INTRODUCTION:3 PART I: COMPANY ANALYSIS5 1-Introduction of the company5 1. 1History:5 1. 2. The industry:5 1. 3. Sports Direct today:6 2. Analysis on the financing structure of the company6 2. 1. Sports Direct financial statements:7 2. 2. JJB Sports financial statements:9 2. 3. Ratios of Sports Direct and JJB Sports12 3. The weighted average cost of capital15 3. 1. Cost of equity:15 3. 2. Cost of debt:15 3. 3. WACC:16 PART II: PROJECT INVESTMENT ANALYSIS17 1-Preliminary report:17 1. 1. Project description:17 1. 2. Elements of the project:18 1. 3. Risk and Uncertainty:19 1. 4. Conclusion:19 2. Project evaluation:20 2. 1.
NPV:20 2. 2. Sensitivity analysis:21 3. Quarterly report:22 3. 1. Introduction:22 3. 2. Comparison:22 3. 3. Risk and uncertainty:23 4. Conclusion:24 | INTRODUCTION: Long ago, when I used to go with my father to the supermarket, I was always asking him to buy me a ball or these fake guns to play with. Sometimes he did buy them for me but sometimes not. I was happy when I had them but when he refused I heard the same reason every time “we do not have the money now but I will buy it for you next time” so I was asking myself: why he was saying to me that he did not have money while he was buying even more expensive goods?
And more intriguing, how he would know that he does not have the money now but he will have it next time? These questions hunted me for many years until I started studying finance in high school. Indeed, I realised that my father was actually doing what is called prioritising. In other words, he was making a list of goods from the most important to the family to the least thus my ball was not really important to anyone in the family except myself. That was my answer for the first question.
For the second, I discovered that my father was planning what he was going to buy on the expected salary that he was receiving each month. The reflection from that is that my father was actually using simple finance tools to manage our family expenses. It might sound strange but most of the people around the world use basic finance to manage their normal life. It is simple to use in this level, however when it comes to big companies like Microsoft or GE, one person cannot manage to tell what will be the priorities, the expenses and the cash flows of the whole group.
Firstly, because it is no longer a family of five people who live together and know each other like the back of their hands, but it is thousands of shareholders, employees, managers, who just share a professional life and who have totally different views on the extent to how the company should be managed. Consequently, having some normalised tools to identify what goods are more important to a company and should consequently buy i. e. NPV to assess what investment to implement. And what will be the cash flows that the company will generate so that it can run this investment i. . the revenue of the company which is the sales. All these tools and ways to manage the company from a financial perspective are known as the Corporate Finance. Some of them will be discussed in the following chapters using a combination of theory and real life cases. In the first part, the company chosen for the coursework -which is SPORTSDIRECT. COM- will be introduced. First it will be briefly described by outlining its activity, from what products it sells to its size relative to the industry without forgetting of course to assess the performance over the past 4 years.
Then the comment on the financing structure of the company will be taken and the Weighted Average Cost of Capital will be calculated using the models learned during lectures and seminars. On the second part, a new investment project will be prepared. At first, the relevant information about the project will be presented. Afterwards, the Net Present Value (NPV) and the Sensitivity Analysis (SA) will be calculated to assess on the profitability of the company and how it will deal with the risk and uncertainty respectively.
And finally a quarterly report will be prepared to compare the forecasted with the actual results. PART I: COMPANY ANALYSIS 1- Introduction of the company 1. 1 History: In 1982 a store in Maidenhead is opened by Mike Ashley. It’s the birth of Sports Direct. However this name was not the first one. Indeed, it was called primarily Mike Ashley Sports. In the 1990s, the founder opened many stores in and around London and over 100 stores across the United Kingdom. By that time, the name of the chain was changed to Sports Soccer.
Although the high number of stores, Mike Ashley was a sole trader and his chain did not acquire the company status until 1999. By doing so, the borrowing power of the company increased and in 2002 he went on to buy Lillywhites, the prestigious sports shop in Piccadilly Circus. In 2005, Sports Direct acquired Hargreaves, Gilesports, Streetwise in 2006, and Field&Trek in 2007(History of the Company. Sportsdirect. com). In this same year, Sports Direct’s shares were listed on the London Stock Exchange and by 2009, Sports Direct operated 470 stores(Annual Report 2009) in the UK. 1. 2.
