CORPORATE FINANCE
The company reported a net loss of 5222 million in the year 2007 followed by a profit of 6756 million next year and 3080 million in the year 2009. In the year March 2010 it reported a net profit of 8610 million. Hence, it has achieved the growth rate of 8.4 during the year 2009-10. It is shown in the graph given below
The profit for the year 2008, 2009 and 2010 is for Vodafone group
The service revenue also increased to 41.70 billion in the year March 2010. The effective tax rate for the current year was 0.6 because of the credit received from the German tax authorities. The losses incurred by German subsidiary were tax deductible. However we find that the Earning per share (EPS) declined by 6.20 in the year March 2010. The free cash flows of the company also went up to 26.50. The telecommunication industry is having a global growth rate of 20 per annum in the last three years. Vodafone plc is one of the leading companies and has a global market share of 7. In the face of heavy competition in the telecom industry the company had to slash down prices over the last three years. However, this was offset by increase in the minutes usage per month. The earning per share of 16.44 pence, 5.84 pence and 12.46 pence was reported for the year 2010, 2009 and 2008 respectively. The company had declared a dividend of 5.20 pence and 5.02 pence per share in the year 2009 and 2008 respectively. The expected dividend for the year ended 31 march 2010 is 5.65 pence per share. The proportionate mobile customers have also increased to 341.10 million reporting a growth rate of 12.70. The interim dividend of the company is also steadily increasing over the last five years. The interim dividend in the current year has increased by 3.5 over last year. (Annual Report, 2010)
The companys debt equity ratio declined in the year 2010. From 40.36 in the year 2009 it declined to 36.69 in the year 2010. This was because the company redeemed bonds, thus reducing the risk of the company. The company has also maintained the ratios recommended by the credit rating agencies such as Fitch Ratings and Standard and Poors with regard the debt equity ratios. The borrowings of the company consists of short term borrowings in the form of commercial paper, bonds bank loan etc and long term borrowings in the form of bonds loans and other long term borrowings. The annual capital expenditure of the company is estimated at 6.20 billion for increasing the products offered and the quality of services provided. A cost savings of 1 billion has been witnessed in the past couple of years. A growth rate of 19 has been reported in the data revenue because of the increase in the mobile internet usage. Around 32 of the companys revenue is generated from emerging markets such as Africa, Central Europe Asia Pacific and Middle East. Vodafone brand is ranked at the seventh position in the world market measured by brand finance and it has 341.10 million customers around the world. Money transfer system has been developed in three countries and the company is expected to further expand it in more countries as the customers increased to 13 million from 6.5 million in the year 2010. The companys debt for the year was 33,316 million and the total shareholders equity was 90,810 million.
Another largest telecommunication company of UK is BT Group plc and it is also the oldest company. It operates in more than 170 countries around the world and it has it headquarter is at London. It is also listed at the London Stock Exchange. It provides fixed phone line across UK. It has diversified to broadband, mobile, and television products and networked IT services. (Annual Report, 2010)
BT Groups revenue declined by 2 in the year 2010 to 20859 million however we find that the profit before tax has improved during the year from 1454 million in 2009 to
1454 million in the year 2010. This was mainly due to operational efficiency. The earning per share for the year 2010 was 17.30 pence and for the year 2009 was 14.10 pence. A dividend of 4.60 pence per share was declared in the year 2010 as compared to 1.10 pence per share.
From the aforesaid discussions we can observe that Vodafone Group plc has been following a consistent dividend policy as compared to BT group. Moreover, its dividend payout ratio that is dividend per share upon earnings per share is higher. This is a very good policy, as investors prefer companies which are consistent in their dividend policies. The dividend payout ratio of the two companies for the year 2010 are calculated hereunder
Vodafone 5.2016.44 X 100 31.63
BT Group 4.6017.30 X 100 26.59
Comparison of Dividend Payout Ratio of Vodafone Group plc. and BT Group
Return on equity shows how efficiently a company is employing the funds of the owners. It shows whether the company is creating wealth or destroying the wealth of the shareholders. The higher the ratio the better it implies that the company is earning good returns on the capital. (Watson Head, 2006)
The return on equity of the two companies for the year 2010 is calculated below
Return on Equity PAT Shareholders Capital
Vodafone 861890810 X 100 9.49
BT Group 1029(2629) X 100 (39.14)
BT Group has shown a very poor performance. The negative owners capital means the reserves are showing losses and the company has in fact destroyed the shareholders wealth. The company has accumulated losses to the extent of 3904 million. The debt equity ratio of the company would also be negative. The telecom industrys average debt equity ratio is 47.99 (Cseh, 2007), while Vodafone groups debt equity ratio for the year 37. This is lower than the industrys average ratio. It means that the company has less risk in the capital structure. It also means that the company can have easy access to loans as it is not over leveraged. Hence, the financing is appropriate for the company and it is performing better than other companies in the same industry.
