Modern corporate finance and their relevance to business capital structure

Course: Masters of Business Administration

Introduction

The following report briefly introduces the company Burberry along with some key details regarding the company's history and financial data. Following these, the report provides brief details about the company's financial performance. The liquidity ratio, the company's leverage ratio, and a brief comparison of these ratios with competitor brands have been performed. Following these details, the report provides details about the largest investment in the company in the last 5 years, its purpose and the way it has become successful.

Table of Contents

• Introduction
• Part a: Overview of the Organisation
• Part b: A critical analysis of the corporation's financial Performance
• Evaluation of the Liquidity and Leverage Ratio
• Review of the capital structure theories
• The monthly share prices of the company
• Association between leverage and return
• Part c: Investment activities
• The purpose(s), aims and expected outcomes of this investment
• The size of the investment and how it was financed
• The feasibility of the investment, at both the macro and micro levels,
• The actual up-to-date outcomes of the investment
• Conclusion
• Reference list

Unit - Corporate Finance (Level 7)

LO1: Understand the key themes that underpin modern corporate finance and their relevance to business capital structure and corporate governance.

Part a: A brief history of your selected company including its industry, business model, market place and major competitor(s). Review major events over the past five years e.g. change of directors, profit warning, legal issues, M&A, or any strategic changes, etc.

Overview of the organisation

Burberry is a luxury fashion brand that has been operating its business worldwide for a long period. The Britain-based Luxury fashion brand has been operating in the industry since 1856. The company currently distributes ready-to-wear accessories, trench coats, Leather accessories, and footwear for a long period. In 1856, Thomas Burberry established the organisation (Burberry.com, 2023). In 1879 the brand launched its Gabardine Brand. This was famous for hard-wearing as well as water-resistant products. These water-resistant yet breathable materials used in the products' fabric quickly became popular. During the 1970s to 1980s, the brand signed several agreements with many manufacturers worldwide to make the best quality products.

In 1977, Victor Barnett, former director of GUS, became the chairman of Burberry, and with his effective leadership, the brand became a successful IPO in 2001 (Gilroy, 2023). In 2023 the brand launched its new logo and branding strategy and brought back its European Knight Logo (Olteanu, 2020).

The company is present in 418 locations but serves almost every country worldwide. This has become one of the very important factors contributing to the company's success. The 167 years old organisation is currently headquartered in London, United Kingdom. Currently, Gerry Murphy holds the post of Chairman of the company. He has been serving as the chairman since the departure of Sir John Peace in 2018. Jonathan Lee is the company's Current CEO, and Daniel Lee holds the post of CCO in the company (Morais, 2020).

It has been reported that as of 2023, the net income of the brand has become 492 million, approximately 492 million Euros. Reports have suggested that the brand's earning has been seriously affected by the Covid 19 and several other issues like the economic instability in the United Kingdom. Among these factors, the Covid-19 pandemic was the most devastating factor or event which has affected the company's overall revenue (Wsj.com, 2023). In 2020 and 2021, the sale growth of the company was reduced by 3.30% and 10.98%, respectively. But since the effect of the pandemic has declined, the company has again started to see improvement in its business. It has effective business performance as the gross income has increased by 9.44% and has reached 1843 Million GBP. As a combined factor of these factors, the gross profit margin of the organisation has become 59.57% in the year 2023.

A few years back, the organisation filed a lawsuit against another brand known as Target Corporation. It was reported that the lawsuit was filed against Target Corporation as it was accused of copying the check print design, which is one of the company's signature designs. Even the brand was recently accused of violating sustainability practices by Greenpeace (Zazzara, Rapetti, and Tyler, 2020). It accused Burberry of destroying the old unsold products of the company. However, the company responded against these allegations by stating that they have captured the released energy making the whole process eco-friendly. Burberry have made investment for five years in the sale of the "paper carry bags" in the stores, the "bio-degradable" materials in the stores, and the sales and the product process. The company has focussed on fashion and the trend in fashion, which is organic and "bio-degradable".

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LO2: Develop a critical understanding of the financing decisions of organisations in modern economies.