The industry: Sports Direct operates as a retailer in the industry of sporting, leisure clothing, footwear and equipment. There are very lucrative niches for functional apparel in this industry particularly for football, tennis, and golf, nevertheless the market is dominated by multipurpose leisure wear that will never see a playing field. Indeed, the demand for clothes like tracksuits, trainers, shorts, T-shirts, and the popularity of keeping fit by jogging or gym is what make the multipurpose products so successful. In general, UK sales of sports clothing were worth approximately 4. 5 billion pounds in 2009(Reportlinker. com). However, the market is gradually beginning to be saturated. One reason for this is the greying of the UK population and another one is the intensity of the competition we mentioned before. As a result, there will be during the next five years a very slow growth in the sportswear except in 2012 where the increase will be boosted given the Olympic Games in London. 1. 3. Sports Direct today: Sports Direct have now approximately 500 stores around the UK, as well as stores in Ireland, Belgium, Holland and Slovenia (sportsdirect. om). Furthermore, Sports Direct has an expansion programme which consist of opening a couple of stores each year in order to make the sports clothing available everywhere in the UK and in order to remain the number one sports retailer in the United Kingdom. Sports Direct also sell leading 3rd party brands such as Nike, Adidas, Reebok, Umbro and Fila, plus group brands, such as, Everlast, Lonsdale, Dunlop, Slazenger and Karrimor and a wide product range which covers all sports and activities (sportsdirect. com). 2. Analysis on the financing structure of the company
In this part, we will focus essentially on assessing the Financing structure of SportsDirect. com. Indeed, we will look at their financial health by calculating the relevant ratios from the financial statements. Afterwards, we will compare these ratios with the ones of the first of Sports Direct. In other words, the JJB Sports company. 2. 1. Sports Direct financial statements: 2. 2. 1. Balance sheet: Balance sheet (? mil. )| 2006| 2007| 2008| 2009| Fixed assets:| | | | | Tangible assets| 205. 3| 224. 5| 322. 8| 295. 8| Intangible asstes| 68. 31| 87. 98| 185. 0| 222. 0| Goodwill| 26. 44| 58. 59| 102. 7| 118. 3|
Other long term assets| 11. 23| 31. 93| 29. 11| 15. 47| Other long term investments| 14. 68| 75. 45| 65. 71| 5. 467| Current assets:| | | | | Investments| 18. 62| 21. 99| 28. 45| 32. 38| Stocks| 218. 8| 231. 4| 218. 8| 262. 3| Receivables| 62. 38| 61. 3| 71. 3| 79. 48| Cash and equivalent| 48. 09| 181. 8| 25. 42| 32. 36| Other capital stock| 0. 0| 0. 0| 0. 0| 0. 0| Other current assets| 35. 38| 27. 32| 23. 19| 32. 45| Current assets| 364. 7| 501. 8| 338. 7| 406. 6| Current liabilities:| | | | | Short term debt | 99. 