The present study is based on the critical evaluation and analysis of the of the cited companies which are ASOS plc and Marks and Spencer plc, in order to aid investor in making better decisions for the investment purpose. The study will cover the calculation of the value of both the companies for the latest years by using tools such as net asset value, cost of capital and dividend value. Subsequent to this, the study will describe about the overall value of ASOS plc. and Marks and Spencer plc. so that investors can have the better idea for investment and can select the best option to make worthwhile and valuable investment.
Marks & Spencer Group plc.
Marks & Spencer Group plc. is the main international retailer; its headquarters is located in the Westminster, London. The company is listed on the London Stock Exchange (LSE) and is a part of FTSE 100 Index (Marks & Spencer, 2018). The company has special features in selling, the home products, lavish food products and clothes. The company provides luxurious and top-notch fashion products, food products and fashionable home ware. It is established over a century with the total of 1463 outlets throughout 57 countries, currently the company is one of the leading retailers of UK. M&S interpret the significance of inspiration, innovation and integrating and possess the same values in their work and activities. It considers continuous innovation, in each product they serve and deliver the best of shopping experience in order to satisfy their customers across the world (M&S, 2018).
ASOS plc.
ASOS plc. is online clothing and cosmetic retailers in British market. It was established in 2002 within London and mainly intending to serve the young adults. The website of company sells more than 850 brands; along with this it also delivers its own variety of accessories as well as clothing, and delivers products and services to more than 200 countries on the basis of fulfilment centres in Europe, US and UK. Asos PLC is an international destination for a variety of aspects (ASOS, 2018). The company serves and sells a broad variety of fashion associated products on its website named ASOS.com. The segments of company are inclusive of RoW, UK, US and EU. The company sells more than 85,000 brands and top quality products via domestic internet and user experiences, rendering from its fulfilment centres in the US , UK and Europe and all over the world.
Task 1
Net asset value
Net assets value is termed as the value of the assets of the enterprise subtracted with the funds, as the shares of the similar funds are registered under the Securities and Exchange Commission, and their redemption is required to done at their net asset value.
Table 1: Statement showing calculation of net asset value
|
Particulars |
ASOS |
Marks And Spencer |
|
Non-Current Asset |
||
|
Property, Plant and equipment |
137.4 |
4837.8 |
|
Intangible assets |
178 |
709 |
|
Others |
10.5 |
1022.4 |
|
Total Non-Current asset |
325.9 |
6569.2 |
|
Current Assets |
||
|
Inventories |
343.3 |
713.5 |
|
trade and other receivables |
25.6 |
324.6 |
|
Others |
177.6 |
|
|
cash and cash equivalent |
162.6 |
468.6 |
|
Total Current asset |
531.5 |
1684.3 |
|
Total Asset |
857.4 |
8253.5 |
|
Less |
||
|
Non-Current Liability |
9.1 |
2774.1 |
|
Current Liability |
||
|
Trade and other payable |
480.7 |
1553.8 |
|
Current tax liability |
5.8 |
66.6 |
|
Other |
57.7 |
747.6 |
|
Net Asset Value |
304.1 |
3111.4 |
|
Number of shares |
82.9 |
1624.7 |
|
Net Asset Value per share |
3.67 |
1.91 |
The cost of capital is referred as the cost of the funds of company, or from the perspective of investor it is the RRR (required rate of return) on the existing securities corporate portfolio. It is employed to make evaluation of new company projects. It generally means the opportunity cost to make a particular investment. It is particularly the rate of return that can be derived by placing the money in various investments having similar risks. Therefore, the cost of capital is needed to influence the investor to make a particular investment.
