Accounting Assignment: Financial Analysis Of Britvic

Question

Task:
Accounting Assignment Description:
The chosen company to be analyzed is Britvic. You need anazlyse the financials and annual reports of Britvic company. Share price performance
Produce a graph comparing the share price of the company with movements in the FTSE-100 index for the period 1st of September 2019 to 1st of October 2021. As far as can be ascertained, critically analyse the share price behaviour of your company (a detailed analysis of movements in the FTSE-100 is not required).

Evaluate the share price of your chosen company using TWO models of valuation and analyse this with respect to current share prices.

Company financing
Analyse the type of financing that this company uses and comment on the balance between its debt and equity – calculate the gearing ratio. Comment on any significant changes in long-term financing over the past couple of years.
Drawing on some of the analysis conducted above, provide an overview of the financial performance of the company this year, from a Financial Management point of view. Comment on how the company is seeking to add value for shareholders.

Evaluation of a project
This project details will be released to you in w/b 29th November 2021. You will consider the parameters mentioned in the ‘breaking news’ related to your company and incorporate this in your final section of your case study analysis taking into account the financial health of your company as observed in the analysis above.

Answer

Share price-performance of the company analyzed in the accounting assignment:
The share price performance of the company is assessed based on the comparative analysis of share price change as compared to FTSE 100. The share price performance is taken for the period from 01st September 2019 to 1st October 2021 and graphical analyses are presented here for assessing share price performance.

The performance of Britvic is effective as compared to the market as the company is providing an average return of 0.07% in the last 2 years while FTSE-100 provides average returns of -0.06%. Hence the company has high market performance as compared to existing market conditions.

The valuation of the share price of Britvic Plc helps in the evaluation of share price performance as the share price are over-valued or under-valued. The methods adopted for the valuation of share price are the CAPM model and the DDM model (Kuantan, Siregar, & Juhro, 2019).

CAPM Model:
The value of shares under CAPM model is based n the present value of free- cash flow. The cost of equity under the CAPM model is as follows:

Beta = 0.75
Risk-free rate = 1.19%
Market rate of return = 5.6%
Cost of equity using CAPM model = Risk-free rate + Beta * (Market rate of return – risk free rate)
Cost of equity = 1.19% + 0.75 * (5.6% - 1.19%) = 4.5%
Free- cash flow during the year 2021 = £ 158.60 million
Expected growth rate = 3%
Value of shares using CAPM model = 158.60* (1+0.03) / 0.045 – 0.03) = 10890.53
Value per share = 10890.53 / 2.6737 = £ 4073 per share
Based on the free cash flow, the company's share price is undervalued and it is beneficial to make an investment in the company for effective returns.

DDM Model:
The value of share using the dividend discounting model is based on the following formula:
Value per share = Dividend for next year / (Cost of equity – Growth rate) (Dukalang, Koni, & Mokoagow, 2021)
Value per share = 1.85 / (0.045 – 0.03) = £ 123.33 per share

Based on the dividend growth, the share price of the company is overvalued. However, the dividend discounting model does not provide complete earning capacity and performance hence the dividend discounting model is not sufficient for the analysis of share price performance.

Company financing:
In the financing of business operations and investment activities of the company, the company has different options such as equity, debt, and preference share. The company financing is required to assess the financial risk and assess the cost bear by the company for the financing of business. Britvic Plc has a different types of financing options in terms of debt financing and equity financing. The company has a total interest-bearing long-term debt of £ 576.90 million in the year 2021 and the balance of equity funding is £ 420.30 million. The company has major financing from the debt funds which includes interest-bearing loans and borrowings, bank loans, and private placement notes (Amraoui, Jianmu, & Bouarara, 2018). The company has also entered into cross-currency swap agreements to manage loan notes and management of foreign exchange risk on the interest rate. The company can reduce its debt financing by £ 46 million by the implementation of cash management policies. The benefits that are available to the company due to high debt funding is tax benefits which reduce the cost of capital for the company.

An effective understanding of company financing structure can be obtained through the gearing ratio which is also known as the debt-equity ratio. The gearing ratio of Britvic Plc and its competitors are as follows:

Based on the above gearing ratio analysis, it is found that the company has low debt financing as compared to competitors. The debt financing helps in reducing the cost of capital for the company due to cost-saving in taxation. Britvic Plc has lower debt financing as compared to competitors means the company is not taking complete benefits of tax saving and also bear the high cost of capital. However, the excess debt financing results in high financial risk for the company (Valogo, Shafiwu, & Adabuge, 2018). The company is required to maintain sufficient liquid funds for repayment of debt funds and meet interest expenses. In the current scenario, after the impact of COVID-19, it is beneficial for the company to maintain minimum debt financing which reduces financial risk and helps in maintaining profitability.

Evaluation of project:
1. Investment appraisal techniques:
The projects are evaluated using different investment appraisal techniques which include net present value, the interest rate of return, pay-back period, and profitability index. The evaluation of projects of Hemsworth Plc is conducted as follows:

Net present value:

Internal rate of return:

Pay-back period:

Pay-back period of option A = 2 years
Pay-back period of option B = 2 + 450/500 = 2.9 years

Profitability index:

2. Recommendations:
Based on the above analysis of projected using different investment appraisal techniques it is recommended to the company accept option B. The investment appraisal techniques contain certain advantages and disadvantages which required consideration by the company for the evaluation of projects. The advantages and disadvantages of investment appraisal techniques are as follows:

(Magni, & Marchioni, 2020)

Based on the advantages and disadvantages of techniques, the profitability index is providing accurate results of different options as the options have a different amount of cash outflow, and based on the profitability index it is recommended to the company to accept option B.

3. Other factors and risks:
The project selection is not only based on the financial factors but also non-financial factors that impact the selection of projects. In this case, option B is using synthetic ingredients, and option A is using natural ingredients. The company has a major impact of political, environmental, social, and economic factors based on which the company has high sustainability risk if the company accepts option B. For the protection of the environment and to provide healthy products to society the company should accept option A of natural ingredients. Hence the selection of projects is also affected by non-financial factors such as the impact of production on the society and environment (Turner, & Coote, 2018).

References:
Amraoui, M., Jianmu, Y., & Bouarara, K. (2018). Firm’s capital structure determinants and financing choice by industry in Morocco. International journal of management science and business administration, 4(3), 41-50. Baddeley, M., & Harcourt, G. (2021). A Behavioural Model of Investment Appraisal and its Implications for the Macroeconomy (No. 2021/05).

Dukalang, H., Koni, W., & Mokoagow, N. C. (2021). Comparison of Dividend Discount Model With Free Cash Flow To Firms For Valuation of Banking Stocks Listed in Jakarta Islamic Index (JII) Period 2016-2020. Accounting assignmentIQTISHADUNA, 12(2), 278-285.

Kuantan, D. P., Siregar, H., & Juhro, S. M. (2019). Misvaluation And Behavioral Bias Of The Indonesian Stock Market (The Development Of The Capm Model And Behavioral Finance Model). DLSU Business & Economics Review, 28(3), 81-88. Magni, C. A., & Marchioni, A. (2020). Average rates of return, working capital, and NPV-consistency in project appraisal: A sensitivity analysis approach. International Journal of Production Economics, 229, 107769.
Turner, M. J., & Coote, L. V. (2018). Incentives and monitoring: impact on the financial and non-financial orientation of capital budgeting. Meditari Accountancy Research.
Valogo, M. K., Shafiwu, A. B., & Adabuge, J. (2018). Analysis of the Relationship between Interest Rates and Gearing Ratios of Banks Listed on the Ghana Stock Exchange. Asian Journal of Econ