55| 218. 0| 476. 4| 458. 9| Trade payables| 124. 1| 139. 4| 87. 12| 107. 0| Other current liabilities| 108. | 244. 6| 184. 9| 168. 5| Current liabilities| 331. 8| 602. 0| 748. 5| 734. 3| Long term liabilities:| | | | | Long term debt| 2. 526| 1. 935| 14. 26| 4. 173| Deferred tax| 15. 98| 18. 59| 26. 42| 33. 49| Other long term liabilities| 39. 66| 40. 26| 52. 19| 51. 94| Capital and reserves:| | | | | Called up share capital| 1. 0| 72. 0| 64. 05| 64. 05| Preferred capital| 0. 0| 0. 0| 0. 0| 0. 0| Reserves| 290. 2| 204. 0| 61. 12| 86. 41| Stockholders equity| 291. 2| 276. 0| 125. 2| 150. 4| 2. 2. 2. Income statement: Income statement (? mil. )| 2006| 2007| 2008| 2009| Revenues | 1,194. 7| 1,347. 1| 1,259. 5| 1,367. 3|
Total revenues| 1,194. 8| 1,347. 2| 1,259. 6| 1,367. 4| Cost of Goods Sold| 738. 1| 751. 0| 709. 8| 809. 7| Gross profit| 456. 7| 596. 1| 549. 7| 557. 6| Selling General & Admin Expenses, Total| 352. 5| 444. 1| 441. 4| 460. 5| Other Operating Expenses| (3. 0)| (0. 3)| (1. 3)| (0. 8)| OTHER OPERATING EXPENSES, TOTAL| 349. 4| 443. 8| 440. 1| 459. 7| OPERATING INCOME| 107. 3| 152. 4| 109. 6| 98. 0| Interest expenses| (6. 2)| (7. 9)| (37. 5)| (21. 1)| Interest and investment income| 4. 2| 3. 1| 5. 6| 1. 3| NET INTEREST EXPENSE| (2. 0)| (4. 8)| (31. 9)| (19. 8)| Income (loss) on equity investment| 3. 4| 3. 4| 5. 0| 2. | Currency Exchange Gains (Loss)| (9. 5)| (31. 7)| (5. 2)| (12. 6)| EBT, EXCLUDING UNUSUAL ITEMS| 99. 1| 119. 3| 77. 5| 93. 3| Merger & Restructuring Charges| (3. 4)| | | | Impairment of Goodwill| 0. 6| | | | Gain (Loss) on Sale of Investments| | | 41. 4| (52. 1)| Other Unusual Items, Total| | (58. 8)| | (30. 5)| Legal Settlements| | (6. 0)| | | Other Unusual Items| | (52. 8)| | | EBT, INCLUDING UNUSUAL ITEMS| 96. 3| 60. 5| 118. 9| 10. 7| Income Tax Expense| 31. 4| 23. 4| 41. 1| 26. 2| Minority Interest in Earnings| (2. 0)| 0. 6| 0. 4| (0. 3)| Earnings from Continuing Operations| 62. 9| | 37. 7| 78. 2| (15. )| NET INCOME| 62. 10| | 37. 8| 78. 3| (15. 8)| NET INCOME TO COMMON INCLUDING EXTRA ITEMS| 62. 11| | 37. 9| 78. 4| (15. 8)| NET INCOME TO COMMON EXCLUDING EXTRA ITEMS| 62. 12| 37. 10| 78. 5| (15. 8)| 2. 2. JJB Sports financial statements: 2. 3. 3. Balance sheet: Balance sheet (? mil. )| 2006| 2007| 2008| 2009| Assets| | | | | Cash and Equivalents| 34. 9| 23. 6| 14. 2| 40. 6| Short-Term Investments| | | 28. 1| | TOTAL CASH AND SHORT TERM INVESTMENTS| 34. 9| 23. 6| 42. 3| 40. 6| Accounts Receivable| 1. 7| 9. 0| 5. 3| 5. 0| Other Receivables| 37. 0| 29. 2| 39. 1| 33. 4| TOTAL RECEIVABLES| 38. 7| 38. 2| 44. 4| 38. 4|