Part b: Calculate and briefly evaluate the corporation's liquidity and leverage ratios for the past five years,

A critical analysis of the corporation's financial performance

Evaluation of the Liquidity and Leverage Ratio

Liquidity Ratios
The"Liquidity Ratio"is an effective measure determining whether a company can pay its debt obligation. The company chosen in the report is Burberry. In this section, a complete ratio analysis will be done based on the company's past five years of business performance. One of the major competitors of Burberry in the fashion industry is Zara. So a complete comparison will be presented in this section through two "Liquidity Ratio" types. After the comparison, a close interpretation will be provided of the business performance of the two competitors.

"Current Ratio" determines if Burberry and Zara can pay off their debt obligations within 12 months. Burberry's "Current Ratio" was 2.51 in 2019, which fluctuated in the past five years and presently stands at 2.24 (Wsj.com, 2023). In this respect, the company, Burberry, is effectively paying off its obligation. A decline in the ratio indicates that the company's capability declines, but it still has enough assets to cover the liabilities. On the other hand, Zara made quite an impressive improvement in the past five years. The increase from 1.41 to 2.05 signifies that Zara has successfully increased its assets to cover its liabilities (Zara.com, 2020).

• Burberry and Zara have high ratios regarding the "Current Ratio", but the number is higher in Burberry. On the other hand, Zara did much improvement than Burberry. So, a clear comparison cannot be made in this case.

"Quick Ratio"represents how effectively Zara and Burberry are paying off their "ultra-short liabilities". The "Quick Ratio" of Burberry slightly increased from 2019 to 2023. The ratio was 1.55 in 2019, which reached 2.07 in 2021, but again declined and reached a ratio of 1.59 in 2023. One is considered the ideal ratio (Wsj.com, 2023). The present ratio of 1.59 is a good indicator as the company is paying its liabilities. Still, if the rate continues to sustain for a long, it will signify that the company needs to be properly utilising its assets. On the other hand, the ratio of Zara increased from 1.31 to 1.93 in 2023 (Zara.com, 2020). Undoubtedly, Zara has made improvements, but as mentioned earlier, a high ratio for a longer period would not be counted as a profitable indicator.
• In this respect, Burberry's "Quick Ratio" is more attractive as the higher ratio of Zara can be detrimental in the long term.

Compare the financial ratios calculated above to the ratios of major competitor, commenting on similarities or differences

Leverage Ratios

"Leverage Ratios"is used to measure the operating expense of Zara and Burberry and predict whether they can sustain themselves in the competitive world.

The "Debt-to-equity Ratio" of Burberry was 0.24 back in 2019. Throughout the 5 years, the ratios have fluctuated, and presently it is standing at 0.23 (Burberry.com, 2023). A low ratio indicates that the company has more equity to meet its debt within time. So, Burberry is doing a great job in this respect. On the contrary, Zara has increased its ratio from 0.001 to 0.11 (Zara.com, 2020). An increase in the ratio is not detrimental for the company in this respect, as the ratio is still less than 1.

• Evaluating the "Debt-to-equity Ratio" shows that Zara has a better financial position than Burberry.

Burberry's "Interest Coverage Ratio" declined from 116.25 to 15.23 in 2023. This ratio benefits the company (Burberry Plc Corporate, 2023). On the other hand, the same ratio has increased from 0 to 4.82 for Zara (Zara.com, 2020). The ratios have fluctuated in the previous five years. But the recent position of the company is far better now.

• In this respect, Burberry has a better position than Zara.

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Comment on your selected company with respect to your selected capital structure theory

Review of the capital structure theories

Capital structure can be defined as a combination of debt and equity used by any given organisation's finance for its overall operations along with the company's growth.

Capital structure is considered one of the essential elements of business for any given company. This can be described as how a company finances its funds with the help of business activities or investments (Bajaj, Kashiramka, and Singh, 2021).
The main two essential components of a company's capital structure are Debt and the Equity of a company.

Debt is the different types of funds a company has acquired from different sources. These sources include banks, financial institutions, bondholders and several other financial institutions. In case of debts, the company usually has to pay interest to the financial institutions from which it has collected its resources.

