Business Finance

Management

ASSIGNMENT/DISSERTATION
HELP, PLEASE CONTACT:
Muhammad Sajid Saeed
Phone: +44 (141)
4045137
Email:
todrsaeed@gmail.com
Skype ID: tosajidsaeed

Table of Contents

1. Introduction.............................................................................................2
2. Sources of Finance Available to Fashionista............................................2
2.1 Equity-based Sources.........................................................................2
2.1.1 Shares..........................................................................................2
2.1.2 Retained earnings........................................................................3
2.2 Debt-related Sources..........................................................................4
2.2.1 Bank Loans...................................................................................5
2.3 Analysis of Available Sources.............................................................5
2.4 Merits of Debt over Equity Sources....................................................6
3. Analysing Comparator: SuperGroup Plc..................................................7
4. Conclusion / Recommendation................................................................9
References.................................................................................................10
Appendix A................................................................................................11

Page | 1

1. Introduction
Fashionista wants to treble the number of retail outlets over the next five
years and for this purpose, the company is looking for a long-term
financing option. In this report, three significant sources of finance (i.e.
shares, retained earnings, and bank loans) are critically evaluated based
on Fashionistas size and nature. The report also includes a discussion on
equity financing and debt financing and merits of raising debt versus
equity. In order to analyse industrial situation, a close competitor of
Fashionista, SuperGroup plc is evaluated based on how its market value
has changed over the past three years, together with how its finance
needs were met during that period.

2. Sources of Finance Available to Fashionista

Two types of finance sources are available to Fashionista: equity financing
and debt financing. Equity refers to the exchange of ownership of capital
in the business and consequently the profit is divided. Fashionista can
secure funds through equity using a number of choices including friends
and family, shares, retained earnings, dividends, investment banking
firms, and venture capitalists, angel investors, and government-backed
community development agencies (Watson and Head 2013).

2.1 Equity-based Sources

2.1.1 Shares
The first and popular option for equity financing that Fashionista can avail
is the issuance of new shares. A share is the smallest element of any
firms entire capital and investors who buy shares are called shareholders.
Shares is a common and permanent type of capital and create grounds for
capital structure of any firm (Baker and Martin 2011). By issuing shares,
Fashionista will be able to decide the face value of new shares in order to
generate long-term financing for the company. Fashionista is not a big
company and the nature of business is risky because of ladies fast
Page | 2

fashion. Therefore, it needs a long-term financing which is possible

through issuing equity shares because in this case, Fashionista is not
required to pay fixed dividends to the shareholders. In contrast to equity
shares, preference shares have a fixed payout ratio and company is liable
to payback investments to shareholders (Northcott 1998).
Issuing equity shares can be a fruitful source of finance for Fashionista
because raising capital through this source can be permanent (Baker and
Martin 2011). This means that Fashionista will not require repaying the
finances during its lifetime. But on the other hand, issuing equity shares
can be proved as a costly alternative for Fashionista for generating longterm finance. This is because of the higher costs associated with equity
capital as compared to the borrowed capital (Singla, 2007). Moreover,
Fashionista can lose the cost advantage by issuing excessive shares and
therefore it will cause over capitalisation. Another point is extremely
relevant here which highlights the legal rights of shareholders for newly
issued shares. According to the law, it is the legal responsibility of
companies to offer additionally issued shares to existing stakeholders
before offering them into the open market. This right is known as Preemptive right of shareholders and thus Fashionista must keep it in mind
before choosing the equity shares option.
On the positive side, Fashionista can raise funds on unsecured grounds
without offering its assets as collateral to the investors. Another foremost
advantage of issuing equity shares is that Fashionista will have no liability
of paying fixed dividends to the investors (Singla 2007). Rather the ratio
for paying dividends will be based on annual profits each year. However,
considering equity shares for raising long-term finance can restrict
Fashionista to trade by issuing other securities in the future (Moles et al.
2011).
2.1.2 Retained earnings
Retained earnings is another source of finance that Fashionista can
consider to generate capital. Retained earnings indicate the savings of the
Page | 3