Inventory| 120. 3| 128. 1| 115. 0| 70. 6| Restricted Cash| | | | 3. 8| Other Current Assets| 168. 1| 168. 1| 170. 7| 168. 1| TOTAL CURRENT ASSETS| 362. 0| 358. 0| 372. 3| 321. 5| Gross Property Plant and Equipment| 309. 3| 332. 3| 352. 0| 357. 2| Accumulated Depreciation| (120. 1)| (133. 3)| (153. 7)| (195. 2)| NET PROPERTY PLANT AND EQUIPMENT| 189. 2| 199. 0| 198. 3| 162. 0| Goodwill| 186. 1| 188. 5| 187. 8| 106. 4| Long-Term Investments| | | 5. 7| 0. 8| TOTAL ASSETS| 747. 5| 772. 8| 789. 5| 615. 3| Liabilities and equity| | | | | Accounts Payable| 18. 5| 41. 6| 24. 4| 29. 6| Accrued Expenses| 13. 9| 9. 0| 12. 7| 11. 2|
Short-Term Borrowings| | | 168. 1| 168. 1| Current Portion of Long-Term Debt/Capital Lease| 168. 1| 168. 1| | 75. 0| Current Income Taxes Payable| (0. 2)| 6. 0| | 1. 5| Other Current Liabilities, Total| 70. 4| 75. 3| 96. 5| (3. 0| TOTAL CURRENT LIABILITIES| 270. 7| 300. 0| 301. 6| 378. 3| Long-Term Debt| 59. 9| 32. 8| 56. 4| | Deferred Tax Liability Non-Current| 19. 8| 23. 4| 24. 2| 2. 7| Other Non-Current Liabilities| 32. 6| 39. 5| 42. 3| 49. 7| TOTAL LIABILITIES| 382. 9| 395. 8| 424. 5| 430. 7| Common Stock| 11. 5| 11. 9| 11. 9| 12. 5| Additional Paid in Capital| 157. 2| 169. 3| 171. 2| 174. 1| Retained Earnings| 194. | 197. 3| 184. 4| (0. 9)| Treasury Stock| | (3. 1)| (3. 1)| (3. 1)| Comprehensive Income and Other| 1. 1| 1. 6| 0. 5| 2. 0| TOTAL COMMON EQUITY| 364. 6| 377. 0| 365. 1| 184. 6| TOTAL EQUITY| 364. 6| 377. 0| 365. 1| 184. 6| TOTAL LIABILITIES AND EQUITY| 747. 5| 772. 8| 789. 5| 615. 3| 2. 3. 4. Income statement: Income statement (? mil. )| 2006| 2007| 2008| 2009| Revenues | 745. 2| 810. 3| 811. 8| 718. 3| Total revenues| 745. 2| 810. 3| 811. 8| 718. 3| Cost of Goods Sold| 393. 1| 425. 3| 405. 6| 353. 7| Gross profit| 393. 2| 425. 4| 405. 7| 353. 8| Selling General & Admin Expenses, Total| 321. 0| 351. 1| 398. | 548. 9| Other Operating Expenses| (3. 2)| (5. 2)| (3. 3)| (5. 7)| OTHER OPERATING EXPENSES, TOTAL| 317. 8| 346. 0| 394. 8| 543. 2| OPERATING INCOME| 34. 3| 39. 0| 11. 3| (178. 7)| Interest expenses| (9. 3)| (9. 9)| (12. 4)| (11. 6)| Interest and investment income| 8. 9| 9. 4| 11. 6| 10. 2| NET INTEREST EXPENSE| (0. 4)| (0. 5)| (0. 8)| (1. 3)| Income (loss) on equity investment| | | 0. 4| (0. 1)| Other non-operating income (expenses)| (0. 2)| 0. 0| (0. 1)| (0. 2)| EBT, EXCLUDING UNUSUAL ITEMS| 33. 7| 38. 5| 10. 8| (180. 3)| Gain (loss) on sale investments| | | | 2. 0| Other unusual items, total| | | | (11. 0)|
EBT, INCLUDING UNUSUAL ITEMS| 33. 7| 38. 5| 10. 8| (189. 2)| Income tax expense| 3. 5| 12. 7| 1. 2| (21. 7)| Earnings from continuing operations| 30. 2| 25. 8| 9. 6| (167. 6)| NET INCOME| 30. 2| 25. 8| 9. 6| (167. 6)| NET INCOME TO COMMON INCLUDING EXTRA ITEMS| 30. 3| 25. 9| 9. 7| (167. 6)| NET INCOME TO COMMON EXCLUDING EXTRA ITEMS| 30. 4| 25. 10| 9. 8| (167. 6)| 2. 3. Ratios of Sports Direct and JJB Sports A ratio is one value divided by another. The result is representative of the value of one quantity in term of another (Irwin/McGraw-Hill 2006). In a given industry, all the companies do not have the same size.
