Sources and uses of finance

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Task 1

Company background

WH Smith PLC is the largest retailer of books and magazines in the UK and the second largest online bookseller, just behind Amazon.co.uk (Answers.com, 2009).

The company was founded in 1792 by Henry Walton Smith and his wife, with the opening of a small newsvendor in Little Grosvenor Street. (WH Smith PLC, 2009). Today it is one of Britain's best known and oldest retailing companies (Answers.com, 2009).

It trades from 565 high street stores, 490 travel outlets and operates a 24 hour a day service from its online store. It stores sells a wide range of products including newspapers, magazines, stationery, books, impulse products and entertainment products, whilst it's travel outlets sell a tailored range of newspapers, magazines, books and confectionery products (WH Smith PLC, 2009).

A demerger took place in 2006, separating its retail and news distribution businesses and two separate companies were formed WH Smith PLC and Smiths News PLC (WH Smith PLC, 2009).

Its main competitors are Waterstone's, Amazon.co.uk, independent booksellers and supermarkets (WH Smith PLC, 2009).

Sources of finance

Three sources of finance found on the balance sheet of WH Smith PLC are as follows:

  • Retained earnings.
  • Called up share capital.
  • Bank overdrafts and other borrowings.

Task 1 Continued

The first listed source of finance is retained earnings, which as at 31st August 2008 are £329 million compared to £383 million in 2007. This source of finance is classed as internal.

Advantages of retained earnings:

  • Can be used for reinvestment in the business or paying off debt.
  • Can be used for acquiring income-earning assets that result in increased income in future years.
  • Increase supply of cash available for acquisitions, repurchasing shares or other expenditures.

Disadvantages of retained earnings:

  • Can be changed by corporate actions and reorganisation.
  • Only able to retain earnings if company makes a profit.

The next listed source of finance is called up share capital, which as at 31st of August 2008 is £35 million compared to £37 million in 2007. This source of finance is classed as external.

Advantages of called up share capital:

  • Good source of long term finance, company is not required to pay it back.
  • Dividend does not have to be guaranteed.

Disadvantages of called up share capital:

  • Shareholders have the right to vote.
  • Shareholders have the ability to elect the board of directors.

Task 1 Continued

The final listed source of finance is bank overdrafts and other borrowings, which as at 31st of August 2008 are £25 million compared to £9 million in 2007. This source of finance is classed as external.

Advantages of bank overdrafts and other borrowings:

  • Overdrafts are quick and easy to arrange.
  • Overdrafts allow you to make essential payments whilst chasing up your own payments, which help to maintain cash flow.

Disadvantages of bank overdrafts and other borrowings:

  • Overdrafts carry interest and fees and can be very expensive for long-term borrowing.
  • Overdrafts may need to be secured against your business assets.

Long term provisions are another external source of finance, but as can be seen on the balance sheet of WH Smith PLC these only stand at £4 million.

Task 2

Importance of finance as a resource

Income

Retained earnings as at 31st August 2008 are £329 million compared to £383 million in 2007. This amounts to a decrease of £54 million in 2008. In 2007 retained earnings were increased by £43 million.

Two significant reasons that could be attributable to this decrease in retained earnings in 2008 are £24 million spent on the acquisition of UNS Group Limited, Alpha Retail UK Limited and Martin McColl and a cash return of £90 million to shareholders.

Called up share capital as at 31st August 2008 is £35 million compared to £37 million in 2007. This amounts to a decrease of £2 million in 2008. The 2008 figure was raised through 157 million 22p shares, whilst the 2007 figure was raised through 183 million 20p shares.

In 2007 a capital reduction was undertaken with the nominal value of ordinary shares reduced from £1.95 to 20p each which created £320 million of distributable reserves.

The £2 million decrease between 2007 and 2008 was due to the purchase of own shares for cancellation.

Bank overdrafts and other borrowings are £25 million compared to £9 million in 2007. This amounts to an increase of £16 million in 2008.

Two significant reasons that could be attributable to this increase in bank overdrafts and other borrowings are to fund the acquisition of UNS Group Limited, Alpha Retail UK Limited and Martin McColl and a cash return of £90 million to shareholders.

Task 2 Continued

Long term provisions as at 31st of August 2007 are £4 million; this figure remains the same in 2008. This suggests that short term finance has been used in preference to long term finance to fund various expenditures in the business in 2008.

Expenditure

Dividend payouts amounted to £21 million in 2008 compared to £17 million in 2007. This indicates an increase in profit in 2008. A special dividend of 33p per share was also paid out in 2008.

Finance costs as at 31st August 2008 are £3 million compared to £6 million in 2007.