company after paying expenses, taxes, dividends, and fulfilling other

obligations. Companies retained their earnings for several purposes
including:

debt

redemption,

renovations,

modernisation,

business

expansion, meeting working capital obligations, buying new assets, using

new technology, etc. (Lasher 2013). Retained earnings can be beneficial
for Fashionista if the company will uphold an adequate balance. However,
the improper use of retained earnings can produce unwanted results and
companys existence can be at risk.
Fashionista can enjoy several benefits by taking into account retained
earnings as an internal and reliable source of finance. For instance,
retained earnings is an inexpensive source of financing which can assist
Fashionista to stay away from entering into legal agreements by raising
capital through external sources such as banks and loan-giving agencies
etc (Weetman 2010). Moreover, retained earnings option will make
Fashionista more financially stronger by not paying additional expenses
such as bank charges, interest, taxes, and other legal fees. Likewise,
retained earnings will enable Fashionista to establish a secured and stable
dividend policy (McLaney 2011). Many other benefits that Fashionista can
receive by choosing retained earnings as a source of finance are:
enlargement in capital arrangement, resist against problematic conditions,
increase reputation, autonomy, no legal obligations, and smooth business
operations (Weetman 2010; McLaney 2011).
Apart from enjoying the benefits of retained earnings, Fashionista may
face hardships if they are not properly used. The inappropriate utilisation
of retained earnings can lead disbelieve or turbulence of shareholders
(McLaney 2011). Moles et al. (2011) mentioned that any company must
be aware of using retained earnings as a capital source due to the risk of
over capitalisation. Moreover, the improper utilisation of retained earnings
can adversely disturb the balanced industrial growth. Sofat and Hiro
(2010) indicate the risk

of

misuse of

retained

earnings

by

the

management for speculating and increasing the value of the shares.

Page | 4

2.2 Debt-related Sources

Debt financing refers to the variety of loans that can be acquired from
commercial banks and other financial institutions. Debt financing is
suitable for any business that wants to keep the ownership itself. There
can be a variety of options of debt financing including personal loans,
credit cards, home equity loans, family and friends, and bank loan
(Watson and Head 2013). In this section of the report, bank loan is
evaluated as an authentic source of debt financing for Fashionista. The
characteristics, availability, and suitability of bank loan are critically
discussed in the following subsection.
2.2.1 Bank Loans
Over the years, bank loan is considered as an encouraging source for
generating long-term capital. Today companies can obtain a business loan
easily due to the advancement in commercial banking operations. The
ease of availability of a bank loan encourages many companies to apply
for a business loan and thus Fashionista may also consider this option for
its funds expansion.
Obtaining a bank loan is more convenient for Fashionista as compared to
borrowing funds through other sources of finance. This is because of
quickly generating funds for immediate use. The bank charges high
interest rate on business loans but the interest amount is considered as an
expense in the financial statements and therefore it minimises the tax
(Bragg 2011). Fashionista can borrow a long-term business loan to treble
the number of retail outlets over the next five years. Hawawini and Viallet
(2010) mentioned that bank loan is reliable and suitable in any situation.
This means that banks can provide loans to Fashionista for promoting the
business as well as to support it during crisis period.
Apart from the benefits, Fashionista must keep in mind the negative
aspect of bank loan as well. Sofat and Hiro (2010) argue that obtaining a
loan from commercial bank or any other financial institution may involve
Page | 5

several wearisome procedures and requirements for a business. Some

examples of these procedures are: collateral of assets, guarantee
statements, margin money stipulation, and periodic statements etc.

