Scenario:

Strategic financial management means not only managing firms’ finances but managing them with the intention to succeed i.e., to achieve their corporate goals and objectives as well as maximize shareholders’ wealth over time. It involves understanding and appropriately obtaining, allocating and controlling firms’ assets and liabilities, including monitoring revenues, expenditures, accounts receivable and payable, inventories, cash flows, etc. In addition, strategic financial management consists of evaluating and managing firms’ capital structures to ensure their long-term solvency.

The 3 major elements of strategic financial management include financing decisions, investing decisions and operating decisions. Financing decisions relate to the raising of finance from various resources to ensure that firms have sufficient capital, and the cost of capital is under control. Financing decisions also involve how much of the net profit should be distributed to shareholders in the form of dividend and how much of the net profit should be retained for expansion and growth. Meanwhile, investment decisions relate to the allotting of firms’ capital between fixed assets (capital budgeting) and current assets (working capital). Finally, operating decisions related to how firms’ assets should be efficiently used to maximize their profits. To achieve their corporate goals and objectives as well as maximize shareholders’ wealth, firms need to ensure that all of these 3 kinds of decisions must be made effectively.

Required:

Using the financial data of a FTSE-100 firm which you have chosen for the first assessment (Individual presentation) during the period from 2016 to 2020 and a variety of other resources (both written and electronic) critically answer the following questions in a 3,000 word report:

• How has the firm’s capital structure strategy has evolved over the period? Critically assess whether there is any evidence that the debt/equity relationship is consistent with a particular view of capital structure, the rationale(s) for the approach undertaken, and whether or not there has been a discernible impact upon share price. To answer this question, you need to calculate relevant solvency ratios including debt-equity ratios, debt-assets ratios, and interest coverage ratios to evaluate how changes in the strategy has influenced the firm’s solvency and hence share price. (20 marks)
• How has the dividend policy of the firm evolved over time? Critically justify the changes (if any) in the policy and discuss their impact on the share price with reference to relevant academic literature and the dividend theories. (10 marks)
• Using relevant models, estimate the firm’s weighted average cost of capital. Make relevant assumptions where necessary. Justify the estimated cost of capital with reference to your discussion in Question 1. What are the problems facing a company in determining its weighted average cost of capital and how are these issues addressed? (10 marks)
• Which working capital management strategy has the firm implemented? How well has the firm managed its working capital? To answer this question, you need to calculate relevant liquidity ratios (the current ratio, the acid-test ratio and the working capital ratio) to see how the firm’s liquidity position has evolved due to working capital management. (10 marks)
• Identify the firm’s mergers and acquisitions (M&As) over the period and critically evaluate its motivations for these M&As. Support your answer with reference to the academic literature. (10 marks)
• Critically evaluate the effectiveness of the firm’s operating decisions. To answer this question, you should compute relevant efficiency ratios (asset turnover ratio, inventory days, receivable days, payable days and cash operating cycle). (10 marks)
• There are different methods which can be used to value a firm. Critically discuss if the dividend growth model or the free cash flow model is suitable to value the firm. (20 marks)
• Presentation and referencing. (10 marks)