Outside Equity As Financing Means Accounting Essay

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Outside equity is commonly used source of financing. In this section I will try to assess the effectivness of outstsde equity as financing means.

The first theory is the trade of theory. This Secondly the more risk averse company can use outside equity e.g borrowings, mtns in order to minimise the risk and share the risk

Marks and spencers have determind the various trade offs between the costs and benefits of debt versus equity

Summarise the history of the company including any significant developments during the period since its incorporation?

Marks and Spencer is the largest retailer in the United Kingdom, which is listed on the London Stock Exchange and part of the FTSE 100 index with over 600 stores. The stores sell clothing, footwear, gifts, home furnishings, and food. The company also has 295 stores across 41 territories. The Company also trades on-line at www.marksandspencer.com. Their core business value is offering value for money and quality products. M&S in UK has been building up a

It all started in 1884 by Michael Marks who opened a stall at Leeds Kirkgate market.Between 1908 - 1931 marks and Spencer's became a public company to raise new capital. After the World War 2 the number of stores grew slowly. However it increased its sales volume by increasing the store size and increasing the range of products.

In 1935 Marks % spencers introduced the first M&S Cafe, and now are the UK's fourth largest coffee shop chain.

The significant developments of marks and Spencer's is offering customers selective high quality merchandise and that is one of the main reason why m &s is and one of the UK's leading retailers of Food, men's, women's and children's fashion. One of the biggest developments was in the 1970s when Massive expansion took place, both the product range and opening of new stores. As well as introducing home furnishing, gifts, beauty, and financial services where Marks & Spencer Chargecard was launched nationally. During the 1990s Marks and Spencers expanding abroad, with both company owned and franchising. The vast majority of the stores that were opened abroad were franchised operations, where M&S sets out how the stores should look and sells its branded goods. This was a shrewd business decision as they have increased the brand name of M&S without risking shareholders cash.

During 1999, the company responded to the internet boom by moving into online shopping. Since year 2000 m & s has expanded its range of its own sub brand including Autograph, Per Una, Blue Harbour and DB07.

In September 2003 Marks & Spencer Financial Services was re-branded Marks & Spencer Money offering existing credit cards as well as loans, insurance, saving and investment. Also developments have been in retail where simply food was added in 2003.

Profitability of marks and spencers has increased year by year. The company's group turnover for 2009 was 9.1bn increase of 0.4%. (Financial statement). This allowing the company to invest in new further stores and expanding the business portfolio.

Give a concise description of how the company is financed with reference to different sources of capital, gearing levels. Describe the changes to the company's financing during the year?

Major Sources of finance can be internal e.g. retained profits, cash and sale of assets. And external for example issuing shares, banks loans and overdrafts. Various sources of finances in Marks and Spencer's plc is combination of

  • retained profits

  • bank borrowings,

  • medium term notes,

  • finance leases and committed bank facilities.

  • Equity - M & S issues a stock on the stock market where this allows investors to buy the shares. Therefore they become shareholders. In m & s they have 1,581.82m shares in issue. This allows private and public investors to trade freely.

Net debt

Marks and spencers is mainly finance by long term debts. Over the years net debt has been increasing. Net debt looks at the companies overall debt including short term and long term borrowings. Looking at the table below there has been an increase of 45% from 2006 to 2009. The possible reason for this could be due to expansion in retail outlets and expansion internationally.

Net debt (billion)

31.3.2006

31.3.2007

31.3.2008

31.3.2009

Marks & Spencer

1.72

1.95

3.1

2.5

Gearing

Gearing is an important ratio as its measures the relationship of long term borrowing to capital employed. M & S long term borrowing accounts to 2,117.9 according to the financial accounts. Mostly are banks loans and medium term notes which are debt instruments that fall due in the medium term. Gearing also gives an indication of a firm's exposure to financial risk. (bob ryan). The gearing calculation for Marks & Spencer is

Gearing ratio

31.3.2006

31.3.2007

31.3.2008

31.3.2009

Vodafone

0.12

0.20

0.27

0.29

The gearing ration represents a modest increase compared to the past year. They have been borrowing more as this year they have got a long term bank loan of 11.2 million compared to last year where they had no loan from bank. This will have a knock on effect on profit as they will have to pay interest on borrowing.