On the other hand, equity is defined as the ownership of the company that an investor gets with the help of investments in the organisation (Gajdosikova and Valaskova, 2022). Equity holders get the benefit of getting a potential share of the profit earned by the company in the form of dividends.

With the help of the dynamics of debt and equity, the dynamics of the debt and the equity of a given company can be analysed. Both important debt and equity components can be found on the balance sheet company. Company assets that are purchased with the help of debt or equity are listed on the balance sheet. As a result, an analysis of the balance sheet of any given company provides an idea about the company's capital structure. A proportion of short-term debt vs the company's long-term debt is considered by making a proportion of the short-term and long-term debt. With the help of the debt-to-equity ratio, an organisation's capital structure can be calculated (Hirdinis, 2019). This also provides how risky the borrowing practices of the company are.

Experts believe that companies that are heavily financed by debts possess a more aggressive financial structure. This aggressive financial structure creates issues for the company as it suggests that investing in these companies can be a riskier option for investors.

In the Net income approach to Capital Structure theory,David Durand postulated that if a firm takes more debt than the leverage time investments, then the capital structure of the firm increases and the weighted average of the cost of capital (WACC) decreases; as a result, firm's value increases (Linhong, 2021).

On the other hand, Modigliani and Miller's (M&M) approach has suggested that the capital structure that any company uses does not matter, as they suggested that in a perfect market, the market value of a firm is determined by the earning power of the company (Brusov et al., 2021).

One of the propositions of M&M has suggested that capital structure is irrelevant and the value of two identical firms will remain the same (Becker, 2021). This will not get affected by the choice of finances.

Proposition two suggested financial leverage boosts the value of a firm and reduces the WACC.

The capital structure of Burberry
The balance sheet, as well as analysis of the financial data of the company Burberry, has suggested that the Equity structure started by the company is based on an Equity Financing type capital structure (Santos, 2022). Though the company's capital structure is based on a combination of debt financing and Equity financing, the financial report has suggested that the company relies more on equity financing than debt financing, as the company's leverage ratio is below 1 and is still declining. This suggests that the company can repay its debt successfully (Meng and Yin, 2019). The low leverage ratio also suggests that the company must allocate more cash flow to pay off the debt.

This is an effective measure by the company as the adoption of debt financing provides an advantage to the company by not diluting the ownership of the company. Still, most of the income gets reduced due to interest payments (Franke and Semmler, 2019). But one advantage of debt financing that must be addressed is that it helps a business by leveraging a small amount of money into a large sum.

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Download monthly share prices of the company and calculate average annual share returns for the past five years. Present both tables and visual aids in your analysis.

The monthly share prices of the company

Year 1
In the year 2023, it has been noticed that in July, the share price of the company Burberry is -438.00 million dollars which seems less according to January. In January, the company made its share price of 417.00 million dollars. The company was much affected in July. Inflation was the main reason behind this reduced share price (Investing.com India. 2023). Inflation refers to the higher prices of consumers. This sometimes slows sales, along with that it reduces the company's profits. Higher prices will sometimes take on the interest rates, which are in higher value. Increased money supply, rate fluctuations, government policies, and other similar things cause it. It affects the buying power of the customers, and it can distort the power of purchasing across time for payers and recipients of fixed interest rates.

Year 2
In 2022, it was noticed that in November, the company's share price was 339.00, which is much more according to March. In March, the company made a lower share profit of -267.00 million dollars. The reason behind their high share price in November was the production of the new fashion trends and consumers' buying power. Fashion trends are the force driving the work behind the industry of fashion as it motivates the cycle of consumption and creation. When a new style emerges, the company wants to produce for their customers(Santos, 2022). And it will grow the sales of the company, and also it will grow the buying power of the company. And for this reason, the company Burberry gained its high share price that month.

