Halfords Group plc: Financial Analysis, Investment, Target Company

This report presents a comprehensive financial analysis of Halfords Group plc, undertaken from a Chief Financial Officer's perspective. It begins by evaluating Halfords' financial statements to assess its performance and industry position. The report then delves into a proposed new project, a bicycle manufacturing plant, analyzing its potential profitability using investment appraisal techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR). The analysis suggests that the project's IRR is lower than the company's cost of capital, advising against its acceptance. Furthermore, the report identifies and evaluates ScS Group plc as a potential acquisition target, employing discounted cash flow analysis to determine its intrinsic value. The analysis indicates that ScS Group is undervalued, making it a potentially profitable acquisition for Halfords to expand its market share. The report concludes by recommending against the bicycle manufacturing plant investment and advocating for the acquisition of ScS Group.

Running Head: Corporate Financial Analysis
1
Project Report: Corporate Financial Analysis

Corporate Financial Analysis
2
Contents
Introduction.......................................................................................................................3
Investment appraisal techniques.......................................................................................3
Potential Target Company................................................................................................4
Conclusion........................................................................................................................5
References.........................................................................................................................7
Appendix...........................................................................................................................8

Corporate Financial Analysis
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Introduction:
Financial analysis is a process which is conducted by the comapny and its
stakeholders to evaluate and identify the performance of the company. There are various
techniques of corporate finance which is used by the different stakeholders of the company.
In the given case, financial analysis study has been conducted on the business point of view.
Being a chief financial officer of a company, it becomes important for the officer to evaluate
and make decisions about all the financial transactions and activities of the company. In the
report, Halfords group plc has been taken into the concern. Being a chief financial officer of
Halfords group plc, financial statement of the company has been evaluated firstly to
recognize the performance of the company and the position of the company in the industry.
Further, the new projects of the company has been identified and it has been evaluated that
whether the company would be able to generate better inflows from the project and lastly, the
target company has been evaluated for the purpose of acquisition.
Investment appraisal techniques:
Halfords limited is a British company which operates its business in retailing the car
parts, camping, touring equipment, camping equipment and bicycle in the UK and Ireland.
The company has been founded in 1892 (Home, 2018). The company also offer various
services to its customers such as Bicycle repair and car accessories installation. The study has
been performed on the company to evaluate the performance of the company.
Investment appraisal techniques are also known as capital budgeting. The process is
done by the financial manager and officer of a company to evaluate the new projects of the
company and their returns. These techniques make it easier for the organization to make
decision about the acceptance of the project (Fridson and Alvarez, 2011).
Being the chief financial officer of the company, it becomes important to evaluate the
new project (Bicycle manufacturing plant) of the company in which company is planning to
invest £ 3,00,00,000. The life of the project would be 10 years and on the basis of the last 5
years cash flows of the company and the trend in the market, it has been found that whether
the project would offer good return to the company or not.
Firstly, the cash inflows of the company has been evaluated and it has been found that
with the help of this new project the sales units of the company would be 8,00,000 to

Corporate Financial Analysis
4
10,00,000 units. In that case, the cash inflows of the company would vary from - £ 60,00,000
to £ 46,00,000 (Ahrendsen and Katchova, 2012). It explains that if the company invest into
the new project that the cash flows of the company than the total cash inflow could vary
according to the sales units of the project.
Further, the net present value technique of capital budgeting, which is evaluated to
identify that whether the cash flows of the project would be positive or negative, has been
discussed firstly and it has been found that the net cash flows of the company would be
positive. In this case, the cash inflows of the company would vary from - £ 69,13,664 to £
1,12,612 (Appendix). It explains that if the company invest into the new project that the cash
flows of the company either would be negative or very lower (Brown, 2012).
It explains that the investment into the project could be profitable for the company.
Further, the internal rate of return, which is evaluate to identify the total return percentage
where the NPV of the company would be 0, has been evaluated and it has been recognized
that the internal ret of return of the project is 1.41% to 11.31% (Appendix). In case of
8,00,000 units, the internal rate of return of the company would be 1.41% and in case of
10,00,000 units, the internal rate of return of the company would be 11.31% (Morningstar,
2018). In both the cases it has been found that the internal rate of return of the company is
lesser than the cost of capital of the company (Brooks, 2015).
On the other hand, the cost of capital of the new project of the company would be
15% which is quite higher than the internal rate of return of the company. Thus, it is
suggested to the company to not to accept the proposal (Gertler and Kiyotaki, 2010).
The investment appraisal techniques study on new project of the company explains
that the project should not be accepted by the company as it would not allow the comapny to
generate more profit as well as the performance of the company would also be worst. In
addition, the cost of the project would also be higher than the return % of the project.
Potential Target Company:
A target company is an organization which has been opted for the merger if
acquisition purpose by a potential acquirer. Takeover of an organization should be done by
the potential acquirer after evaluating and analyzing all the related aspect of the company.
The financial and non financial performance of the company is also required to be analyzed
(Brown, 2012).