Calculation of cost of equity using capital asset pricing model
If the Beta of ASOS 1.6 and M& S is 1.1
Here the risk free rate of return= 3%
Expected return from market=6%
Cost of Equity = Risk-Free Rate + Beta * (Market Rate of Return – Risk-Free Rate)
Cost of equity of ASOS= 3+1.6(6-3)
= 7.8%
Cost of equity of M & S= 3+1.1(6-3)
= 6.3%
If the Beta of ASOS 1.2 and M& S is .9
Cost of equity of ASOS= 3+1.2(6-3)
= 6.6%
Cost of equity of M & S= 3+.9(6-3)
= 5.7%
Calculation of cost of debt capital
Tax rate= 20%
Coupon rate of ASOS = 5%
Cost of debt= coupon rate (1-tax rate)
= 5(1-.2)
= 4%
Coupon rate of M& S= 6%
= 6(1-.2)
= 4.8%
Calculation of the weighted average cost of capital
For ASOS
Number of shares= 82.9 M
Price as on 29 December 2017= 0.035
Value of equity= 82.9*0.035
= 2.9015
Value of debt = 9.1 M
If cost of equity 7.8% and cost of debt = 4%
Weighted average cost of capital= (7.8*(2.9/12)/ (4*(9.1/12)
=4.912%
If cost of equity 6.6% and cost of debt = 4%
Weighted average cost of capital= (6.6*(2.9/12)/ (4*(9.1/12)
= 4.614%
For M & S
Number of shares= 1624.7 M
Price as on 29 December 2017= 0.250
Value of equity= 1624.7*0.250
= 406.175 M
Value of debt = 2774.1 M
If cost of equity 6.3% and cost of debt = 4.8%
Weighted average cost of capital= (6.3*406.175/3180)/ (4.8%*2774.1 /3180)
= 4.99%
If cost of equity 5.7% and cost of debt = 4.8%
Weighted average cost of capital= (5.7*406.175/3180)/ (4.8%*2774.1 /3180)
=4.725%
Dividend value
Dividend yield is known as the financial ratio that makes the measurement of the cash dividend quantum payable to the shareholders comparative to the market value of each share. A corporate having higher dividend yield is required to pay a considerable share of its earned proceeds in dividend. On the basis of this concept, dividend grown model is developed to determine price
If growth rate is 0%
Price of the ASOS using dividend growth model
If Ke= 7.8%
= 0/7.8-0 =0
If Ke= 6.6%
= 0/6.6-0 =0
Price of M & S
If Ke= 6.3%
= 23.3(1+0)/6.3-0
= 3.70
If Ke= 5.7%
= 23.3(1+0)/5.7-0
= 4.09
If growth rate is 2%
Price of the ASOS using dividend growth model
If Ke= 7.8%
= 0/7.8-2 =0
If Ke= 6.6%
= 0/6.6-2 =0
Price of M & S
If Ke= 6.3%
= 23.3(1+.02)/6.3-2
= 5.53
If Ke= 5.7%
= 23.3(1+.02)/5.7-2
= 6.42
On the basis of the income and expenditure statement it has been seen that in case of ASOS Company, the performance of the company in the year 2017 was more than as compare with the year 2016. Since in the year 2016 the company was in loss, but in the year 2017, the company not only covered its loss but also obtain the profit. This reason behind the good performance was the growth in the sale and reduction in the indirect expenses of the company (Hunjra & et.al 2014).
The company reduced its administration and distribution expenses also to the great extent. Moreover in case of Marks and Spencer the performance of the company in the year 2017 falls below as compare with the year 2016. By comparing the gross profit ratio of the both years, there was slight reduction. However the net profit of the company in the year 2017 was significantly reduced from the year 2016. The reduction in the net profit of the company is due to the increase in the overhead expenses of the company.
Further the earning per share of the company shows that the amount of earning for the shareholders of the company (Ballings & et.al 2015). It is very important tool for measuring the performance of the company. In case of the ASOS Company the earning per share was very fluctuating, since in the year 2016 it was 29.3, while in the year 2017 it was 76.6 per share. It means the company through its planning and strategy improved its performance in a very good manner. Further in case of the M & S company the earning per share of the company in the year 2016 it was 34.9, while in the year 2017 it was 30.2, which shows that the profitability for the shareholders of the company was reduced as compare with the year 2016. On the basis of the earning per share of the company the ASOS was better as compare with the M & S Company.
The net asset value of the company shows the net value of the company. The current asset and the liabilities of the company can be evaluated by its net asset value and the investor can take the decision for the investment in the security of the company. If the investor estimated that the company will grow in the future then it may be possible that the investor can pay more price than its net present value. From the above calculation it has been analysed that the in the year 2017 NAV of the ASOS company was 3.67 and the M & S company 1.91, which shows that the investor by investing in the ASOS company get more return as compare with the investment in the M & S company.
The cost of equity shows the expected rate of return for the shareholders of the company. In other words it can be say that the cost of equity is the expectations from the company by the investor to obtain the return from the company for taking the risk of the investment in that company (Evstigneev, Hens, and Schenk-Hoppé, 2015). The company can get the finance with the equity investor or by the borrowing from the other person.
