Last Updated 28 May 2020

Bellway Plc – Coporate finance

Category Finance, Investment, Money
Words 843 (3 pages)

Bellway p. l. c. is a holding company whose subsidiaries build residential houses and conduct associated trading activities. The subsidiaries build starter or first time buyer homes, featuring two and three bedroom semi-detached houses, apartments and terraced houses. 1The Company operates in England, Wales, Scotland and Australia. Current ratio2 indicates the company has sufficient liquid to give comfort to its creditors in short-term. Working capital 3gives a distorted image about the company's financial position, as stock constitutes a major portion of Current assets4.

Therefore, Return on Capital employed5 should be looked upon, which is not high suggesting the company is not able to earn sufficient profit in proportion to capital employed. Since, Gearing6 ratio is low and interest cover7 is high, owner's investment is less risky and the company is in a position to pay interest cost on borrowing. On the whole, the financial position of the company is moderate. The company's financial structure has higher amount of equity as compared to debt, with sufficient liquid but its stock is very high and return on capital employed (ROCE) is low.

Holding of stock for a building and construction company is essential but it can cost a lot. 'A rule of thumb puts the costs of holding stock for one year in the region of 25p for every i?? 1 of stock held. '8 Financing can be improved by maintaining a balance between debt and equity. The company is in a position to raise finance through debt and pay off the interest on borrowing too. The company should lower its stock and keep it up to an acceptable lower level consistent with risks involved. This would lower costs and make it profitable for company bringing an increment in ROCE.

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Weighted average cost of capital (WACC) represents the expected return on all of the company's security. It is suitable for evaluation of financial strategy for small companies and is based on market values. As it is difficult to find market values of debt, a combination of market value and book value of equity and debt for the company has been used, for the purpose of calculation of WACC29 which gives a distorted figure of WACC. Since the company raises both fixed interest and floating rate debt capital, the cost of debt capital will fluctuate as market conditions vary.

Also it is difficult to incorporate floating rate debt into WACC. The company is in a position to raise finance for new or existing project through debt as WACC is very low and the cost of debt is quite low than cost of equity. Moreover, cost of issue of new shares is higher than for retained earnings, cost of which is same cost of equity. As the cost of equity is higher than debts, shareholder expects higher rate of return i. e. higher dividend. Also, gearing and WACC are interdependent and gearing (23. 3%) 30is low, it reduces the uncertainty of return to equity shareholders.

Free cash flow is an important element in shareholder value analysis. 'Shareholder value analysis is an approach to financial management which focuses on the creation of economic value for shareholders, as measured by share price performance and flow of dividends'. 43 The factors used in calculation such as operating profits after tax, working capital and so on, has greatest impact on shareholder value and creates management awareness of the key value. It reflects the performance of the company in monetary terms rather than as a ratio.

It takes into account the cost of capital and therefore shows if the company is adding value for its shareholders. However, current earnings are better indicator of future cash flow, than is the current free cash flow. Also, the calculation can be complex and the constant percentage assumption may be unrealistic. The method which is considered as most appropriate is the one which closely matches the actual share price. Out of the four methods, Earnings valuation closely matches the share price prevailing in the market.

The difficulty is that the reported earnings are based on historical cost accounts. But this method is considered to be appropriate where the size of the shareholding is sufficient to influence dividend policy and therefore, shareholders are more concerned with the underlying level of earnings, rather than just dividends. The other methods i. e. dividend yield and assets valuation are considered as inappropriate because former ignores growth and later is based on book value. Investment objective of hostile bidder would be to take control of the company or takeover control from minority shareholders.

The bidder may see the acquisition of the company as a unique opportunity to purchase a major market share, without paying the market premium. Also, the company's prospects might appear better than share price would indicate. High dividend payout by the company may be a major attraction for hostile bidder. The above mentioned method would be appropriate for a hostile bidder as the company's P/E ratio being below from its competitors. One of the similar company and competitor for Bellway plc is Berkeley group whose 'principal activities are residential house building and commercial property investment and development'.

Bellway Plc – Coporate finance essay

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