Retained profits

Retained profit is what the business keeps after all deductions of expenses including tax have been made. It is used to develop the business. M &s has kept back 5,728.1 million after paying its shareholders. A slight increase of 20.2 million compared to past year. It has used its retained earnings to invest in capital expenditure e.g opening of 75 new stores. Modernising the old stores and investing internationally. (Financial report page 19)

Medium term notes

Marks and spencers have issued 2106.7 million medium term notes maturing from year 2011 to 2037. The main objective of issuing MTNSs is to finance their medium term needs, raise funds and it is an easier way of debt funding and cheaper. Presently there are six MTNS in circulation.

Other Borrowing and overdrafts

Marks and spencers have borrowed much more this year compared to last. They have borrowed 86.1 million more. Looking at the past 5 years of M &S accounts borrowing has been increasing year on year. Bank overdraft has decreased by over 42%. The reason for this could be they have issued more medium term notes to public therefore not needing the bank overdraft as much as previous year.

Looking at the group cash flow for Marks & Spencers their net cash flow has changed dramatically compared to previous year. It reported a positive cash inflow of 107.5 million compared to (917.5) in 2008. The main reason for the company's finance changing dramatically is the capital expenditure in 2008 was much higher, a difference of 323.3 million therefore they have spent less on further investment. Appendix 1

Share buy back has also been a major factor of the positive cash flow. Difference of 515 million. Majority of shares were bought back in 2008 improving the balance sheet efficiency. This was all financed by cash available and debt markets.

http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=/published/emeraldfulltextarticle/pdf/0090341204.pdf

http://www.ukessays.com/essays/finance/company-debt-equity.php

Why do you think the company has chosen this method of financing? Do you consider the method of financing to be appropriate for a company of this type?

Make reference to appropriate theories of capital structure?

M&s financed by medium term notes i.e. loans and equity, therefore the advantages and disadvantages of each. Refer to theories of capital structure.

      Provides tax relief (loans) high risk,

Equity -

A main chunk of Marks & spencers comes from medium term notes totalling 2106.7 million at the end of March 2009. Medium term notes are flexible debt instruments that are offered to investors with fixed interest rates and maturities that range from 2011 to 2037. This is an advantage to M&S as they can offer these MTNs with a longer maturity date if need to be. Now the main reason they have issued these bonds is to maintain the growth of the new stores since 2007 and expand internationally. The advantage of MTN is that they are unsecured borrowing. Therefore if Marks & Spencer goes bankrupt and has no money to pay the investors the investment will be worthless. However MTNs are not considered high risk.

An example of a MTN that m&s will pay 5.625% to the investor until it matures in march 2014. The advantage to the investor is they can get a return on money invested and if the holder has £10000 in M&S notes they would receive a single payment of interest of £562.50 each year. (lse). Comparing it to equity bondholders have experienced less volatility, as share price has been around 350p in 1994, rallying up to 650p in 1999 and now slipping back their present level in 1994. This is an advantage to the investor in the MTN as will receive an income until maturity each year.

I think that this type of borrowing is appropriate for a retail company as interest on bonds is detectable in the income statement under finance costs. If M&S issue more equity they will have to pay dividends on stock and this is not detectable. Therefore for tax purposes it provides tax relief. Also by issuing debt the shareholders ownership will not be diluted by more owners as the MTN holder will receive interest and they will not be the owners of the assets compared to shareholders.

M&s isn't the only retail offering bonds, its competitive NEXT PLC has a similar 5.25% issue maturing in 2013. Therefore it is not just M&S that prefer this method finance.

Other financing is by syndicated bank facility.

A syndicated bank facility is a credit facility granted by the banks e.g. Barclays, Lloyds, and standard chartered to Marks & Spencer. The banks work together to provide funds as this allows the bank not to have extreme exposure in case m&s default. M&s have borrowed 1.2 bn revolving credit wich is set to mature in march 2013. Revolving credit is an arrangement that provides the borrower with a degree of flexibility to draw and repay different amounts until maturity. The flexibility of this bank facility allows m&s to borrows the fund it actually needs. (brian coylepage 44)The obvious reason why m&s have chosen this is that large amounts of capital can be raised as it is the largest source of international capital. This will provide m&s more capital structure and they will be able to offer customers a combined credit and loyalty card in the financial market. (independent) the drawback of syndicated bank facility is if the financial position of m&s does deteriate badly and default, this could be difficult for the banks who raised the 1.2 bn. As the banks may disagree whether to refinance m&s or reschedule the repayments. And if so who should provide them the extra money.