Debt Equity Ratio of Vodafone Group Plc.
The Weighted Average Cost of Capital is the average cost of the companys capital that is average cost of debt and equity. The weighted average cost of capital is calculated taking book value as weights. The weighted average cost of capital (WACC) is given by the following formula
D(DE) X Kd (1-T) Ke X E(DE)
Here,
D Debt
E Equity
Kd Interest rate on Debt
T Effective Tax rate of the company (28)
Ke Rate of return required by the owners
The interest cost on debt is calculated as borrowing costs total debt
1512 million33,316 million X 100
4.54
The effective tax rate of the current year was 0.6. However, this was due to abnormal losses which were tax deductible. Therefore, the statutory tax rate, of 28 was taken into consideration. The interest rates paid by the company is tax deductible, hence after tax cost of debt is taken for calculating the cost of debt of the company. The cost of capital of the company reduces when it uses debt in its capital structure. This is because the cost of debt is lower than cost of equity. Moreover the cost of debt is tax deductible.
The required rate of return of equity share holders as per the Capital Asset Pricing Model (Pike, 2005) is given by
Ke Rf (Rm - Rf) X Be
Rf Risk free rate of return (assumed 6)
Rm Return from market (assumed 12)
Be Beta of Equity, is 0.81 (Daily Finance)
Therefore Ke 6 (12-6) X .81
10.86
Therefore, the WACC for the company is
33316 (3331690810) X 4.54 X (1 - .28) 90810 (3331690810) X 10.86
8.82
Therefore, the WACC of the company is 8.82.
The key ratios of Vodafone of last three years are given below
(In million pounds)
Particulars201020092008Gross profit 15033.00 15175.00 13588.00 Revenue 44,472.00 41,017.00 35,478.00 Profit after tax 8,618.00 3,080.00 6,756.00 Debt 33,316.00 34,223.00 22,662.00 Equity 90,810.00 84,777.00 76,471.00 Total Assets 156,985.00 152,699.00 127,270.00 Gross profit margin ()33.80 37.00 38.30 Net profit margin () 19.38 7.51 19.04 Return on Assets () 5.49 2.02 5.31 Return on Equity () 9.49 3.63 8.83 Debt to equity ratio 0.37 0.40 0.30 Asset turnover ratio () 28.33 26.86 27.88
The return on assets of a company shows the profitability of the business in terms of asset employed. In other words it the amount which the company is earning for every pound of asset employed (Ross, Westerfield Jordon, 2008). The return on assets for the company has also improved. In the year 2008-09 the ratio had dipped considerably but it recovered in the year 2010. Both profit as well as asst had increased for the period. It is given by
Return on assets Net Profit Total assets
The gross profit margin is a profitability ratio which is calculated as a ratio of gross profit upon sales. It is the margin which is earned on the sales. It has declined in the current year. It is given by (Tennent, 2008)
Gross Profit Revenue (Sales)
We find that for the year the return on equity has increased by 5 in the year 2009-2010. This was mainly because profit for the year that is PAT had increased by more than 55 for the year. We find that the performance of the year 2008-09 was very poor. This can be attributed to the financial market crisis which had shaken the entire world economy. All major banks had to face the brunt of the crisis. However we find that the performance in the year 2009-10 has improved significantly. It is given by
Return on Equity PAT Equity
The net profit margin is another profitability ratio, which indicates how efficiently the business is managed (Khan Jain, 2006). The net profit margin has improved significantly over last year.
Net profit margin PAT Revenue
The debt equity ratio shows how much the company is leveraged. Use of debt in the capital structure reduces the cost of capital of the company. However use of too much debt is risky for the company. The fixed obligations in the form of financial charges would increase. The companys Debt equity ratio has declined from 0.40 in 2009 to .37 in 2010. This was mainly due to increase in the reserves.
The total asset turnover ratio is calculated as a ratio of sales upon total assets. The higher the ratio the better it is. It shows how much sales the company is able to generate for a unit of asset employed. It is observed that the asset turnover ratio has improved during the current year. It is given by (Arnold, 2005)
Total Asset turnover ratio Sales Assets
From the aforesaid analysis it can be concluded that the overall performance of the company has improved during the year 2009-10 as compared to the previous year. Company is expected to perform better in the following year as the markets are improving worldwide. The major strength of the company is that it has ventured into developing countries, such as India and China, where the population is very high. The company has also managed to create goodwill for itself in these developing countries and is having considerable market share.
