
of virus over the medium term and short term finance.
c) Evaluating the proposal of Dave Ellis for cancelling the dividend in respect to implications for
the investors with reference to Modigliani and Miller
Seeing the pandemic organisations have to redesign their strategies and policies for
mitigating and reducing the impact over operations. Business environment has become very
weak due to the pandemic. All the operations of the business run from liquidity which is most
affected due to the virus. Cash flows of the businesses are highly affected and management has
to adopt the strategies for successfully succeeding the period of pandemic.
In the present case Dave Ellis Managing Director is also considering different ways
through which impact could be mitigated. There is no established process or procedure through
which the impact could be mitigated. It has to make strategies and have to continuously review
them to ensure that the operations are conducted accordingly. The financial manager is proposing
to cancel the dividend for current financial year. Dividend is return that company provides to the
investors over their investments (Lin and Lee, 2020). They are made out of the profits earned
during the year from carrying out the business. It could also be made out of reserves in case the
company is not having adequate profits in any financial year. Dividends are paid in cash.
Dividend theory is explained by Modigliani & Miller Approach
According to the M&M approach the dividend policy does not have any impact over price of
shares of firm and believes that the investment policy increases the value of firm. Investors of the
firm are satisfied with retained earnings of the company as long the returns are higher than equity
capitalisations rate. It is of the view that when returns are below the cost of capital then
shareholders like to have earnings in form of the dividends.
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The approach further states that market value of the firm is affected by operating income,
apart from risk involved in investment. The theory also states that value of firm is not dependent
over choice of the capital structure or the financial decisions of firm. The hypothesis provides for
irrelevance concept of the dividend in the comprehensive manner (Korganbekova, 2018).
Dividend policy according to them is irrelevant as it does not have any impact over the share
prices of the firm. It expressed value of firm is determined through earning power of investment
policy or assets and not by the dividend decisions by split of earnings of the retentions and the
dividends.
As per this approach market prices of the shares at beginning of the period equal to present
value of the dividend paid at end of period plus market prices of shares at end of period. M&M
approach also provides practical situations where the dividends are irrelevant for the investors.
Investors are capable of making own cash flows from stocks, the irrespective of whether
company is paying dividend or not depending over the need for cash. If investors needs money
higher than dividend received, then they could sell part of the investments for making up the
difference. Likewise the investors could also reinvest dividend in stocks. M&M states that
dividend policy of the company have influence over investment decision of investors. It is
believed that the dividends are not relevant by arbitrage arguments. Through this logic, dividend
distributions to the shareholders are offset by external financing. Distribution of the dividends,
price of stock decreases and would nullify gain made by investors due to dividends.
It is based over assumptions of perfect capital market is existing and there are no transaction
or floatation cost and have no large investors for influencing market prices of shares. There are
no taxes and does have fixed dividend policy and there is no risk of the uncertainty.
Considering the above theory it could be evaluated that the decisions of company of not
paying dividend will not impact the valuation of company. It could also be evaluated that the
business will not be affecting the wealth of shareholders. The decision of cancelling the dividend
will be beneficial for the organisation as the stockholder equity is decreased by total value of the
dividends paid. Effects of the dividend change depend over kind of the dividends company pays.
Dividend cuts could be permanent or temporary. At the time of crisis companies announce
dividend cuts for preserving the cash during the uncertain times. Dividend cuts affect cash
outflows of the dividend paying firms and cash inflows of the investors having shares in
companies.
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The decision of financial manager is viable at this time as it has direct influence over the
cash outflows. For payment of dividends company has to reduce the retained earnings and the
cash balance (Che and et.al., 2018). This will affect the financial management of the business as
profitability of the company due to virus is affected. Non payment of dividend will help the
organisation to retain the company position and liquidity and will also improve the net cash
flows.
On the other investors buys shares generally of companies who are regular in dividend
payments. Halt or cut affects the cash flows of investors as it is considered as source of cash
inflows. However, the wealth of shareholders is not affected as the amount equivalent to
dividend payment will be added directly to the shareholder’s equity as retained earnings will not
be decreased from dividends.
Hence the decision of Finance manager of not paying the dividends is viable as it will
prevent the cash outflows and will enable the company to manage the financial strategies.
CONCLUSION
From the above report it could be concluded that the pandemic has affected the economy of
the world. Organisations globally are seeing the impact of virus and are framing the strategies
and policies for mitigating the impact of virus over different operations of the business. The
business has to analyse the impact according to their concern industry and to measure the effects.
If organisations do not reframe their strategies they could significantly influence over the
business. The impact of pandemic will be long term however the organisations and management
have to manage the business and its operations accordingly.
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REFERENCES
Books and Journals
Chen, J., Song, W. and Goergen, M., 2019. Passing the dividend baton: the impact of dividend
policy on new CEOs' initial compensation. Journal of Corporate Finance. 56. pp.458-481.
Lin, J.J. and Lee, C.F., 2020. Does managerial reluctance of dividend cuts signal future
earnings?. Review of Quantitative Finance and Accounting. pp.1-26.
Korganbekova, A., 2018. The Impact of Dividend Announcements on Stock Prices (Doctoral
dissertation, Central European University).
Che, X., and et.al., 2018. The effect of growth opportunities on the market reaction to dividend
cuts: evidence from the 2008 financial crisis. Review of Quantitative Finance and
Accounting. 51(1). pp.1-17.
Tonkiss, K., 2016. Delegation in hard times: The financial management of arm's length bodies in
the UK. Financial Accountability & Management.32(3). pp.362-378.
Buckle, M. and Thompson, J., 2020. The UK financial system: Theory and Practice. Manchester
University Press.
Swamy, M.K., 2017. FINANCIAL MANAGEMENT ANALYSIS OF MONEY LAUNDERING
THROUGH FRAUDULENT LCs, LOUs, LOCs AND SWIFT: CASE STUDIES OF
JOHNSON MATTHEY BANK: JMB (UK) AND INDIA'S MAJOR COMMERCIAL
BANK. Journal of Financial Management & Analysis.30(2). pp.65-71.
Tacon, R. and Walters, G., 2016. Modernisation and governance in UK national governing
bodies of sport: How modernisation influences the way board members perceive and enact
their roles. International journal of sport policy and politics. 8(3). pp.363-381.
Berry, M., 2016. The UK press and the deficit debate. Sociology.50(3). pp.542-559.
Chishti, S., 2016. How peer to peer lending and crowdfunding drive the fintech revolution in the
UK. In Banking beyond banks and money (pp. 55-68). Springer, Cham.
Online
Auto Trader raises equity to tackle coronavirus crisis. 2020. [ONLINE]. Available
through<https://currency.com/autotrader-share-sale-coronavirus>
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