For instance, McDonalds and Burger King are in the same industry, moreover they are fierce competitors. However, when taking the size of McDonalds there is no way of comparison with Burger King. Yet, the size does not go with profitability or efficiency and there are many companies like British Petroleum which face serious debt problem but their size would dissimulate these deficiencies. To remedy to this situation, analysts use ratios to determine if the company is in a good financial health and to compare it with competitors with different sizes. The following ratios are the ones I judged useful to comparing Sports Direct with JJB Sports: . 4. 5. Formulas:| | Short term solvency ratios| Current ratio| Current assets/current liabilities| Quick ratio| (Current assets-inventory)/current liabilities| Turnover ratios| | Inventory turnover| Cost of good sold/inventory| Total asset turnover| sales/total assets| Long term solvency| | Total debt ratio| (total assets-total equity)/total assets| Debt-equity ratio| total debt/total equity| Profitability ratio| | Profit margin| net income/sales| Return on assets| net income/total assets| Return on equity| net income/total equity| 2. 4. 6. Sports Direct ratios: | Sports Direct|
Short term solvency ratios| 2006| 2007| 2008| 2009| Current ratio| 109. 9%| 83. 3%| 45,20%| 55. 3%| Quick ratio| 43. 9%| 44. 9%| 16. 1%| 19. 6%| Turnover ratios| | | | | Inventory turnover| 3. 4| 3. 3| 3. 3| 3. 1| Total asset turnover| 1. 8| 1. 4| 1. 3| 1. 4| Long term solvency| | | | Total debt ratio| 0. 6| 0. 7| 0. 9| 0. 8| Debt-equity ratio| 1. 3| 2. 4| 6. 7| 5. 5| Profitability ratio| | | | Profit margin| 5. 2%| 2. 8%| 6. 2%| (1. 2%)| Return on assets| 9. 3%| 4. 0%| 8. 0%| (1. 6%)| Return on equity| 23. 9%| 13. 7%| 62. 5%| (10. 5%)| 2. 4. 7. JJB Sports ratios: | JJB Sports| Short term solvency ratios| 2006| 2007| 2008| 2009|
Current ratio| 133. 7%| 119. 3%| 123. 4%| 84. 9%| Quick ratio| 89. 3%| 76. 6%| 85. 3%| 66. 3%| Turnover ratios| | | | | Inventory turnover| 3. 3| 3. 3| 3. 5| 5. 0| Total asset turnover| 0. 9| 1. 1| 1. 1| 1. 2| Long term solvency| | | | Total debt ratio| 0. 5| 0. 5| 0. 6| 0. 7| Debt-equity ratio| 1. 1| 1. 1| 1. 2| 2. 3| Profitability ratio| | | | Profit margin| 4. 1%| 3. 2%| 1. 2%| (23. 3%)| Return on assets| 4. 1%| 3. 4%| 1. 2%| (27. 2%)| Return on equity| 8. 3%| 6. 9%| 2. 7%| (90. 8%)| 2. 4. 8. Analysis: In short term solvency, it can be seen that in 2006 Sports Direct did not have much to worry about.
However in 2009 the company is in a fix with a quick ratio covering less than 20% of the current liabilities. In contrast, JJB Sports is handling its debts efficiently as they are covering more than ? of them. Concerning their long term solvency, it can be seen that Sports Direct is in a better position than its competitor. Also, a ROE higher than ROA reflects that both companies are using financial leverage. Finally, it can be said that JJB Sports financial structure is slightly better than Sports Direct structure because of their solvency. However, Sports Direct is more profitable.
