Financial Decision-Making At Vodafone PLC Assignment Sample

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Introduction of Financial Decision-Making At Vodafone PLC Assignment

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In this topic, a detailed discussion about the financial perspective of a selected company from the London Stock exchange shall be thoroughly outlined. A detailed discussion regarding the gearing ratios and capital structure of the selected company shall also be briefly discussed and a thorough discussion on the working capital structure and sources of working capital shall be mentioned. This topic shall also highlight the importance of dividend policies for the selected company along with the profitability and risk metrics to provide a piece of well-rounded information stating the financial perspective. The selected company for this particular topic involves Vodafone Plc, whose primary business concern is related to offering telecommunication services to the customers in the market.

1: Section 1: Long Term Sources of Finance

1.1: Long Term Sources of Finance

In order to further assess the significance and importance of the financial aspects and parameters for Vodafone Plc, special emphasis is being showered upon the identification and utilisation of reliable long-term sources of finance. The various available long-term sources of finance for Vodafone Plc include equity share capital, treasury shares, debentures, borrowings and financial liabilities for option arrangements (investors.vodafone.com, 2022). The additional long-term sources of finance for Vodafone Plc also include Asset securitisation as well as Venture capital from private funding, which further allows Vodafone Plc to establish a stronghold in the short as well as the long-run continuation of the business.

 1.2: Theories and Models Associated with Capital Structure

The usage and application of various available financial models are considered to be an area of specialised concern for Vodafone Plc to further boost its relevant business structures in the long as well as short run. In order to justify long run business sustainability and develop a financial stronghold in the market, the concerned personnel of Vodafone Plc focuses on the implementation of Net Income and Net operating income approach (irishexaminer.com, 2022). A specialised level of concern is also being ushered upon the pecking order as well as static trade-off theories, which further empowers the management of Vodafone Plc to encourage substantial financial growth for the organisation. The pecking order theory mainly emphasises on integration of available internal sources of funds to feasibly facilitate the daily operational business conduct. The significance and relevance of static trade-off theories further encourage Vodafone Plcto refrain from possibilities of future business insolvency and bankruptcy and maximise the adequate usage of available assets.

 Theories of Capital Structure

(Source: Created by Learner)

1.3: Calculation of Gearing Ratios

Year

Debt to Equity Ratio

 Amount (M)

Ratio

2021

Debt

 € 68,536.00

= Debt/ Equity (68,536/57,816)

1.185415802

Equity

 € 57,816.00

2020

Debt

 € 72,158.00

= Debt/ Equity

(72,158.00/ 62,625.00)

1.152223553

Equity

 € 62,625.00

Table 1: Debt to Equity Ratio

(Source: Created by Learner)

The above-mentioned table consisting of calculation for debt-equity ratio suggests ratios of 1.185 and 1.152 respectively. The formula for calculating debt-equity ratio can be attributed as Total debt fund divided by Total equity fund.

Year

Interest Coverage Ratio

 Amount (M)

Ratio

2021

Earnings Before Interest and Taxes

 € 4,400.00

= Earnings Before Interest and Taxes/ Interest Expenses

= (4400/ 374)

11.76470588

Interest Expenses

 € 374.00

2020

Debt

 € 795.00

= Earnings Before Interest and Taxes/ Interest Expenses

= (795/ 330)

2.409090909

Equity

 € 330.00

Table 2: Interest Coverage Ratio

(Source: Created by Learner)

The above- depicted table of Interest Coverage Ratio calculations states ratios for the year 2021 and 2020 as 11.76 and 2.40 respectively. The formula used for calculation of Interest coverage ratio includes Earnings before Interest and Taxes divided by Interest Expenses.

