Task 1:
Critically examine the following theories and concepts
with the help of suitable example. Synthesize your answer
with relation to an uncertain and dynamic business
environment.
A) Shareholder Value Addition (EVA and SVA)
It is a major corporate goal for a large number of organizations as it
emphasizes the generation of value for shareholders in the long term. The
last value, shareholders value, can be measured by two indicators, namely
Economic Value Added (EVA) and Shareholder Value Added (SVA). Both are
tools used to justify whether the company is creating gains for its
shareholders, but does it in a slightly different manner.
EVA (Economic Value Added)
EVA is a financial performance measurement that estimates the value the
firm creates from capital investments for its shareholders net of the cost of
such capital or EVA = NOPAT – WACC*IC. It is built to simply reflect the
profitability of the company, or to say, whether the company is earning more
than the cost of capital.
Example: EVA may be used by a technology firm which undertakes research
and development projects to assess the extent to which these projects are
generating higher returns than the cost of capital. PE, as well; means,
therefore, that if EVA is positive, the company is creating shareholder wealth
and if the EVA figure is negative, the company is destroying shareholder
value. Specifically, in a highly volatile business environment where change
could be rapid, as in the case of technologies, EVA may allow organizations
to determine whether certain capital investments are value improving.
SVA (Shareholder Value Added)
While still a measure that is based on residual amount, SVA is very similar to
EVA although it emphasizes the actual shareholders gains more than any
other method. Dividend as well as the change in stock price within a
specified period is given consideration by the model. SVA can be regarded as
an endeavor to match the firms’ managerial decisions with the stock owners’
wealth, which is a mirror of increased value added.
Example: Indeed, if the SVA model is to follow a retail company like Tesco,
then the company and the model will define the present value of the new
product line and thus demonstrate the increase in the firm’s market value.
But in periods of stock market instability (for example, during the recession)
the stock price may hardly represent company performance, and SVA is not
quite suitable for evaluation of the value added through business operations.
Critique:
Compared to other valuation models, EVA is preferable in an environment of
great business risk because it shows whether the firm actually generates
value after paying all its costs of capital. Despite that, it has been criticized
as being historical and may not capture long-term economic benefits such as
Research and Development or through intangible assets.
On the one hand, SVA captures the market’s estimate of value which may
not be equivalent to actual improvement in operation during stable or high
market flamboyance. It can be too brittle to remain insensitive to short-term
changes in stock market prices.
However, for dynamic environments like those created by technological
disruption or geopolitical instabilities, both EVA and SVA can play an
effective role although the data received must be applied with other data
and interpreted cautiously to ensure that long term value is being created.
B) Financial Planning
Financial planning is a systematic arrangement of anticipating and
controlling the flow of funds within a business in order to fulfil strategic
goals. It encompasses issues of financial planning, control, analysis and
evaluation, investment, and determination of the overall Company’s financial
risks. Whenever the specific environment of the business is unstable and
competitive, financial planning emerges as the key to existence and
development strategies.
Elements You Need to Consider When Planning
Budgeting: The preparing of elaborate sales and expenditure prediction
models. This ensures resources are well utilized so that the goal and
objective of an organization will be met with efficiency.
Cash Flow Management: Making certain that a firm has adequate liquidity
to go round discharging all its due commitments. It means expenses and
income a company foresees for future as well as those which were not
planned have to be tracked and controlled.
Investment Planning: Recognizing how to deploy capital on projects that
are most profitable and are in line with strategic objectives of the business.
Risk Management: Application of knowledge of how to hedge some of the
major financial risks such as exchange rate risk, interest risk as well as credit
risks.
Example: Since the price of oil is highly unpredictable, a company in the oil
industry has to integrate flexibility to its financial strategies and models. In
this case, when the market is experiencing a shock, such as the oil price
crash resulting from geopolitical tensions or the COVID-19 crisis, operators
like BP and Shell may seek to change the organization’s financial strategic
plan to save capital, minimize expenditure, and seek business segments that
have good chances of withstanding the trend in an appropriate period, for
instance, in renewable energy.
Critique:
Uncertainty: Just as it has been pointed out, in highly uncertain conditions,
financial planning models are not sufficient. Businesses are sometimes
confronted with some circumstances that make their budget or cash flow
estimate posted wrong.
Flexibility: Financial planning has to be amorphous. This means that
embracing a culture of change that focuses on certain key areas, and
sticking strictly to this plan in a rapidly evolving business environment can
actually mean missing a great opportunity or sinking the business. For
example, let us imagine strategic financial plan developed before the
existence of the pandemic, that plan would have been greatly affected by
the shift in the retail market that happened all of a sudden and companies
have no choice but to adapt.
Key approaches relevant for unpredictable periods include: updating
forecasts frequently; using scenario planning; and, checking that there is
enough cash for an organization to overcome future shocks. For instance,
where they experienced supply chain disruptions, Tesco had to review
upwards its financial estimates and modulate its functional plans in order to
contain shocks in cash flows.
