PART I: COMPANY ANALYSIS5
1-Introduction of the company5
1.2. The industry:5
1.3. Sports Direct today:6
2. Analysis on the financing structure of the company6
2.1.Sports Direct financial statements:7
2.2.JJB Sports financial statements:9
2.3.Ratios of Sports Direct and JJB Sports12
3.The weighted average cost of capital15
3.1.Cost of equity:15
3.2.Cost of debt:15
PART II: PROJECT INVESTMENT ANALYSIS17
1.2.Elements of the project:18
1.3.Risk and Uncertainty:19
3.3.Risk and uncertainty:23
Long ago, when I used to go with my father to the supermarket, I was always asking him to buy me a ball or these fake guns to play with. Sometimes he did buy them for me but sometimes not. I was happy when I had them but when he refused I heard the same reason every time “we do not have the money now but I will buy it for you next time” so I was asking myself: why he was saying to me that he did not have money while he was buying even more expensive goods? And more intriguing, how he would know that he does not have the money now but he will have it next time?
These questions hunted me for many years until I started studying finance in high school. Indeed, I realised that my father was actually doing what is called prioritising. In other words, he was making a list of goods from the most important to the family to the least thus my ball was not really important to anyone in the family except myself. That was my answer for the first question. For the second, I discovered that my father was planning what he was going to buy on the expected salary that he was receiving each month.
The reflection from that is that my father was actually using simple finance tools to manage our family expenses. It might sound strange but most of the people around the world use basic finance to manage their normal life. It is simple to use in this level, however when it comes to big companies like Microsoft or GE, one person cannot manage to tell what will be the priorities, the expenses and the cash flows of the whole group. Firstly, because it is no longer a family of five people who live together and know each other like the back of their hands, but it is thousands of shareholders, employees, managers, who just share a professional life and who have totally different views on the extent to how the company should be managed.
Consequently, having some normalised tools to identify what goods are more important to a company and should consequently buy i.e. NPV to assess what investment to implement. And what will be the cash flows that the company will generate so that it can run this investment i.e. the revenue of the company which is the sales. All these tools and ways to manage the company from a financial perspective are known as the Corporate Finance. Some of them will be discussed in the following chapters using a combination of theory and real life cases.
In the first part, the company chosen for the coursework -which is SPORTSDIRECT.COM- will be introduced. First it will be briefly described by outlining its activity, from what products it sells to its size relative to the industry without forgetting of course to assess the performance over the past 4 years. Then the comment on the financing structure of the company will be taken and the Weighted Average Cost of Capital will be calculated using the models learned during lectures and seminars.
On the second part, a new investment project will be prepared. At first, the relevant information about the project will be presented. Afterwards, the Net Present...