Year

Debt To Total Assets

 Amount (M)

Ratio

2021

Debt

 € 68,536.00

= Debt/Total Assets

= (68,536.00/ 155,063.00) * 100

44.20%

Total Assets

 € 155,063.00

2020

Debt

 € 72,158.00

= Debt/Total Assets

= (72158/ 168,168.00) * 100

42.91%

Total Assets

 € 168,168.00

Table 3: Debt to Total Assets

(Source: Created by Learner)

The above-depicted table of debt to total assets is calculated by dividing Debt fund with Total assets. The resulting ratio figures are simultaneously calculated as 44.20% and 42.91% respectively for the years 2021 and 2020.

Year

Equity to Total Assets

 Amount (M)

Ratio

2021

Equity

 € 57,816.00

= Equity/Total Assets

= (57816/ 155,063.00) * 100

37.29%

Total Assets

 € 155,063.00

2020

Equity

 € 62,625.00

= Equity/Total Assets

= (62625/ 168,168.00) * 100

37.24%

Total Assets

 € 168,168.00

Table 4: Equity to Total Assets

(Source: Created by Learner)

The above-depicted table of equity to total assets is calculated by dividing Equity fund with Total assets. The resulting ratio figures are simultaneously calculated as 37.29% and 37.24% respectively for the years 2021 and 2020 [Refer to Appendix 1 and 2].

1.4: Company’s attitude towards risk management

The attitude towards risk management of the company is considered to be an area of significant concern, which further decides the financial reliability in the domestic as well as the international market. As per the observations and explanations of Almilia (2019), the risk management of Vodafone Plc mainly consists of equity and borrowing based risks which further define the overall financial performance in the long run. The attitude towards risk management of Vodafone Plc is considered to be based purely on the maximisation of revenue streams for the company as well as minimising the possibilities of financial disparity. The disparities and hindrances can hamper the financial structure in the regular business processes, which can lead to a significant decline in the external association of stakeholders with Vodafone Plc (nst.com.my, 2022). Additional emphasis on the risk management of Vodafone Plc can be attributed to possibilities of an economic disruption, which emperors the organisation to keep adequate financial backups to justify and prolong the business sustainability during uncertain times.

2: Section 2: Working Capital Management

2.1: Calculation of Ratios

Year

Current Ratio

Amount (M)

Ratio

2021

Current Assets

 € 27,013.00

= Current Assets/ Current Liabilities

= 27,013.00/ 28,711.00

0.94

Current Liabilities

 € 28,711.00

2020

Current Assets

 € 33,246.00

= Current Assets/ Current Liabilities

= 33,246.00/ 33,385.00

1.00

Current Liabilities

 € 33,385.00

Table 5: Current Ratios

(Source: Created by Learner)

The above-depicted table of Current Ratio is calculated by dividing Current Assets with Current Liabilities.

Year

Acid Test Ratio

Amount (M)

Ratio

2021

Current Assets

 € 27,013.00

= (Current Assets- Inventory)/ Current Liabilities

= (27,013.00- 676) / 28,711.00

0.92

Inventory

 € 676.00

Current Liabilities

 € 28,711.00

2020

Current Assets

 € 33,246.00

= (Current Assets- Inventory)/ Current Liabilities

= (33,246.00- 598) / 33,385.00

0.98

Inventory

 € 598.00

Current Liabilities

 € 33,385.00

Table 6: Acid Test Ratio

(Source: Created by Learner)

The above-depicted table of Acid-Test Ratio is calculated by dividing (Current Assets – Inventory) with Current Liabilities.

Year

Debtors Turnover Ratio

Amount (M)

Ratio

2021

Sales

 € 43,809.00

=Sales/ Average Debtors 3.868856802

Average Debtors

 € 11,323.50

2020

Sales

 € 44,974.00

=Sales/ Average Debtors

3.70308769

Average Debtors

 € 12,145.00

Year

Receivable Days

Amount (M)

Ratio

2021

365 days

365

= (365/ Debtors Turnover Ratio )

94.34311443

Debtors Turnover Ratio

3.868856802

2020

366 days

365

= (365/ Debtors Turnover Ratio )

98.56639392

Debtors Turnover Ratio

3.70308769

Table 7: Receivable Days

(Source: Created by Learner)

The above- mentioned table of Receivable days is calculated by 365 days divided by the Debtors turnover Ratio.