2.3 Analysis of Available Sources

In the previous sections, three different sources of finance available to
Fashionista are critically discussed. In this section, these three sources are
evaluated on the basis of finance available, financial requirements,
repayment terms, and cost of finance.
According to Denis (2004), companies should not rely on a single source of
finance. This means that Fashionista may consider and evaluate more
than one financial source in order to ensure the availability of at least one
in case if a single source is not available due to unavoidable
circumstances. Similarly, the financial requirements of each source are
different and Fashionista is required to consider so many things; for
example,

approval

of

directors,

confidence

of

shareholders,

legal

constraints, debt to equity ratio, interest coverage ratio, and credit score
needs etc. Braggs (2011) highlights the importance of obtain information
about all prerequisites of each source of finance before making a final
decision.
In order to generate long-term funds to treble the number of retail outlets
over the next five years, Fashionista should consider interest amounts and
each opportunity that the firm can avail. For example, Balloon payments,
periodic payments, or interest-only payments offered by many banks
today to let the businesses to repay loans easily (Slee 2011). Chandra
(2008) asserts that companies must look for loans with a higher allocation
to principal in order to minimise the overall cost.
Many hidden and small costs tend to increase the overall cost of debt and
equity financing. For example, loan application fee, brokers fee, interest
rates, origination

fee,

dividend

payments

and

venture

capitalists.

Fashionista requires to keep in mind these fee and additional associated

Page | 6

costs when using debt financing. Also, it is necessary to carefully read and
understand the legal terms and conditions of a contract especially in case
of asset collateral. Table 1 presents the analysis of source of finance
available to Fashionista based on factors discussed in this section.
Table 1: analysis of sources of finance available to Fashionista

Factor

Shares

Retained
earnings

Bank loan

Finance
availability

Yes

Yes

Yes

Financing
requirement

Payoff
dividends;
Legal
responsibilities

Shareholder
confidence

Periodic
statements;
Asset collateral

Repayment
terms

Dividends on
profit

No or easy

Cost of finance
Long-term

High
Yes

Low
No

Periodic
payments;
High interest
rate
High
Yes

2.4 Merits of Debt over Equity Sources

Although the merits of a bank loan have been discussed in the previous
section, but the overall advantages of debt financing over equity financing
are discussed in this section.
One of the vital merits of debt over equity financing is that loans do not
weaken the ownership of the company and lenders will have no claim on
sharing the profits. However, it is necessary to repay loan and interest
amount on time (Chandra 2008). Debt financing permits an organisation
to keep control over its business activities and the company is not
answerable to investors or partners about the decisions. The interest rate
in debt financing is normally based on prime interest rate and tax
deductable at the end of the year (Chandra 2008). It acts like a shield of
income and consequently reduces the tax responsibility each year. When
an organisation selects debt financing option to finance its operations,
Page | 7

then it can fully utilise its resources without any permission of key
stakeholders and business partners. Moreover, debt financing can be
easily secured for both short and long time periods (Guerard and Schwartz
2007). This can be beneficial for small and medium sized organisations
such as Fashionista in terms of its growth in fast fashion industry. Finally,
it is possible for a company to forecast the principal repayments and fixed
interest amount for the future consideration of a bank loan.

3. Analysing Comparator: SuperGroup Plc

In this section of the report, the market value of SuperGroup Plc for the
last three years is evaluated. SuperGroup is a listed UK company and it is
selected because it is a close competitor of Fashionista in the fashion
market with 1.32b current market capitalisation. The selection of
SuperGroup is based on extensive search of matching the market
capitalisation of different companies in LSE with Fashionistas market
capitalisation. The competitors in the same markets either have very low
market capitalisation or large capitalisation ranging from 4 billion to 6
billion.
SuperGroup is a distinctive UK fashion retailer selling quality-based
clothing accessories of both men and women. SuperGroup was initially
founded in 1985 and successfully established a good brand name over the
years. Now the company is selling their stylist products under the flagship
brand names of SuperDry and Cult. Currently, SuperGroup has 71
standalone stores in the UK and 56 worldwide while 143 licensed stores
are franchised as well. SuperDry brand is in 54 countries through a
licensed franchised network (Super Group 2013).
The full financial data about SuperGroup are
available in appendix A and some highlights

37.60

34.97
27.98

25.04

of it are presented in the graphs at right.

27.89
20.83
ROCE

ROA

Figure 1 shows a slight reduction in the

profitability of SuperGroup due to reduction

2011

2012

2013

Page | 8

in capital employed.