Equity investors get the return in terms of the dividend or by increase in the investment. The borrower gets the interest from the company for providing the fund to the company (Berk, and Van Binsbergen, 2016). In the present study the cost of equity was determined by the using the capital asset pricing model. In this method the expected rate of return is based on the systematic risk of the company. Beta indicates the systematic risk of the market by which the performance of the company got affected. Therefore if the Beta is high then investor will expect more return from the company for taking the higher risk and vice versa.
The expected rate of return from the ASOS Company is 7.8% if the Beta of the company was 1.6 and 6.6% if the Beta of the company is 1.2. The expected rate of return from M & S Company is 6.3% if the Beta of the company was 1.1and 5.7% if the Beta of the company is .9. From the data of both the company it has been analysed that the risk of the M & S Company is less than as compare with the ASOS company. However the rate of return in the M & S company also less than as compare with the ASOS Company.
The cost of debt represents the rate of interest payable by the company to its borrower. Since the company can get the deduction of the interest expenses therefore the effective cost of debt is calculated by after considering the tax rate. In case of the ASOS Company the cost of debt was 4% however in case of M & S Company the cost of debt was 4.8%. through the cost of debt of both the companies it has been evaluated that the company M & S pay the more interest to its borrower as compare with the company ASOS.
In this study, the price of the share is calculated by using the dividend growth model. The price is based on the expected future dividend pay by the company. Since the company ASOS did not pay the dividend in the year 2017, therefore the value of share of the company cannot be calculated by using the dividend growth model. Moreover in case of the M & A company If the growth rate of the company 0% and cost of equity 6.3% then the price per share of the company 4.09 and if the cost of equity 5.7% then the price per share 4.02. If the company growth rate of the company 2% and the cost of equity 6.3% then the price of share 5.53 and if the cost of equity 5.7% then the price of share 6.42.
The price earnings ratio shows the value of the company by considering the income generated by their operating activities. If the price earnings ratio is high then it shows that the demand of the share in the market is high because it is estimated that company has better opportunities for growth (Houmes, and Chira, 2015). The price earnings ratio of the company ASOS in the year 2016 was 154.6, while in the year 2017 was 74. There is significant reduction in the year 2017 as compare with the year 2016. However the earrings of the company were more than in the year 2017, but the market price did not increased as in comparison with the earrings of the company. Further in case of M & S Company the price earnings ratio of the company in the year 2016 was 11.8 and in the year 2017 were 11.1. There is only minor reduction in the year 2017.
On the basis of the analysis it is recommended that the investors should invest in the ASOS Company because of the company is in growing stage. However the investors who want to take the low risk then it is advisable for them to make investment in M & S Company.
References
ASOS, 2018. THIS IS ASOS (Online). Available from < https://www.asos.com/?channelref=paid+search&affid=14230&ppcadref=211936968%7c14524757328%7ckwd6719232088&gclid=Cj0KCQiAoJrfBRC0ARIsANqkS_6VPVoCqCf_CZTO83ZT05-0CxPJHfDV4UXr5jT7kSYv6vwEl4dMOxIaAjLrEALw_wcB&gcldata-src=aw.ds>. [Accessed on 10 November 2018].
Ballings, M., Van den Poel, D., Hespeels, N. and Gryp, R., 2015. Evaluating multiple classifiers for stock price direction prediction. Expert Systems with Applications, 42(20), pp.7046-7056.
Berk, J.B. and Van Binsbergen, J.H., 2016. Assessing asset pricing models using revealed preference. Journal of Financial Economics, 119(1), pp.1-23.
Evstigneev, I.V., Hens, T. and Schenk-Hoppé, K.R., 2015. Capital Asset Pricing Model (CAPM). In Mathematical Financial Economics (pp. 53-59). Springer, Cham.
Houmes, R. and Chira, I., 2015. The effect of ownership structure on the price earnings ratio—returns anomaly. International Review of Financial Analysis, 37, pp.140-147.
Hunjra, A.I., Ijaz, M.S., Chani, M.I. and Mustafa, U., 2014. Impact of Dividend Policy, Earning per Share, Return on Equity, Profit after Tax on Stock Prices.
M&S, 2018. (Online). Available from < https://www.marksandspencer.com/>. [Accessed on 10 November 2018].
Marks & Spencer, 2018. About M&S (Online). Available from < https://global.marksandspencer.com/about-ms/>. [Accessed on 10 November 2018].
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