Corporate Financial Analysis
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In the case of Halfords group plc, it has been found that the ScS group plc should be
acquired by the company. This company is operating its business in the same industry. So, it
would help the company to achieve the mission of the company to grab more market. Further,
the study of the financial performance of ScS has been evaluated to identify the performance
of the company and the profitability level of the company (Gopalan, Song and Yerramilli,
2014).
Discounted cash flow of the company has been evaluated to recognize the
performance of ScS and it has been found that the cash flow of the company is increasing by
170.17% from last 5 years. On the other hand, the performance growth rate of cash flow of
the company is 3.03%. On the basis of these figures, it has been found that the terminal cash
flows of the company are £ 27,100.87 (Appendix).
It explains that the discrete cash flow of the company would be £ 56,545. It leads to
the total terminal cash flows of the company is £ 4,96,352.86. On the basis of those
calculations, it has been found that the total value of firm would be £ 5,52,897.85, Out of
which £ 1,19,500 is the total debt of the company and thus the equity value of the company is
£ 4,33,397.85. It explains that the current worth of the company is £ 4,33,397.85 (Gibson,
2011). If Halfords group plc wants to acquire the company, than the total investment of the
company would be £ 4,33,397.85. ScS group has issued 2000 shares in the market. The
market value of the company’s share is £ 216.7. On the other hand, the intrinsic value of the
company is £ 216.70 (Appendix).
It explains that the company has been undervalued and thus if the Halfords limited
would acquire the company right now, than the company just have to pay £ 210 to each
shareholder of the ScS group company whereas the total worth of each shares of the comapny
is £ 216.7 (Morningstar, 2018). It would lead to the company to huge profit and thus, it has
been found that the company should acquire the ScS group to achieve the mission of the
company to grab more market (Higgins, 2012).
Thus, it is recommended to the Halfords group limited to recognize the offer of
acquire the ScS group limited. It would make it easier for the company o achieve the mission
of grab more market and be the leader in the market.
Conclusion:

Corporate Financial Analysis
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To conclude, the investment appraisal techniques study on new project of the
company explains that the project should not be accepted by the company as it would not
allow the comapny to generate more profit as well as the performance of the company would
also be worst. In addition, the cost of the project would also be higher than the return % of
the project. In addition, the target company, ScS has been evaluated for the purpose of
acquisition and it has been found that if the company would invest into the project than the
mission of grabbing more market could be achieved.

Corporate Financial Analysis
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References:
Ahrendsen, B.L. and Katchova, A.L., 2012. Financial ratio analysis using ARMS
data. Agricultural Finance Review, 72(2), pp.262-272.
Brooks, R., 2015. Financial management: core concepts. Pearson.
Brown, R., 2012. Analysis of investments & management of portfolios. Pearson Higher Ed.
Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a practitioner's
guide (Vol. 597). John Wiley & Sons.
Gertler, M. and Kiyotaki, N., 2010. Financial intermediation and credit policy in business
cycle analysis. In Handbook of monetary economics (Vol. 3, pp. 547-599). Elsevier.
Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.
Gopalan, R., Song, F. and Yerramilli, V., 2014. Debt maturity structure and credit
quality. Journal of Financial and Quantitative Analysis, 49(4), pp.817-842.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Home. 2018. Halfords group plc. [Online]. Available at: http://www.halfordscompany.com/
[Accessed as on 25th April 2018].
Morningstar. 2018. Halfords group plc. [Online]. Available at:
http://financials.morningstar.com/cash-flow/cf.html?
t=XFRA:HDK&region=deu&culture=en-US [Accessed as on 25th April 2018].
Morningstar. 2018. ScS group plc. [Online]. Available at:
http://financials.morningstar.com/income-statement/is.html?t=SCS&region=gbr [Accessed as
on 25th April 2018].