Concerning the losses in 2009, it can be assumed that it is due to the economic situation. 2. The weighted average cost of capital The WACC is the return required on the whole firm, shareholders and creditors return combined. To calculate the WACC of Sports Direct, we will first calculate the cost of equity and then the cost of debt. 3. 4. Cost of equity: It is the rate of return required by a shareholder. We will use the Capital Asset Pricing Model (CAPM) to calculate the Ke. We assume that: The risk free rate is 5% (Bank of England interest rate) The Beta of the company is 1. 39 ( http://in. reuters. com) The risk of the FTSE 100 is 8. 5% (Credit Suisse First Boston) Consequently the Ke will be [0. 05+(0. 0845-0. 05)*1. 39]=0. 098 or 9. 98%. 3. 5. Cost of debt: It is the rate of return that creditors require. The company has a net debt of ? 431. 3M of bank loans. The interest rate is 8% (annual report 2009) and the tax rate is 30%(annual report 2009). As a result the Kd will be [0. 08*(1-0. 33)] = 0. 054 or 5. 4%. 3. 6. WACC: We calculate the WACC using the tabular approach: The value of the equity is [5. 77M*109. 9] = 634. 123M (Google finance). The value of the debt is 431. 3M. | V| K| V*K| Equity| 634. 123M| 0. 098| 62. 144054M| Debt| 431. 3M| 0. 054| 24. 528M| Total| 1065. 423M| | 86. 296854M| Consequently, the WACC is equal to 86. 296854? 1065. 423=0. 081 or 8. 1%. PART II: PROJECT INVESTMENT ANALYSIS 1- Preliminary report: Preliminary report on new project investment in Morocco FROM:| Project manager| | DATE:| 21/07/2010| TO:| Board of directors| | ADRESSE:| Unit A| SUBJECT:| Opening of new stores | | | Brook Park East| | in key cities in Morocco | | | Shirebrook| | | | | NG20 8RY| 1. 1. Project description: Sports Direct strategy during the past 10 years has been to expand its business in the UK and overseas through new stores opening, acquisitions, and strategic alliances.
Therefore, this new project fit perfectly with the strategic aims and objectives of the company. The company’s aim is to expand internationally. Indeed, they have stores in Europe, Asia, and America. However, they did not yet enter the African market. Currently, Sports Direct is facing a declining demand in the UK, which is its major source of revenue, and this situation might as well spread to other European countries because of the actual recession and the Greece issue, in Asia they have a well-established alliance with ITAT Group limited, and in America they are present in USA but the competition is very strong.
Consequently, Africa seems to be a very profitable potential market thanks to its growth opportunities and its low competition. Our project is basically to enter this market through first integrating one country, Morocco, and if after 5 years the results of this investment are reassuring, they may well expand to other neighbour countries. The objective is to open one store in the capital Rabat and another one in the business capital Casablanca. By doing so, they will reduce the negative effect of the demographic concentration in the UK and follow the expansion strategy by new stores opening. . 2. Elements of the project: For the lack of information about the different types of costs and revenues, simple assumptions will be made based on my previous experience on the real estate and the building industry in Morocco. 1. 3. 1. Initial investment cost: The initial investment cost will be the cost of buying the two stores and designing so they comply with the norms of the Sports Direct stores. The initial cost will be 3M Dirhams or 230000 Pounds for buying and redesigning each store. The total cost will then be 460000 Pounds.
The company will finance this investment by a loan from a local bank at 7% interest rate. Morocco provides many facilities for FDI so getting the credit will not be a big issue. 1. 3. 2. Annual revenues: Each store will be expected to sell 500 Pounds per day so the revenues per annum of the two stores will be 365000 pound. 1. 3. 3. Annual operating costs: The operating costs will be basically the cost of goods sold and the selling and administrative expenses. The total of these two will be 250 Pounds per day per store with a total of 182500 Pounds per annum for the two stores.
The variable costs, included in the operating costs, will be 100 Pounds per day or 73000 per annum. 1. 3. 4. Rates of inflation: It is 2% in Morocco and it is well managed. Thus, it will not be a major point to take into consideration. 1. 3. 5. Taxation: In Morocco, all new investments are exempted for a period of 5 years to promote new investments. 1. 3. Risk and Uncertainty: In a project we are never certain of the results. The investment costs are known. However the cash flows generated are the ones that have a degree of risk and uncertainty on them.