Year

Creditors Turnover Ratio

Amount (M)

Ratio

2021

Cost of Sales

 € 30,086.00

= Cost of Sales/ Creditors 1.681298723

Creditors

 € 17,894.50

2020

Cost of Sales

 € 30,682.00

= Cost of Sales/ Creditors 1.768109261

Creditors

 € 17,353.00

Year

Payable Days

Amount (M)

Ratio

2021

365 days

365

=365/ Creditors Turnover Ratio

217.0940803

Creditors Turnover Ratio

1.681298723

2020

365 days

365

=365/ Creditors Turnover Ratio

206.4352063

Creditors Turnover Ratio

1.768109261

Table 8: Payable Days

(Source: Created by Learner)

The above-mentioned table of payable days is calculated by 365 days with the creditors turnover ratio.

Year

Inventory Days

Amount (M)

Ratio

2021

Average Inventory*365

 € 232,505.00

= (Average Inventory * 365) / Cost of Sales

7.728013029

Cost of Sales

 € 30,086.00

2020

Average Inventory*366

 € 239,440.00

= (Average Inventory * 365) / Cost of Sales

7.803924125

Cost of Sales

 € 30,682.00

Table 9: Inventory Days

(Source: Created by Learner)

The above-mentioned table of Inventory days is calculated by multiplying Average Inventory with 365 days and further dividing it with cost of sales.

Year

Cash Cycle

Ratio

Days

2021

Inventory Days

7.728013029

= Inventory Days+ Receivable Days – Payable days

-115.0229528

Receivable Days

94.34311443

Payable Days

217.0940803

2020

Inventory Days

7.803924125

= Inventory Days+ Receivable Days – Payable days

-100.0648883

Receivable Days

98.56639392

Payable Days

206.4352063

Table 10: Cash Cycle

(Source: Created by Learner)

The formula for calculating Cash cycle involves sum of inventory days and receivable days deducted with payable days.

1.2: Discussion on efficient management of working capital sources

The efficient management of working capital sources for Vodafone Plc is largely attributed to the significance and importance of key working capital components. The primary components of working capital include the current assets of Vodafone Plc which are further categorised as cash in hand, trade receivables and inventories. The emphasis on the maximisation of cash in hand balances is a paramount concern for Vodafone Plc to further establish a solid financial base for justifying and carrying out the daily operational activities. The emphasis on a decent receivables turnover ratio as well as a feasible inventory turnover ratio is also an area of paramount importance, where Vodafone Plc slightly lacks behind, due to its aggressive nature of multiplying business returns (investopedia.com, 2022).

The second major component of working capital sources of Vodafone Plc consists of current liabilities, which are further categorised on the basis of trade payable ratios. A suitable trade payable ratio is a precise indicator of Vodafone Plc acknowledging healthy business relations with its suppliers to prolong its market dominance in the telecommunications industry (wallstreetmojo.com, 2022). However, aggressive working capital management can often lead to a significant delay in settling off creditors and suppliers, which can directly hamper the procurement and operational processes of Vodafone Plc in the long as well as the short-run business propositions.

3: Section 3: Dividend Policies

3.1: Range of Dividend policies available

In order to further establish a suitable business growth in the domestic as well as international markets, the contribution of dividend policies is considered to be on a grand scale. This further impacts the financial decision-making abilities of an organisation and encourages the need for determining suitable financial business prospects to signify business strategies and growth in the long term. As per the explanations and opinions of Sheppard (2018), the dividend policies can be further classified on the basis of categorisations, which are essential for Vodafone Plc to justify prolonged business growth. A detailed discussion on the available range of dividend policies available has been mentioned as follows.

Dividend Irrelevance Policy

The first important theory and policy associated with the suitable application and implementation of dividend policies are attributed to Dividend irrelevance theory. The significance of Dividend irrelevance theory with the current financial parameters of the organisation further establishes a non-collinear relationship of a company’s stock price, when dividend of that company fluctuates substantially.