Year 3
In 2021, the company got a high share price in April, which was 161.00 million dollars. But the company lost its profit in August, according to April, which was -229.50 million dollars. It affected the company's growth as the loss was higher than the profit month of the year 2021. It might be the reason the industry's performance has impacted the company highly (Pardal, 2021). Sometimes the stock price of the organisations in the equal industry will move according to each other. This is for the reason that the market conditions which affect the company are noticed to be not safe, and then this can impact other companies which create the same product. It severely affected the company Burberry in the year 2021.

Year 4
In the year of 2020, the company Burberry lost its high share value. But in November, the company increased their high rate of share price, which was 379.0 million dollars. According to the other months, the company lost its share price in March to 394.00 million dollars (Piovan, 2022). Their high profit in November is sales and distribution in new markets. When the brand expands into new markets, though it takes work for them, the consumers might attract and express their interest in the company's product, which could affect their product value and impact the company's growth.

Year 5
In the year 2020, it was noticed that in May, the company lost its share profit, and in July, the company gained the highest value of its share price, which was 374.00 million dollars (Al-Jaberi, 2022). The factor that negatively impacted the company was economic and political shocks.

Association between leverage and return

The "relationship between leverage and return" can be described as the increase in "financial leverage" and it can increase or the ease of the net income of a company, where the company is taken as "Burberry" and with the "net income" it is also the "return on equity". The "financial leverage" of the company increases the "variability" of the net income of the company and the "return on equity", which can increase and also decrease both the variables of the company (Piovan, 2022)."Leverage" is the strategy of the company for the use of the money which is borrowed. It can be described more specifically as the use of different types of various types of "financial instruments" or the "borrowed capital" (Sion and Nehmé, 2021). The company has used this strategy to increase the "return", which is also the "potential return" of any investment. "Leverage" is the "amount of debt" used by a firm and can be used for the assets for finance.

The "return" is the overall or the "total income" of the investor in the company, "Burberry", and the "return" of the company is calculated as the "return" of every year of a company. It is naturally "quoted" as the percentage of the "value of the investment", which is calculated as the total percentage of the company (Silvano, 2020). In finance, there are mainly three types of "return", which are "Interests", "dividends", and "Capital gains", and these are the main types of return.

The "Investment" of a company is the investments that have been done by the investors for the "savings account", "GICs", and "the bonds", which can pay interest. With the help of these types of investments, the company can know the amount of money that has been earned by the company with the investment.

The "Dividends" of a company here is "Burberry" has been paid the "dividends" by the stocks, and those can give the investors a share of the company which has been made by the company (Morais, 2020). The company can get an income which is the "regular income", and these are earned from those investments ed from those investments (Pardal, 2021). The company has determined the "dividend" amount and can get a regular income from all those investments. The amount of the investment of the company depends on the performance of level or the "well performance" of the company in one year with the type of stock in which the company has its ownership.

The "Capital Gains" of the company is the "investment" which has been made like a "stock", "ETF", "bond", and "mutual fund". If a company sells its "capital gain" for which it has paid, it can have a "loss in capital".

The "Return" of a company is mainly based on the "profit" that the company has made on any investment (Mustaniemi, 2022). The "return of Burberry" is the amount of money that the company can earn from its investment.

The "developers" of a business have trust in the "leverage", which means increasing the "potential return" on investment has been increased, and this is increased because the risk of a "property" has been increased for the "cost of debt", "financing", "bank loan", and this is mainly cheaper than the "unleveraged returns" which is generated by a property. The "leverage" can be taken from the "additional return" and the "leveraged portion" of a project, and it is applied to the "leveraged portion" of a project.

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Part c: Select one of the chosen company's largest recent investment activities during the past five years and cover the following points:

The purpose(s), aims and expected outcomes of this investment.
The size of the investment, and how it was financed.
The feasibility of the investment, in terms of its current business
Current outcome of the investment:

Investment activities

In recent times, sustainability has become one of the major issues that business organisations worldwide must address to improve their brand image and contribute to the United Nations' sustainable development Goals. The company recently issued a 5-year sustainability bond in 2021, 2022 (Burberry, 2022). This was linked with the sustainability-linked credit facility. This type of investment will become one of the essential investments for the company in its international business as it will improve its brand image and approach towards the development of sustainable products.