There are many techniques to deal with uncertainty. We will use the sensitivity analysis to manage the risk as it is the major technique that we applied during the course of corporate finance. Sensitivity analysis (SA) is the study of how the variation (uncertainty) in the output of a mathematical model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of the model(John Wiley & Sons 2008). In another words, it is the changing of the elements of a project systematically to point out the effect of these variations. 1. . Conclusion: Every investment has its own risk, own important elements to take into consideration, and own degree of feasibility. Although the majority of these elements have been covered, it cannot be assured that the project will be successful. The main reason is that the economic situation is more and more volatile thus making it difficult to predict major changes that can affect the project drastically. The dilute the effect of the unpredictability, NPV and Sensitivity Analysis will been calculated and analysed in the next part. 1. Project evaluation: 2. 5. NPV:
YEAR| 0| 1| 2| 3| 4| 5| REVENUES| | 365000| 365000| 365000| 365000| 365000| OPERATING COSTS| | -182500| -182500| -182500| -182500| -182500| INITIAL INVESTMENT| 460000| | | | | | INTEREST 7%| | -32200| -32200| -32200| -32200| -32200| NET CASH FLOWS| | 150300| 150300| 150300| 150300| 150300| DISCOUNT FACTOR (ANNUITY)| 3. 9822| | | | | | DISCOUNTED CASH FLOWS| 598525| | | | | | NPV| 598525-460000=138525| | | | | The main reason that the NPV has been calculated is that, in contrast with the Internal Rate of Return (IRR), it has the ability to handle easily unconventional cash flows.
Furthermore, even if it doesn’t take into account the risk factor, it adjusts to it in contradiction with the Discounted Payback (DPB) which fails to do so. The NPV is positive; therefore the project is worth being taken. However it does not take into account the risk factor, thus doing sensitivity analysis will be more helpful to help evaluate the uncertainty and risk of the project. 2. 6. Sensitivity analysis: * Sales: 365000*3. 9822=1453503 * Variable cost: 73000*3. 9822=290701 * Volume: 1453503-290701=1162802 ELEMENTS| SALES VOLUME| SALES PRICE| VARIABLE COST| CONTRIBUTION| 138525| 138525| 138525|
VOLUME | 1162802| | | SALES| | 1453503| | VARIABLE COST| | | 290701| LEVEL OF TOLERANCE| 11. 9%| 9. 5%| 47. 7%| * 138525/1162802*100=11. 9% * 138825/1453503*100=9. 5% * 138525/290701*100=47. 7% * If the volume of the sales or the sales price decreases by 11. 9% or 9. 5% respectively, the NPV will be equal to zero. And if the variable costs increase by 47. 7% the NPV will equal zero. In other words, it can be said that the company is more sensitive to the volume of the sales and the selling price thus it has to consider carefully the price setting and manage efficiently the stores so they reach the wanted sales.
In contrast, the variable costs can be increased by almost the half without really affecting negatively the profitability f the project. 2. Quarterly report: Quarterly report on the results of the investment FROM:| Project manager| | | DATE:| 21/12/2010| TO:| Board of directors| | | ADRESSE:| Unit A| SUBJECT:| Comparing the actual| | | | Brook Park East| | With the forecasted results| | | | Shirebrook| | | | | | NG20 8RY| 3. 7. Introduction: After the project has started by three months, here is this quarterly report to assess on the performance and compare the forecasted with the actual results.
There are many reasons why divergences occur in results. We will discuss them in more depth in the next section. 3. 8. Comparison: | FORCASTED RESULTS| ACTUAL RESULTS| MONTHS| 1| 2| 3| 1| 2| 3| REVENUES| 30417| 30417| 30417| 18000| 22000| 25000| OPERATING COSTS| -15208| -15208| -15208| 20000| 12000| 10000| INITIAL INVESTMENT| 460000| | | 500000| | | It can be seen clearly that there are differences in the expected revenues, operating cost, and initial investment with the actual ones. Many reasons may have led to these differences. One reason the predicted revenues have not been realised might be that the company did not advertise at all.
This is why they have been low in the first month and started gradually to increase. The difference can also be the result of the decrease of the Pound value compared to the Dirham. Regarding the operating costs, they increased in the first months because maybe the new employees needed some training which is an additional cost. However these operating costs decreased in the next two months because the salaries were cheaper than expected and that the company diminished the number of its employees because it realised that the stores did not need that much to be maintained.
Finally, the price of the locations went up because of the time elapsed between the planning and the starting of the project. In morocco as in the majority on the countries, the price of the land normally increases by the time instead of going down. There are many causes why the foreseen results have not been realised. However, the reasons listed above are in my opinion the most relevant. 3. 9. Risk and uncertainty: Evaluate again the degree f risk and uncertainty to find out how it can be managed 3. Conclusion: Having analysed the structure of the company and implemented a new project investment.