C) Financial Deployment and Control
Financial implementation and financial management are processes of putting
into operation the plans developed during the financial planning phase. It
comprises of the daily procedures of providing and Directing the financial
resources, assessing the performance, and confirming strict congruity of the
financial operations with strategic goals.
Foundations of Financial Implementation
Resource Allocation: Spending of monitory resources on different
departments or on different projects according to the financial plan. That is;
speaking of high return investments as a priority.
Performance Monitoring: The process of comparing the actual business
performance with key specified objectives or goals in the course of
operations.
Cost Control: Defining the fields where spending can be optimized and at
the same time avoiding the company over expenditure.
Adjustments: The continuous process of modification of the financial plan
with regards to the changes in the environment that affects a certain
venture.
Example: An e-commerce solution provider such as ASOS, a fast-fashion
company may pose a strategy like expanding e-commerce capacities to
reach many clients. Yet at the implementation stage, factors like greater
than expected logistics expenses or technologies shocks may occur, which
may force the company to bend the budget and re-allocate resources.
Critique:
Adaptability: Thus, a powerful future financial management need to
respond rapidly to dynamic environments. For instance, if Sainsbury’s starts
experiencing increased competition from the wing of other stores during the
period of economic down turn, then the financial management of the
corporate firm realizes that they have to counter this either through cost
cutting or reorganizing its growth strategies.
Integration with Strategy: Balance sheets have to be linked to
corporate strategies. Lack of a proper coordination between financial
objectives and business strategies are disadvantageous. An organization
may set up a financial plan to secure high returns from a short-term
expansion while neglecting long-term financial sustainability factors.
Task 2:
Weighted Average Cost of Capital (WACC) for Oscar Health Inc. (OSCR) is as
Under:
Weighted Average Cost of Capital= ( Equity∗Ke ) +¿ ¿
Where:
Ke: Cost of equity
Kd: Cost of debt
Tax Rate: Corporate tax rate
Source link to be created
Cost of Equity (Ke):
Using the Capital Asset Pricing Model (CAPM):
Ke = Rf + β (Rm – Rf )
Where:
Rf: Risk-free rate (e.g., U.S. 10-year Treasury yield, ~ 4.37%).
Beta (β): Marks and Spencer Beta of (~ 1.61)
Market Risk Premium (Rm – Rf) ~ 4.72%
Ke = 4.37% + 1.61 * 4.72%
Ke = 11.97%
Market Value of Equity:
Marks and Spencer’s equity value is calculated as:
Share Price × Number of Shares Outstanding
Using the latest share price of $9.47, and assuming approximately
2,075,900,000 shares outstanding (as per its latest filings),
E=9.47 × 2,075,900,000 = 19.658 billion USD (approx.)
Market Value of Debt:
Market Value of Debt is 3,938,209,379
Cost of Debt (Kd):
Company cost of long-term debt is 5.5% which is a pretax rate. So Post Tax
Kd will be
Kd = 5.5 % * ( 1 – 35.88% ) = 3.56%
Final WACC Calculation:
( 19.658 B∗11.97 % )+(3.938 B∗3.56 %)
WACC =
19.658+3.938
WACC = 10.61%
B) Key Financial Ratios like profitability ratio, liquidity
ratio, gearing ratio, and efficiency ratios.
Profitability ratios
Net Profit/Total Assets * 100
2022 2023 2024
Return on Assets (ROA): 3.2% 4.0% 5.0%
Net Loss/Revenue * 100
2022 2023 2024
Net Profit Margin 2.82% 3.05% 3.31%
Net loss/ Total Shareholder’s Equity *100
2022 2023 2024
Return on Equity (ROE): 10.54% 12.93% 15.24%
ANALYSIS: The analysis shows that Marks & Spencer (M&S) remained
consistently profitable from 2022 to 2024 because of the following reasons.
The most backing factors include; growth in food division, increased supply
chain and product differentiation. Promoting sales through strategic
investments In on line media and improving customer satisfaction were also
instrumental in improving sales results.
Marks & Spencer (M&S) demonstrated systematic improvements in
profitability during the period of 2022-2024 by various commercial aspects.
The firm also felt strong performance in its food segment leveraging on
consumers’ demands for prestige groceries and convenience goods.
Improving supply chain operations and making organization functions leaner
both helped to cut costs and increase margins. In addition, M&S invested in
its multiple channels of online retail, growing its digital capability and serving
customers better. The product differentiation through new products such as
the environmentally friendly and high-quality clothing improved the pool of
clients for the organization hence enhanced sales. These combined efforts
helped M&S to retain a favorable competitive position and earned more or
less steady growth in profitability.