Clientele Dividend Policy

The second major theory associated with the implementation of dividend policies of a company includes Clientele Dividend Policy. As stated by Wu (2019), the relative significance and importance of the application of these theory further helps organisations to facilitate a streamlined and compatible return for their investors to afford based on the income and preferred tax slabs of the shareholders. 

Bird in the Hand Policy

The third important theory involved in the dividend policy of an organisation further includes the application and implementation of Bird in the Hand Policy theory. The feasible and reliable usage of this particular theory further allows organisations to facilitate a streamlined return for their investors based on their expected capital gains from investment in various organisational projects.

Signalling Theory

The fourth major theory associated with the application and implementation of dividend policies in an organisation is further attributed to the Signalling Theory(globenewswire.com, 2022). The application and suitable usage of this theory further allows organisations to encourage a positive and incremental growth in the dividend payout of an organisation to further attract investor attraction.

3.2: Discussion on the application of dividend policies being implemented

The application of suitable dividend policies is also considered as an area of paramount importance for the management of Vodafone Plc to further establish a dominant financial reliability and performance in the market (firstpost.com, 2022). Currently, the dividend policy that is being implemented in the organisational paradigms of Vodafone Plc includes the Signalling theory as the likelihood of encouraging new business ventures is high for Vodafone Plc. As per the statements and explanations of Heydari and Abdoli (2019), the subsequent usage of Signalling theory by Vodafone Plc further allows the investors to be more involved with the organisation. This further empowers the possibility of bringing in a plethora of fresh capital to expect high returns from new projects.

4: Section 4: Risk and Profitability

4.1: Market Structure analysis of the company

Market structure analysis is an area of significant importance for the business propositions of a major corporate organisation, which further translates to the possibilities of the company making substantial profits. As per the opinions and explanations of Gherasim and Ionescu (2019), the market structure of Vodafone Plc is largely considered to be a perfectly competitive market. The relevance of a competitive market can be further traced as major competitors such as Sky and BT are also considered to be key players in the UK telecommunications market. Therefore, it becomes necessary for Vodafone Plc to continuously offer new and innovative telecom products to its customers for ensuring a prolonged sustainability in the industry.

4.2: Ratio Calculations

Year

Gross Profit Ratio

Amount (M)

Ratio

2021

Gross Profit

 € 13,723.00

= (Gross Profit/ Sales)*100

31.32%

Sales

 € 43,809.00

2020

Gross Profit

 € 14,292.00

= (Gross Profit/ Sales)*100

31.78%

Sales

 € 44,974.00

Table 11: Gross Profit Ratio

(Source: Created by Learner)

The formula for calculating Gross Profit Ratio involves division of gross profit with sales and dividing it with 100.

Year

Net Profit Ratio

Amount (M)

Ratio

2021

Net Profit

 € 536.00

= (Net Profit/ Sales )*100

1.22%

Sales

 € 43,809.00

2020

Net Profit

 € (455.00)

= (Net Profit/ Sales )*100

-1.01%

Sales

 € 44,974.00

Table 12: Net Profit Ratio

(Source: Created by Learner)

The formula for calculating Net Profit Ratio involves division of gross profit with sales and dividing it with 100.

Risk free rate (Rf)

Market risk return (Rm)

Beta (β)

1.75%

4.10%

4.53%

Cost of capiatal under CAPM model

1.86%

Table 13: Calculation of Beta with CAPM model

(Source: Created by Learner)

The formula of calculation of Beta involves the product of risk free rate and market risk return and divided by cost of capital under CAPM model.

4.3: Application of Models

The application of a suitable model and theory is considered to be an area of significance and importance, further encouraging the feasible business growth opportunities available for an organisation. In order to further establish the business dominance and to increase the revenue as well as customer orientation, the application of Porter’s Five Sources as a suitable model is considered paramount. A detailed discussion on the Porter’s Five Sources is further discussed as follows.