The purpose(s), aims and expected outcomes of this investment.

The company operates in an industry where sustainability is one of the major associated concerns. In this industry, emissions of chemicals, waste generation, and greenhouse gas emissions are among the major associated concerns. As a result, taking action to improve the company's strategy towards sustainability becomes very important for the company.

The investment in the bond that the company has taken is driven by a few aims and objectives (Burberry, 2022). Through these investments, the company focuses on establishing some initiative in the company that helps the company to take some key steps regarding environmental issues.

These initiatives focus on improving the efficiency of the company in achieving zero or almost negligible carbon footprint in its business operation. Burberry aims to reduce the company's carbon footprint by getting emissions near almost zero. By 2040 the company aims to be climate-friendly in each of its operations.

With Burberry's initiatives with various investments, the company has followed the bond to reduce the indirect greenhouse gas emissions through the company's operation by 4.6% by the end of 2030 (Talukdar and Yu, 2020). The company is also planning to measure the carbon footprint left by the company in its operation. The company has realised that only 2% of the Greenhouse gas generated is from direct operations. Still, the remaining 98% is from indirect operations such as sourcing raw materials and delivery of products. As a result, the company is looking for better or more sustainable options for managing its supply chain.

Along with improvisation in its business operation to reduce carbon footprint, the company has also planned to take a step to improve society with the help of spreading awareness as a part of its ESG goals.

Another aim that has driven the organisation to issue the 5-year bond is the 100% use of renewable electricity.

The company is also planning to Decarbonise its value chain.
The size of the investment and how it was financed
"The size of the investment" of Burberry means "the market exposure", which is already desired by the clients during the investment process. It is mainly based on and also expressed in the "Base Currency", which has been set by the "Client", and it is notified to the "ECU" in the writing process from "time to time". The "Credit Policy of the Firm", "Burberry", is the main "determinant" of the size of the investment of the receivables of the accounts of Burberry(Guo, Sun and Lam, 2020). The "Credit Policy" is included with the limit which is over the sale of the credit is made, and the number of days which have been counted for the credit with the "rates of discounts" for making payments early has been found in the "size of the investment". An "investment" of any company refers to any mechanism used to generate the "income" that is done in the future.

"Three hundred million Euro" has been invested by "Burberry" for the success of the project, and the company has invested in sustainability measures for the next five years, which have helped the company to become successful (Swaminathan, 2019). The investment has been financed by investing in organic fabric materials, and also the company has produced "bio-degradable" raw materials. The company, "Burberry" has successfully invested in bio-degradable raw materials. The products and the maintenance of the stores have required a large amount of capital investment. The investment has been made in the year, "2021" to "2022" for five years, and the investment procedure will end in the year, "2026". The investment has been made for five years in the sale of the "paper carry bags" in the stores, the "bio-degradable" materials in the stores, and the sales and the product process. The company has focussed on fashion and the trend in fashion, which is organic and "bio-degradable". The most common options for investment are "bank loans", "loans from institutions for finance", "syndicated loans", "bonds", and the "hybrid securities" and many other options. There are many investors like the "partners", "the shareholders", "the stakeholders", and "the private and also the public investors" (Schwarz, 2023). These are the investment that the company has made for the success of the company. The sponsors invest in the development of the company for the promotion of sustainability of the company, and the company has been promoted for the improvement in the "awareness program" of sustainability of the company, "Burberry".

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The feasibility of the investment, at both the macro and micro levels
The "economic activities" can be divided into two types, "micro level of activity" and "macro level of activity". The main focus of "microeconomics" is the actions that individuals have done within an economy like the "households", "workers", "and businesses". And "Macroeconomics" looks upon the whole economy. Macroeconomics is focused on the growth rate, the unemployment rate, and the broad issues of the company on inflation and the balance of trade of the company. The company has been focused on "macroeconomics" and the investment of the company for the growth of the company in the sustainability measures taken by the company (Burberry et al., 2022). The company's investment has been made broadly on the sustainable measures taken by the company. The company is mainly focused on the growth of the profit of the company, and the profit has increased with the importance given by the company to the safety of the planet. The "macroeconomic environment" of the company has been developed with the investments made by the company for the development of sustainability measures taken by the company (Youn and Jung, 2021). The investments made by teh company in the awareness programs and the strategies of the company which the company has implemented. Burberry has taken measures for waste reduction, and it is a global sustainable brand. The company has used almost one hundred per cent "renewable electricity", which is used for the future and future development. The company has taken the challenge of "zero-use" plastics by 2025.