The fourth generation technology or popularly known as the 4G technology is expected to remove the draw back of 3G technology. It would enable mobile users to access internet at faster speed. It is an improvement both in terms of quality and speed. It would offer speed of 100 megabits per second (Guardian, 2009). The introduction of 4G technology by Vodafone would increase the demand for its services considerably, as people demand better technology every day at lower rates. It also helps to access the internet even on move. As the financial markets are improving, this is the right time to invest in the most awaited technology which provides 10 times faster speed than what is offered by the 3G connection. The introduction of the new technology would costs around 1.89 billion for acquiring licenses. Additional costs of 10 billion are estimated for development training and implementation costs. The company would have easy access to bank loans and other debt instruments as its debt equity ratio is lower than the industry standards. According to a report generated by IT and communications consultancy Idate, approximately 400 million people would be using the 4G technology by 2015. (Kolle, May 2010). It would provide seamless and high quality mobile broadband communication service. It would also help in providing personalized and flexible services to the customers. This would also ensure strong place in the market as it has not been developed yet in UK.
Available at www.dailywireless.org
For introduction of this technology the company would require to provide adequate training to its staff. The new technology would help generate annual revenue of 22 billion pounds. The company currently maintains a net profit margin of 19.38. Therefore the total costs amounts to 80.62 of the total revenue. For the purpose of the new project the company is expected to maintain the same margin hence, the costs are expected to be around 80 of the first years revenue. Thereafter it would increase by 4 every year because of the inflation. The current inflation rate in UK is 3.40 (Trading economies, 2010). It is expected to remain the same in future. For this purpose we expect the annual costs increase by 4 during the life of the project. The tax rate is expected to remain same at 28. It is included in the costs. The annual revenue are expected to increase by 25 for first three years and subsequently it would grow by 15. The weighted average cost of capital of the company as calculated earlier was 8.82. Therefore, for calculating the net present value of the project we would discount the net revenue by the current WACC of the company. It is expected that the company would maintain its current debt equity ratio. The net present value (NPV) of a project is the present value of future cash inflows less the initial investment. The cash flows would be discounted at the WACC calculated above. A project generating positive NPV should be accepted and a project generating negative NPV should be rejected. This is because the project is not viable and would not be able to generate the investment made. Use of NPV for the purpose of decision making is considered optimal because it takes into consideration the time value of money. A higher NPV means the said project is more profitable. (Lumby Jones, 2003). NPV of any project is given by-
NPV I(1 kc) I(1 kc)2 I(1 kc)3 ..I(1 kc)n - Initial investment
(In billion pounds)
Particulars Year 0Year 1Year 2Year 3Year 4Year 5Revenue 22.00 27.50 34.38 42.97 49.41 Expenses 17.60 18.30 19.04 19.80 20.59 Net inflows 4.40 9.20 15.34 23.17 28.82 Initial outflow 11.89
The life of the project is expected to be 5 years. The NPV of the project is given below-
4.40 (10.0882) 9.20 (10.0882)2 15.34 (10.0882)3 23.17 (10.0882)4 28.82 (10.0882)5 11.89
47.24 billion
As the NPV is positive, that is 47.24 billion hence, the 4G project should be accepted.
The risk factors in the initial years are the slow economies. However, this is expected to improve within a couple of years. There is also increased competition among telecom industry hence the company needs to focus on cutting costs so as to provide services to the customers at lower costs. Further, the handsets available in the market should be upgraded to accept the new technology. A delay in the implementation of the project could adversely affect the profits of the company.
The details of the performance of the company for the first quarter are given below
Confidential Vodafone Group plc.
Report to the Board of Directors
Analysis of the quarterly performance of the 4G project
(In billion pounds)
Fixed BudgetFlexible BudgetActualRevenue5.56.206.2Expenses4.44.965.27Net inflows 1.11.240.93
The companys annual revenue had been forecasted to be 22 billion pounds for the first year. Therefore, the expected quarterly revenue would be 5.50 billion pounds. The expenses including interest and taxes would be 80 of the total revenue, which is equal to 4.4 billion pounds. Hence a budgeted profit 1.1 billion pounds was expected from the first quarter. We find that the company has generated more sales than expected. This was mainly because of our intensive marketing of the product. Moreover, the economy had improved at a faster pace than expected. However, the costs incurred were greater than the budgeted costs. The budgeted costs for revenue of 6.2 billion pounds come to 4.96 billion pounds, while the actual costs for the same were 5.27. The annual costs of the product was 85 of the revenue, however our estimation was 80 of the revenue. This was mainly because of the increased costs of training employees who had to be educated about the new technology. Secondly, our marketing costs happened to be higher as we undertook extensive marketing programs. The companys actual profits were lower by 0.17 billion pounds than the estimated performance. However, the performance in the next quarter is expected to improve because the investment in the marketing and training costs would reduce considerably (Dury, 2008).
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