Capital expenditure for the year ending 31st August 2008 is £39 million (32 million, 2007) which includes £19 million (12 million, 2007) on new stores and store development, £9 million (7 million, 2007) for refurbishment of stores, £8 million (9 million, 2007) on systems and a further £3 million (4 million, 2007) on other. All of these figures are in line with the expansion of the business.

There is a £15 million increase in wages and salaries in 2008 compared to 2007. One reason for this could be the expansion of the business due to the acquisition of UNS Group Limited, Alpha Retail UK Limited and Martin McColl.

During the year ending 31st August 2007 contributions of £35 million were made to the WH Smith pension trust. This figure includes a one off payment of £25 million as part of the demerger from Smiths PLC.

Corporate advisory costs of £6 million were paid during the year ending 31st August 2007 in relation to the prior year's demerger from Smiths News PLC.

Task 3

Explanation of recorded figures

Operating profit figure

The operating profit figure on the income statement of WH Smith PLC as at 31st August 2008 is £74 million compared to £77 million in 2007. This amounts to a decrease of £3 million in 2008.

Whilst turnover is £53 million higher in 2008, so are cost of sales with an increase of £12 million.

Furthermore is an increase of £35 million in distribution costs and £9 million in administrative expenses. The main reason for these increases could be due to the expansion of the business.

Fixed assets figure

The fixed asset figure on the balance sheet of WH Smith PLC as at 31st August 2008 is £247 million compared to £231 million in 2007. This amounts to an increase of £16 million in 2008.

The main reason for this change is a £17 million increase in goodwill in 2008. This is due to the acquisition of UNS Group Limited.

Another noticeable change is a £3 million increase in other intangible assets in 2008. This is due to the acquisition of Martin McColl and Alpha Retail UK Limited.

Task 3 Continued

One further increase is £1 million in property, plant and equipment in 2008. This is due to the acquisition of UNS Group Limited.

Current assets figure

The current asset figure on the balance sheet of WH Smith PLC as at 31st August 2008 is £241 million compared to £286 million in 2007. This amounts to a decrease of £45 million in 2008.

The main reason for this change is a £60 million decrease in cash and cash equivalents in 2008. Two significant reasons that could be attributable to this decrease in cash are the acquisition of UNS Group Limited, Martin McColl and Alpha Retail UK Limited and a cash return of £90 million to shareholders.

The second most noticeable change is a £11 million increase in trade and other receivables in 2008, with £1 million of this amount being due to the acquisition of UNS Group Limited.

Thirdly is a £6 million increase in inventories in 2008, with £2 million of this amount being due to the acquisition of Martin McColl and Alpha Retail UK Limited.

Current liabilities figure

The current liabilities figure on the balance sheet of WH Smith PLC as at 31st August 2008 is £303 million compared to £261 million in 2007. This amounts to an increase of £42 million in 2008.

The main reason for this change is a £22 million increase in trade and other payables in 2008, with £7 million of this amount being due to the acquisition of UNS Group Limited.

The second most noticeable change is a £16 million increase in bank overdrafts and other borrowings in 2008. Two significant reasons that could be attributable to this increase in borrowing are the acquisition of UNS Limited, Martin McColl and Alpha Retail UK Limited and a cash return of £90 million to shareholders.

Thirdly is a £6 million increase in current tax liabilities in 2008. This could be due to the expansion of the business and higher profit levels.

Task 4

Share price movements

WH Smith PLC is listed on the London Stock Exchange (SMWH) and is part of the FTSE 250 index.

Figure 1

As can be seen in figure 1 the share price for WH Smith PLC has increased over the period October 2nd to November 13th 2009. The main reason for this increase could be due to the recent publication of the annual financial accounts which show an increase in profit. Therefore if a business is making a good profit or is growing with possibility of future good profit people will want to buy the shares and the price will go up.

References

  • Answers.com (2009) Company History: WH Smith PLC. Available at: http://www.answers.com/topic/wh-smith-plc [Accessed: 28 October, 2009].
  • Answers.com (2009) Hoover's profile: WH Smith PLC. Available at: http://www.answers.com/topic/wh-smith-plc [Accessed: 28 October, 2009].
  • WH Smith PLC (2009) Our Company: History 1792-1900. Available at: http://www.whsmithplc.co.uk/WHSPLC-OC-History1.htm [Accessed: 28 October, 2009].
  • WH Smith PLC (2009) WH Smith PLC: About us Available at: http://www.whsmithplc.co.uk/WHSPLC-AboutUs.htm [Accessed: 28 October, 2009].
  • WH Smith PLC (2009) Our Company: History 1990-Present. Available at: http://www.whsmithplc.co.uk/WHSPLC-OC-History3.htm [Accessed: 28 October, 2009].
  • WH Smith PLC (2009) Media Centre. FAQ. Available at: http://www.whsmithplc.co.uk/WHSPLC-MC-FAQ.htm [Accessed: 28 October, 2009].

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.