Corporate Financial Analysis
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Appendix:
Calculation of Net present value
Year Cash outflow Cash inflow PV Factor Present value
0
£
3,00,00,000 1.000
-£
3,00,00,000
1
£
60,00,000 0.870
£
52,17,391
2
£
60,00,000 0.756
£
45,36,862
3
£
60,00,000 0.658
£
39,45,097
4
£
60,00,000 0.572
£
34,30,519
5
£
60,00,000 0.497
£
29,83,060
6
£
60,00,000 0.432
£
25,93,966
7
£
60,00,000 0.376
£
22,55,622
8
£
60,00,000 0.327
£
19,61,411
9
£
60,00,000 0.284
£
17,05,574
10
£
60,00,000 0.247
£
14,83,108
Net present value = cash inflow - cash outflow
£
1,12,612
Calculation of Internal rate of return
Year Cash outflow Cash inflow
PV Factor
(20%) Present value
0
£
3,00,00,000 1.000
-£
3,00,00,000
1
£
60,00,000 0.833
£
50,00,000
2
£
60,00,000 0.694
£
41,66,667
3
£
60,00,000 0.579
£
34,72,222
4
£
60,00,000 0.482
£
28,93,519
5
£
60,00,000 0.402
£
24,11,265
6 £ 0.335 £

Corporate Financial Analysis
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60,00,000 20,09,388
7
£
60,00,000 0.279
£
16,74,490
8
£
60,00,000 0.233
£
13,95,408
9
£
60,00,000 0.194
£
11,62,840
10
£
60,00,000 0.162
£
9,69,033
Internal rate of return 11.31%
Units 10,00,000
Selling Price per unit 32
Labour cost per unit 10
Materials cost per unit 12
Variable Overheads per
unit 3
Fixed Overhead 10,00,000
Net Cash Flow 60,00,000
Calculation of Net present value
Year Cash outflow Cash inflow PV Factor Present value
0 £ 3,00,00,000 1.000 -£ 3,00,00,000
1 £ 46,00,000 0.870 £ 40,00,000
2 £ 46,00,000 0.756 £ 34,78,261
3 £ 46,00,000 0.658 £ 30,24,575
4 £ 46,00,000 0.572 £ 26,30,065
5 £ 46,00,000 0.497 £ 22,87,013
6 £ 46,00,000 0.432 £ 19,88,707
7 £ 46,00,000 0.376 £ 17,29,310
8 £ 46,00,000 0.327 £ 15,03,748
9 £ 46,00,000 0.284 £ 13,07,607
10 £ 46,00,000 0.247 £ 11,37,050
Net present value = cash inflow - cash outflow -£ 69,13,664
Calculation of Internal rate of return
Year Cash outflow Cash inflow PV Factor Present value
0 £ 3,00,00,000 1.000 -£ 3,00,00,000
1 £ 46,00,000 0.870 £ 40,00,000

Corporate Financial Analysis
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2 £ 46,00,000 0.756 £ 34,78,261
3 £ 46,00,000 0.658 £ 30,24,575
4 £ 46,00,000 0.572 £ 26,30,065
5 £ 46,00,000 0.497 £ 22,87,013
6 £ 46,00,000 0.432 £ 19,88,707
7 £ 46,00,000 0.376 £ 17,29,310
8 £ 46,00,000 0.327 £ 15,03,748
9 £ 46,00,000 0.284 £ 13,07,607
10 £ 46,00,000 0.247 £ 11,37,050
Internal rate of return 1.41%
Units 8,00,000
Selling Price per unit 32
Labour cost per unit 10
Materials cost per unit 12
Variable Overheads per
unit 3
Fixed Overhead 10,00,000
Net Cash Flow 46,00,000
Valuation of equity taking free cash flows of firm
Past
average
FCFF (£M) 10,187.60
Discrete free cash flow growth 17.07%
Applied for next 5
years
Permanent growth rate free
cash flow 3.33%
Applied after 5
years
Estimated Free cash flows for firm
Year FCFF (£M)
2017 11,926.66
2018 13,962.59
2019 16,346.05
2020 19,136.39
2021 22,403.04
2022 26,227.32
Terminal cash 27,100.87

Corporate Financial Analysis
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flows
Present value of discrete cash flows for next 5 years
Year FCFF (£M)
PVF
@13.11% PV of Cash Flows
1 11,926.66 0.884 10,544.30
2 13,962.59 0.782 10,913.50
3 16,346.05 0.691 11,295.62
4 19,136.39 0.611 11,691.11
5 22,403.04 0.540 12,100.46
Total 56,544.99
Present value of terminal cash flows
Terminal cash
flows 27,100.87 4,96,352.86
Total value of Firm (£M) 5,52,897.85
Less: Value of Debt 1,19,500.00
Total value of Equity 4,33,397.85
No of Shares Outstanding 2,000.00
Per share value of value of equity 216.70
210