Solved: Corporate Finance-The Case of Burberry Group Plc

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  • Post category:Finance

Burberry group Plc is a renowned conglomerate within the retail industry, it manufactures, whole-sells   and retails contemporary luxury goods. The company also issues licenses to third parties to manufacture and distribute products via its trademarks.

Burberry’s retail/wholesale segment has a wide range of channels in its sale of luxurious goods to name a few; mainline stores, concession, outlets, digital commerce, franchises as well as its prestigious department stores. The licensing segment is engaged in the receipt of royalties from its offshore partners in Japan which licenses eye-ware, wrist-ware and children’s-wear. Its product main classification entails Women, Men and Children apparel, further it also manufactures and produces accessories and beauty products.

https://markets.ft.com/data/equities/tearsheet/profile?s=BRBY:LSE

LO1 & LO5

  • Evaluate the risk profile of the firm, and examine the sources of risk.

From the Annual report?? Not sure

  • Analyse the firm’s What is the breakdown of stockholders in your firm – insiders, individuals and institutional?

The above graph clearly demonstrates that Burberry has three main categorical owners, Institutions, Mutual Funds and Insiders. The total of institutions amounts to 412 where as its fund owners totaling 1,173. From the analysis below the Group Market capitalization is a staggering 7.47bn GBP out of this figure 45.05% is owned by institutions, 47.87% by funds and the remainder of 7.18% by insiders.

Pls. see the equity ownership top five funds and institutions:

LO3

  • How risky is this company’s equity? What is its cost of equity?

I use Capital Asset Pricing Model (CAPM) to calculate the cost of equity.

Cost of Equity = Risk-Free Rate of Return + Beta * market premium

  1. Risk-Free Rate of Return -The 10 year Treasury Constant Maturity has been utilized as risk free and as for the current risk free rate is 12.4%
  2. Beta – According to markets.ft.com the sensitivity of the expected asset returns to the expected excess market returns Burberrys Beta is 1.5001.
  3. Market Premium – In regards to calculating the market premium, according to (Anon., n.d.) the MP is 6% As the result: Cost of Equity = 1.24% + 1.5001 * 6% = 8.7%

As the result: Cost of Equity = 1.24% + 1.5001 * 6% = 8.7%

  • How risky is this company’s debt? What is its cost of debt?

I use the following formula for Cost of debt calculation: 

Cost of debt: interest expense /latest two-year average debt.

As at 31 March 2017 Burberry Group interest expense (positive number) was 1.8m.

Its total Book Value of Debt (Bank overdrafts and borrowings)

As at 31 March 2017: 34.3m and

As at 31 March 2016: 51.5m thus,

The average Debt is: (34.3+51.5)/2= 42.9Mil

As the result:  Cost of Debt = 1.8 /42.9 = 4.195%.

  • What is this company’s current cost of capital?

I use the weighted average cost of capital formula to calculate companies cost of capital. This is the rate that a company is expected to pay on average to all its security holders to finance its assets.

I use the following formula is: WACC=E / (E + D)*Cost of Equity +D / (E + D)*Cost of Debt*(1 – Tax Rate)

The market value of equity (E) is also called “Market Cap (M)” is 7,470bn according to the http://investors.morningstar.com . (Anon., n.d.)

I use book value of debt (D) for market value of debt calculation. As shown above the total Book Value of Debt (D) is 34.3m.

We use tax rate of 25.8%, as indicated in the annual report of Burberry Group PLC.

  1. weight of equity = E / (E + D) = 7,470/ (7,470 + 34.3) = 0.99547
  2. weight of debt = D / (E + D) = 34.3/ (7,470 + 34.3) = 0.0046

WACC=0.99547*8.7%+0.0046*4.195% *(1-25.8%) = 8.674%

LO1 & LO2

  • Examine the firm’s investment choices.
  • How has this company returned cash to its owners? Has it paid dividends or bought back stock?
  • How much cash has the firm accumulated over time? Given this firm’s characteristics today, how would you recommend that they return cash to stockholders (assuming that they have excess cash)?
  • How much cash could this firm have returned to its stockholders over the last few years? How much did it actually return?
  • Given this dividend policy and the current cash balance of this firm, would you push the firm to change its dividend policy (return more or less cash to its owners)?
  • How does this firm’s dividend policy compare to those of its peer group and to the rest of the market?

LO1, LO3 & LO4

  • What is company’s market value and what is the “key variable” (risk, growth, leverage, profit margins…) driving this value? (10 marks)
  • If you were hired to enhance value at this firm, what would be the path you would choose? (10 marks)

References:

Bibliography

Anon., n.d. About: Burberry Group PLC. [Online]
Available at: http://investors.morningstar.com/ownership/shareholders-overview.html?t=BRBY
[Accessed 31 10 2017].

Anon., n.d. Financial times: Burberry Group PLC, beta. [Online]
Available at: https://markets.ft.com/data/equities/tearsheet/summary?s=BRBY:LSE
[Accessed 20 11 2017].

Anon., n.d. Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United Kingdom. [Online]
Available at: https://www.gurufocus.com/economic_indicators/123/10year-treasury-constant-maturity-rate
[Accessed 1 09 2017].

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