Figure 1: Profitability
ratios

Figure 2, 3 and 4 are more relevant to this

report.

Figure

capitalisation

2
of

shows

the

SuperGroup

market

which

1.07

is
Market Capitalisation (b)

increasing on annual basis. This means that

both companys market value per share and
outstanding shares are gradually increasing.

2011

The gearing ratio in figure 3 demonstrates

SuperGroups decreasing long-term debt
compared

to

its

equity

capital.

is shrinking on yearly basis and it is out of

risk

and

bankruptcy

2012

2013

Figure 2
54.11

47.55

40.02

This

indicates that SuperGroups leverage level

financial

1.32

1.17

due

2011

2012

2013

Gearing

to

decreased volatility of profits and debt

Figure 3

repayment schedules (Ryan 2007). The

Price to Earnings (P/E) ratio in figure 4

36.91
35.09
PE ratio
32.44

shows that the stocks are highly valued due

to the higher earnings growth rate of
SuperGroup plc. Fashion clothing industry
has relatively higher P/E ratio because of

2011

2012

2013

Figure 4

high hopes of investors in the future (Ryan

2007).
The financial statements and accounts of
last three years show that no long-term loan
was taken by SuperGroup plc and also no
dividend and shares were used to generate
long-term finance. This is because that
SuperGroup has retained an adequate level
of earnings (See appendix A). In this case,
SuperGroup does not need to acquire a
bank loan because the company can use its
retained earnings for investment purpose.

Page | 9

4. Conclusion / Recommendation
With the consideration of debt-related source preferably a bank loan,
Fashionista will only be liable to repay loan and pay interest on loan.
Furthermore, the interest amount will be tax-deductable as well.
Moreover, Fashionista can easily secure a loan with zero risk of profit
sharing and also by the means of making decisions freely. The only
requirement is the repayment of loan in parts along with interest at prime
rate. In these days, several banks offer balloon payments which refer to
gradually increase in monthly repayments as the business grow.
Fashionista can acquire long-term business loan to treble the number of
retail outlets over the next five years. Besides, several banks offer
interest-only payments as well which can be helpful for Fashionista to
lowering down monthly note (Slee 2011).
The case of SuperGroup is different from Fashionista because unlike
Fashionista, SuperGroup retained an adequate level of earnings which will
help the company to invest in future. Also, the option of debt financing
through by a bank loan is also open to SuperGroup because of its healthy
profitability level and market capitalisation.

Page | 10

References
Baker, H.K. and Martin, G.S. (2011). Capital Structure and Corporate Financing
Decisions: Theory, Evidence, and Practice. John Wiley & Sons
Bragg, S.M. (2011). Obtaining debt financing. John Wiley & Sons
Chandra, P. (2008). Financial management. Tata McGraw-Hill Education
Denis, D.J. (2004). Entrepreneurial finance: an overview of the issues and
evidence. Journal of Corporate Finance, 10, pp. 301-326
Guerard, J. and Schwartz, E. (2007). Quantitative Corporate Finance. Springer
Hawawini, G. and Viallet, C. (2010). Finance for Executives: Managing for Value
Creation. (4th Ed.) Cengage Learning
Lasher, W.R. (2013). Practical financial management. (7th Ed.), Cengage learning
McLaney, E.J. (2011). Business finance theory and practice. (9th Ed.) Harlow:
Financial Times Prentice Hall
Moles, P., Parrino, R. and Kidwell, D.S. (2011). Corporate finance. John Wiley &
Sons
Northcott, D. (1998). Capital investment decision-making. London: Thomson
Learning
Ryan, B. (2007). Corporate Finance and Valuation. Cengage Learning EMEA
Sofat, R. and Hiro, P. (2010). Basic Accounting. (2nd Ed.), PHI Learning Ltd
Singla, R. K. (2007). Business Studies. India: FK Publications
Slee, R.T. (2011). Private Capital Markets: Valuation, Capitalization, and Transfer
of Private Business Interests + Website. (2nd Ed.) John Wiley & Sons
Super Group Plc (2013). About SuperGroup. [Online]. Available from:
http://www.supergroup.co.uk/about-supergroup (Accessed: 27 February
2014)
Watson, D. and Head, A. (2013). Corporate finance: Principles and practice. (6th
Ed.) Harlow: Pearson
Weetman, P. (2010). Management accounting. (2nd Ed.) Harlow: Financial Times
Prentice Hall Pearson

