Models of Corporate Financial Management

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
• Internal rate of return(r) and cost of capital (k) remains constant
• All profits are distributable
• Opening profits and dividends never change
  
  

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

P0= D1/Ke-g
D1= Expected dividend
G= growth rate
Ke= discount rate

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.

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 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 maximizes 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.

Go through this sample: Business Finance

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 by the firm and transform all of them into huge loss of the firm.

b) Financial performance

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 alll 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 whhich shows the less imposition of taxation incurred on an enterprise. The existing abilitu of an entity is strong enough in order to handle the heavy pressure imposes on an enterprise.

Interpretations

The overall business segment of British land Plc is classifiied 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 whichexrracts the non-operating profit oit of the profit generated by the form (Pratheepkanth, Hettihewa and Wright, 2016). This profit generated by an enterprises 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.

Interpretations

Generation of return is regarded as primary objective of the business owner pf Briitish land plc in operating their business in the external market. Every business aims to earn profit by applying initial investment in the business tograb higher market opportunities. The profit cann be enhanced by the firm by focuses on the internal strengths and recognizes their special talent. The core compentencies of an entity are analysed in order to make competitive advanatge over its competitors wwho 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 conditio is the basic reason behind the increasing returns genearted by the business over the years. The returns will be generated by an entity owner with the passage of time as their basic advanatge is to reduce all its weaknesses.

Interpretations

This is regarded as basic ratio helps an entity owneer 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 nad current liabilities incurred in the same entity (WH Smith should borrow to thrive, 2013). Current assets are maximises to pay off short term liabilities exists in the business of British land Plc. Trade creditors are importat source of short term obligaations 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 placee is increasing which shows the higher cotribution of current assets in meeting available current liabilities incurred in the business enterprise.

Interpretations

Acid test ratios is recognises 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 currengt analysis shows that British land place has incrreasing quick ratios that showcases the ability of the business in generating higher results over the period of time.

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 is available to a entity in order to fulfil their short term as well as long term business requirements which would help in uplifting their current market status.

d) Recommendation on an optimal capital mix of the firm

It can be recommended to British land Plc to reframe 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.

References

• Acharya, V. and Xu, Z., 2016. Financial dependence and innovation: The case of public versus private firms.Journal of Financial Economics.
• Amiraslani, H., Lins, K., Servaes, H. and Tamayo, A., 2016. A Matter of Trust? The Bond Market Benefits of Corporate Social Capital during the Financial Crisis.
• Bergmann, A., Rotzek, J. N., Wetzel, M. and Guenther, E., 2017. Hang the low-hanging fruit even lower-Evidence that energy efficiency matters for corporate financial performance.Journal of Cleaner Production.
• Calomiris, C. W. and Carlson, M., 2016. Corporate governance and risk management at unprotected banks: National banks in the 1890s.Journal of Financial Economics.
• Chakraborty, A., Baum, C.F. and Liu, B., 2017. Corporate Financial Policy and the Value of Cash under Uncertainty.International Journal of Managerial Finance.

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