§

The data shows that Philips is clearly a low geared firm; the gearing percentage hasn't changed much from 2001 to 2002 however in 1999 it was 20.4 % not a major difference and it seems to be quite stable.

Philips have a great advantage at hand because they provide a lower risk investment. Therefore they can, negotiate loans more easily and at a lower cost. Banks will be more likely to lend money to Philips as they know that Philips have the financial backup to pay back the loans as the interest payment will be much lower. In addition shareholders will be attracted to the firm as interest payments are low, shareholders dividends are likely to increase, and this will definitely create awareness.

Having a low geared firm can also be seen as a weakness especially if the economy is growing rapidly. Philips gearing percentage is very low, this may be due to a very cautious management; therefore an investment into a firm such as Philips may be safe to shareholders but perhaps dull.

Philips have the benefit of borrowing cash quite easily and paying it back to support the console. As the console launch will require vast amount cash available Philips will be more than capable of supporting the console through marketing and finance.

Retained profits

It could use that profit for its investment projects. We can conceder this kind of financing as a less risky and more profitability from the new project

If you analysing the group account for a group of companies then you will need to use the consolidated accounts but if you a looking at just a subsidiary or parent company then the account of the subsidiary or parent will be what you require to calculate the ratios.

How the company is financed refers to the proportion of equity to debt on the company's balance sheet, its dividend policy, how much retained earnings it uses to fund its business as opposed to paying dividends, does the company regularly use overdraft or long term debt etc recall that the company has to make three key decisions via investment, finance and dividend; what it decides to invest in will affect the source of finance it will seek and the source of finance it seeks coupled with the investment choice affect how much it can pay out as dividend and how much it decides to retain for reinvestment as well as how much more debt or equity it must seek to finance positive NPV projects.

Medium term notes are debt instruments that fall due in the medium term.

INTRODUCTION AND BACKGROUND

By choosing a firm or organisation it is possible to assess the relationship with its business environment.

The firm that is going to be the focus in this study is the well-known organisation Marks and Spencer.

Marks and Spencer is known for being one of the UK's leading retailers in clothing, foods, home ware, and financial services. They have over 300 stores in the UK and have 38 other stores in countries worldwide.

STAKEHOLDERS OF MARKS AND SPENCER

A Stakeholder is any individual or group who have a connection with the company. Stakeholders don't all have equal importance to a firm but they all play a part in the existence of the company. Stakeholders can be split into 2 categories; internal stakeholders or external stakeholders.

Internal Stakeholders of Marks and Spencer

Internal stakeholders are groups within the firm and are important to the welfare of the company. The Internal stakeholders in Marks and Spencer are;

  • Staff and Management

  • Owners and Shareholders

Staff and Management at all levels are important stakeholders of Marks and Spencer as they rely on their positions within the firm to earn a wage. Working for the firm is their primary source of income.

Owners are also internal stakeholders as they depend on the profits of the company for their income.

Members of the public and often people who work within the company invest their money by buying shares in Marks and Spencer, with hope that the value of the shares will increase, through the company remaining profitable. The shareholders are internal stakeholders as their money is used to benefit the company by providing the means for further investment and expansion of the company.

External Stakeholders of Marks and Spencer

External stakeholders have a role in the success of the business as they sell to and buy from the firm, but do not work for or belong to the firm. Not only do they contribute to the success of the company but to benefit themselves. The external stakeholders in Marks and Spencer are;

  • Customers

  • Suppliers

  • Communities/General Public

Customers are one of the most obvious stakeholders for a company. The customers of Marks and Spencer buy their products to benefit themselves and in the same instance Marks and Spencer are making a sale.

The suppliers are also external stakeholders as they are firms in the business environment that sell their goods to Marks and Spencer benefiting both parties.

Communities and general public can be seen as external stakeholders as the firm's goods or processes of production can have an impact on them. Marks and Spencer have to consider whether or not their products are produced as environmentally friendly, and that their methods of production do not generate high levels of pollution.

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