Page | 11

Appendix A
Income Statement ( m)

28-Apr-13

29-Apr-12

01-May-11

Continuing Operations
Revenue

360.40

313.80

237.90

51.50

51.30

47.20

0.00

0.00

0.00

Profit Before Tax

51.80

51.40

47.30

Profit After Tax

36.30

36.10

30.10

0.00

0.00

0.00

36.30

36.10

30.10

Operating Profit/(Loss)
Net Interest

Discontinued Operations
Profit After Tax
PROFIT FOR THE PERIOD
Attributable to:
Minority Interests

-0.40

0.00

0.00

Equity Holders of Parent Company

35.90

36.10

30.10

Earnings per Share - Basic

44.70p

45.00p

37.90p

Earnings per Share - Diluted

44.30p

44.70p

37.90p

Earnings per Share - Adjusted

47.80p

38.10p

45.20p

Earnings per Share - Basic

44.70p

45.00p

37.90p

Earnings per Share - Diluted

44.30p

44.70p

37.90p

Earnings per Share - Adjusted

47.80p

38.10p

45.20p

0.00p

0.00p

0.00p

Continuing EPS

Continuing and Discontinued EPS

Dividend per Share

Balance Sheet ( m)

28-Apr-13

29-Apr-12

01-May-11

Assets
Non-Current Assets
Property, Plant & Equipment

63.70

63.80

38.60

Intangible Assets

41.50

40.70

29.40

Investment Properties

0.00

0.00

0.00

Investments

0.00

0.00

0.00

Other Financial Assets

0.00

0.00

0.00

Other Non-Current Assets

34.00

38.00

44.20

139.20

142.50

112.20

Inventories

72.50

55.50

52.30

Trade & Other Receivables

45.90

42.60

35.70

Cash at Bank & in Hand

54.50

30.90

32.20

Current Asset Investments

1.40

0.00

0.00

Other Current Assets

0.00

0.00

0.00

174.30

129.00

120.20

313.50

271.50

232.40

Current Assets

Total Assets
Liabilities
Current Liabilities
Borrowings
Other Current Liabilities

-0.20

-0.20

0.00

-57.20

-53.00

-42.70

-57.40

-53.20

-42.70

Page | 12

Balance Sheet ( m)

28-Apr-13

29-Apr-12

01-May-11

Assets
Net Current Assets

116.90

75.80

77.50

Borrowings

-0.20

-0.40

-0.90

Provisions

-2.90

-3.10

-3.50

-29.10

-30.80

-34.50

Non-Current Liabilities

Other Non-Current Liabilities

-32.20

-34.30

-38.90

Total Liabilities

-89.60

-87.50

-81.60

Net Assets

223.90

184.00

150.80

Capital & Reserves

Share Capital
Share Premium Account
Other Reserves

4.00

4.00

4.00

140.10

138.60

138.60

-303.00

-304.60

-340.60

Retained Earnings

382.40

346.00

348.80

Shareholders Funds

223.50

184.00

150.80

Minority Interests/Other Equity

Total Equity
Ratios - based on IFRS

0.40

0.00

0.00

223.90

184.00

150.80

28-Apr-13

29-Apr-12

01-May-11

Continuing Operations
PE Ratio - Adjusted
Dividend Cover
Revenue Per Share
Pre-Tax Profit per Share

36.91

32.44

n/a

n/a

35.09
n/a

448.93p

391.10p

299.86p

64.52p

64.06p

59.62p

Operating Margin

14.29%

16.35%

20.47%

Return on Capital Employed

27.89%

34.97%

37.60%

Source: London Stock Exchange

Page | 13