The company mainly uses natural carbon for the development of profit. The company has focussed on the development of sustainability. The company has invested in "Climate Positive by the year 2040", which can go beyond carbon emissions, and has also invested in the benefit of the environment (Mukendi et al., 2020). The company has made its investment in the success of the future of the company. The company has focussed on the production of the "luxurious and fashionable" "British Products" which are made sustainable and are mainly based on the promotional strategies taken by the company. The awareness programs promoted by the company have been improved with much investment in the sustainability measures taken by the company. The biggest competitors of "Burberry" are "Gucci" and "Coach", "Armani" and "Polo" (Cherradi and Tetik, 2020)."Burberry" is a "premium" luxury brand that produces luxurious products. The company has mainly focussed on the promotional strategies made by the company, which is mainly based on the sustainability measures taken by the company. The company uses the "premium pricing strategy", which does not change the price of the products. The company makes more investments in its marketing strategies. There are different decisions the company has taken for the development and improvement of the company in the world. Burberry has focussed on the innovation and production of innovative products. The products made by the company are focused on "premium quality".

The actual up-to-date outcomes of the investment
The main tagline of "Burberry" is producing and selling "Iconic British Luxury" products. The products made by the company have focussed on the development and sale of premium brands, and it is one of the world's most famous "textile" and "fashion" brands. The company has made its focus and also on the development of products that focus on the "aristocratic" and "premium" quality of raw materials used by the company. The company has produced valuable products focussing on the sustainability measures taken by the company. In the year, "2022", the company has focussed on the sustainability measures taken by the company, and it has invested "Three hundred million Euro" for sustainability. The company has emphasised the branding of the products with the sustainability measures taken by the company. The company has focussed on the "zero-use of plastics" and less carbon emission by the year "2050". The company has also focused on using "renewable electricity" and minimising waste (Santos, 2022). The company has focussed on the reuse of the products which the company has produced. The target customers of the company are the "celebrities" and the people having "high-economic condition" and also "high-economic state". There are many competitors of "Burberry" who have mainly focussed on sustainability measures and the use of sustainable and " bio-degradable " products. The products produced by the company are sustainable, and also those are organic (Olteanu, 2020). The "raw materials" used by the company are organic, and the products are "bio-degradable". Burberry mainly focussed on "Climate change" due to pollution and also due to the use of plastics. The company has been successful in the measures taken for sustainability.

Conclusion
The above study concluded that the Britain-based Luxury fashion brand currently distributes ready-to-wear accessories, trench coats, Leather accessories, and footwear for a long period. g factor or event which has affected the overall revenue of the company. There are different decisions the company has taken for the development and improvement of the company in the world. Burberry has focussed on the innovation and production of innovative products. The products made by the company are focused on "premium quality". In 2020 and 2021, the company's sales growth was reduced by 3.30% and 10.98%, respectively, and the gross profit margin of the organisation became 59.57% in the year 2023. The products made by the company have focussed on the development and sale of premium brands, and it is one of the world's most famous "textile" and "fashion" brands. The company has made its focus and also on the development of products that focus on the "aristocratic" and "premium" quality of raw materials used by the company.

FAQ:

• Q: What are the key themes of modern corporate finance?
• Q: What is capital structure and how is it relevant to corporate finance?
• Q: How does corporate governance tie into modern corporate finance?
• Q: What are the main financing decisions faced by organizations?
• Q: What are some key factors considered when making financing decisions?
• Q: How have modern economies impacted financing decisions?
• Q: What are the potential consequences of poor financing decisions?
• Q: Where can I learn more about financing decisions?

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