2. Financial management policies and structures
1. Capital investment decisions
1. Financial decisions
2. Dividend decisions
3. Investment decisions
3. Working capital management
4. Risk management
5. Strategic decisions
6. Social, ethical and environmental decisions
7. Evaluation of usefulness of Hermes principle
1) Retail gearing
3) Dividend paid
4) Business model
6) Working capital cycle
FROM: Itayi Mutete
SUBJECT: An Investigation of Marks and Spencer and the Hermes principles DATE: 11/04/08
Marks & Spencer Plc (M&S) is an international retailer which is currently operating in 34 countries and has established over 600 UK stores as well as over 219 franchise stores. The company trades in clothing, home furnishings and foods. The company’s corporate objective is to increase long-term shareholder wealth.
The aim of the report is to evaluate the financial management policies and practices of Marks and Spencer plc (M&S). Hermes principles will be used to identify the main areas of the company’s financial management policies and practices.
The primary goal of companies is to ensure that they make appropriate decisions and use techniques which will aid them to maximize their value as well as reduce financial risks. The main areas of corporate financial management can be divided into short-term and long term decisions and techniques.
2. Financial management policies and practices
Marks and Spencer’s financial management policies and practices are decisions concerning capital investment decisions, working capital management, strategic decisions and social, ethical and environmental decisions.
1. Capital investment decisions
Companies often make long-term capital investment decisions concerning fixed assets and capital structure. These decisions are inter-related and comprise of financing decisions, investment decisions and dividend decisions. 1. Financing Decisions
Financial decisions play an important role in financial management as they provide information on the capital available or necessary to finance all the functions within the business. They provide a basis by which managers can analyse capital projects and manage the company’s working capital.
Before investing in any projects companies are faced with questions about which projects to invest in, how the investment is to be financed (whether they will use equity or debt) and when or whether to pay dividend to shareholders. Companies aiming at maximising shareholder wealth seek to invest in projects which yield a positive net present value by using the right mix of funding.
According to Hermes sixth principle companies should have an efficient capital structure which will minimise the long-term cost of capital. This principle can be related to the company’s financial decisions, dividend decisions and working capital management.
Over the last five years M&S has been restructuring and improving their capital structure thus reducing the company’s overall cost of capital.
Marks and Spencer uses a mixture of equity and dept to finance its operations and obtains it finances from both internal and external sources.
The debt raised to finance the company’s investment portfolio is a mixture of short and medium term instrument. M&S management ensure that they match the financing mix to the asset being financed this enables the company to chose a capital structure which results in maximisation of shareholder value.
However it is important to note that though equity financing is less risky for the company the underlying cost of equity is higher than the cost of debt. The amount more...