It can be said that SportsDirect. com is a typical capitalist company. It aims is to expand and sell as much as possible and if that means a higher degree of financial leverage, well why not let’s do it. One economist said one day that the optimal financing structure is 100% debt. Even if the company is now facing some financial problems, SportsDirect. com is following a sustainable strategy which will have a long term positive effect on the company as well as on the GDP of the UK. Many finance tools have been used during this assignment, however the corporate finance is much wider than just the NPV or the profitability ratio.
It is a discipline that becomes an art if it is used properly and can contribute in a tremendous way to the success of a company. On the other hand if it is handled to inexperienced employees or too experienced managers, i. e. they may use it to hide losses and make the company look healthier than what it is really just to get loans, it can be the deathblow that will make an enterprise go bankrupt. References: Sports Direct annual report 2009. Complete link: http://www. sports-direct-international. com/library/AnnualReport2009_2. pdf UK Sports Clothing & Footwear. Complete link: http://www. reportlinker. om/p050749/UK-Sports-Clothing-and-Footwear. pdf Sports Direct Around the World. Complete link: http://www. sportsdirect. com/CustomerServices/aboutus. aspx SPORTS DIRECT INTERNATIONAL (SPD:LN): Financial Statements – BusinessWeek. Complete link: http://investing. businessweek. com/research/stocks/financials/financials. asp? ticker=SPD:LN JJB SPORTS PLC (JJBSF:US): Financial Statements – BusinessWeek. Complete link: http://investing. businessweek. com/research/stocks/financials/financials. asp? ticker=JJBSF:US Corporate Finance Fundamentals(2006), 7 Edition, Ross/Westerfield/Jordan Risk Free rate. Complete link: ttp://www. bloomberg. com/markets/rates-bonds/government-bonds/uk/ Beta of Sports Direct. Complete link: http://in. reuters. com/finance/stocks/overview? symbol=SPD. L Risk of the Market. Credit Suisse First Boston. Complete link: http://www. fool. co. uk/news/foolseyeview/2001/fev011031c. htm Saltelli, A. , Ratto, M. , Andres, T. , Campolongo, F. , Cariboni, J. , Gatelli, D. Saisana, M. , and Tarantola, S. , 2008, Global Sensitivity Analysis. The Primer, John Wiley & Sons. ——————————————– [ 1 ]. Sports Direct annual report 2009 [ 2 ]. Reportlinker. com [ 3 ]. http://www. portsdirect. com/CustomerServices/aboutus. aspx [ 4 ]. http://www. sportsdirect. com/CustomerServices/aboutus. aspx [ 5 ]. SPORTS DIRECT INTERNATIONAL (SPD:LN): Financial Statements – BusinessWeek [ 6 ]. SPORTS DIRECT INTERNATIONAL (SPD:LN): Financial Statements – BusinessWeek [ 7 ]. JJB SPORTS PLC (JJBSF:US): Financial Statements – BusinessWeek [ 8 ]. JJB SPORTS PLC (JJBSF:US): Financial Statements – BusinessWeek [ 9 ]. Corporate Finance Fundamentals, 7 Edition, Ross/Westerfield/Jordan [ 10 ]. http://www. bloomberg. com/markets/rates-bonds/government-bonds/uk/ [ 11 ]. http://in. reuters. com/finance/stocks/overview? ymbol=SPD. L [ 12 ]. http://www. fool. co. uk/news/foolseyeview/2001/fev011031c. htm [ 13 ]. Sports Direct annual report 2009 [ 14 ]. Sports Direct annual report 2009 31. 4/96. 3=33% [ 15 ]. On the 09/07/2010 the price of a share was 109. 9 and there were 5. 77 million shares in flotation [ 16 ]. Sports Direct derived the last year approximately 82% of its total revenue from the UK. [ 17 ]. 1pound=13. 14 dirhams [ 18 ]. Saltelli, A. , Ratto, M. , Andres, T. , Campolongo, F. , Cariboni, J. , Gatelli, D. Saisana, M. , and Tarantola, S. , 2008, Global Sensitivity Analysis. The Primer, John Wiley & Sons.