Net Profit Margin
3.40%
3.30%
3.20%
3.10%
3.00%
2.90%
2.80%
2.70%
2.60%
2.50%
2024 2023 2022
Liquidity ratios
2022 2023 2024
Current Ratio
0.56 0.40 0.41
(Current Asset - Inventory)/Current Liability
2022 2023 2024
Quick ratio 0.62 0.51 0.54
Analysis and suggestions: Current ratio comes up shy in the case of
Marks & Spencer’s showing a decline in one year and an increase in the
next; such instability in the short term liquidity points to factors such as
fluctuating inventory levels or in receivables. Nonetheless the quick ratio has
been rising figures which show enhancement of the liquidity control
especially on cash and receivables but not inventory. The following
improvement reveals the fact that M&S is increasing it capability to meet
short-term commitments, especially, without needing to discount inventory.
It is suggested that M&S should pay more attention on accomplishing more
improvements regarding the inventory management and decreasing the
receivables turnover time in the future for stability maintenance. Cash flow
should have been improved and the quick ratio level maintained to prevent
usual liquidity hazards and improve financial solidity.
Current Ratio
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2024 2023 2022
Gearing ratio.
Total Debt/ Total Shareholder’s Equity
2022 2023 2024
Gearing ratio 2.24 2.23 2.07
Debt Equity Ratio
2.30
2.25
2.20
2.15
2.10
2.05
2.00
1.95
1 2 3
Debt Equity Ratio
Analysis and suggestion: If the position is that of a falling DE ratio
invariably implies rising financial risk, an increasing DE ratio opposite
direction can be interpreted as the company lowering its dependence on
debt and increasing equity, which may be considered a positive sign.
Although this minimizes financial risk it can also constrains growth prospects
for poor equity capital if available. In turn, M&S can engage in strategic debt
financing that will help to expand the business while avoiding high debt
levels which are bad for an optimal capital structure.
Efficiency ratio.
Net Profit/Total Assets * 100
2022 2023 2024
Return on Assets (ROA): 3.2% 4.0% 5.0%
Return on Assets (ROA):
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2024 2022 2021
Analysis and suggestion:
An efficiency ratio greater than the prior year of 3.2% of 5% means that the
company has become more efficient in terms of operational costs with the
company posting higher sales revenue compared to the cost of sales
incurred. This implies improvements in the handling of resources and the
issue of costs. To sustain this trend, the company M&S should stay on
improving on processes, have to explore innovation especially on technology
for higher automation and ensure minimization of costs in terms of waste,
and preserving quality to underscore the gains in the company’s profitability.
TASK 3
A) Projected Cash flows for the project.
B) NPV and IRR for the stated project.
Year 0 1 2 3 4 5
Revenue
1,800,00 1,980, 2,178, 2,395, 2,635,
0 000 000 800 380
Variable Costs
(1,080,00 (1,188, (1,306 (1,438 (1,581
0) 000) ,800) ,680) ,228)
Fixed Costs
(500,000) (500,0 (500,0 (500,0 (500,0
00) 00) 00) 00)
Depreciation
(200,000) (200,0 (200,0 (200,0 (200,0
00) 00) 00) 00)
EBIT
20,000 92,00 171,2 257,1 354,1
0 00 20 52
Tax (15%)
3,000 13,800 25,68 38,56 53,12
0 8 3
NOPAT
17,000 78,20 145,5 218,5 301,0
0 20 52 29
Add back:
Depreciation 200,000 200,00 200,0 200,0 200,0
0 00 00 00
Cash Flow
(NOPAT + (1,000,0 217,000 278,2 345,5 418,5 501,0
Depreciation) 00) 00 20 52 29
Investment
PV @ 11.91%
(1,000,0 196,185 227,38 255,3 279,6 302,6
00) 8 23 22 15
NPV (+ve)
261,134
IRR 19.098
%
C. Feasibility Analysis of the Undertaken Project and
recommendations:
Positive NPV (Net Present Value):
The calculated NPV of the project is 261,134$ which is more than the value
of cost of capital (11.91% discount rate). In other words, if NPV is greater
than zero, the project adds value to shareholders’ equity, and therefore is a
financially feasible one.
IRR (Internal Rate of Return):
The IRR is higher than the required rate of return, meaning the cost of
capital, showing that the firm will expect to make a profit from the project.
Cash Flow Growth: An analysis of the different years depicted in the
project reveals that, cash flows are on the rise implying enhanced
profitability and general operating performance. Cash flow increases
gradually from $ 217,000 in the first year, to $ 501,029 in the fifth year.
Tax & Depreciation Impact: Depreciation on the other hand, limits the
taxable income, and the taxation factor is well containing, improving cash
flow. The Net Operating Profit after Tax commonly known as the NOPAT
increases every year—a sign of better profitability.
Recommendations: Monitor Market Conditions: Even though the respective
project demonstrates reasonable financial results, it is necessary to indicate
that the demands and prices for the offered products have to remain rather
attractive to support the steady growth of revenues.
Expand Operations Carefully: When more cash is generated, use this
money to reinvest profits and grow the business even bigger but be careful
not to overdo it.
In total, the evaluated project seems quite realistic due to the positive NPV,
high IRR value, and increasing cash inflow rates. Though, the analysis of the
external environment and proper control of growth will always remain critical
to maintaining the success achieved.