“Power of Buyers”

The first major ingredient of the Porter’s Five Sources includes the “power of buyers”. As per explanation and illustration of Ahmad et al. (2020), the importance of buyer power is significant as a high purchasing power usually translates to a high quantity being sold by the company. Vodafone Plc can further establish a strong financial metric, when more customers use their products and become heavily dependent, thereby allowing a high number of services provided.

“Power of Suppliers”

The second aspect of Porter’s Five Sources involves the “power of suppliers”. A higher power available to the supplier usually allows the organisation to strategically increase its product prices to encourage the substantial revenue and monetary growth. The implication of supplier power by Vodafone Plc further translates to acquisition of key telecommunication commodities to encourage the service offerings as well as prices of products available to the customers.

“Threat of a New Market Entrant”

The third aspect of the Porter’s Five Sources includes “threats possessed due to a new market entrant”. Ahmed, Ramakrishnan Noreen (2018), illustrated that a new market entrant usually brings in fresh business strategies within the market, which can further dampen the business dynamics for Vodafone Plc.

“Threat of New or Substitute Products”

The fourth aspect of Porter's Five Sources includes “threats possessed due to availability of new or substitute products in the market”. A new telecommunication company can bring in fresh telecommunication products and offer the same level of services to customers in UK, which can further cramp up the market share for Vodafone Plc.

“Level of Industry competition”

The fifth aspect of Porter's Five Sources includes the significant “level of prevailing industry competition in the market”. As per observations and demonstrations of Srinivasan and Kamalakannan (2018), the level of competition in the UK telecommunication industry is generally considered to be on the higher side as more competitors exist in the current market scenario. Significant amount of weightage is needed to be portrayed by the management of Vodafone Plc to continually innovate and improvise with their products and pricing strategy to further define a large-scale market dominance in the UK as well as overseas.

In order to further establish a suitable application of relevant theories and models, the application of Minsky analysis is considered an area of paramount importance. The application of Minsky analysis is further categorised based on following divisions.

Hedge

The first stage involves the Hedge stage, where the optimum and minimal risks are being taken by the banks to encourage the repayment of principal and interest amount for loans.

Speculative

The second stage involves the speculative stage, in which an investor and a banker can take calculative risks to further increase the profitability and financial reliability of their organisations.

Ponzi

The third stage involves the Ponzi stage, in which banks and financial institutions can neither take loans or can afford to pay principal or interest amounts of banks, leading to a financial disharmony in the market.

4.4: Investor’s Perspective

The investor's perspective is also considered to be an area of strategic importance for the spearhead of Vodafone Plc to further define the requisite longevity in their business structures. The primary focus from an investor point of view is highly glorified through the risks expected in the investment tools of Vodafone Plc. The investment tools of Vodafone Plc further indicate and encourage the usage of Capital Asset Pricing Model (CAPM) to assess the expected and available risk in the market. The above mentioned table of CAPM model calculates Beta as 4.53%, thereby defining the nature and potential of risks available for the investors to justify a long term business proposition. As per the illustrations and demonstrations of Svatošová (2019), a beta of 4.53% is generally considered to be slightly higher in terms of risks for the investors. However, the possibilities of an incremental reward for the investors also exist, which can further help Vodafone Plc to boost its equity and preference capital.

5: Conclusion

This topic has discussed the major significance and relevance of financial decision making with a selected company in the United Kingdom. A detailed analysis of the gearing ratios for the selected company Vodafone Plc has been conducted in which specific emphasis has been given to the application of pecking order theory as well as static tradeoff theory. A detailed discussion on the working capital management for Vodafone Plc has also been conducted and a critical discussion has been based with reference to increase in business revenue maximisation. A thorough discussion on the available dividend policies has also been conducted on this topic, where the usage of Signalling theory as a suitable dividend policy is considered to be more fruitful for Vodafone Plc. Additionally, with the help of this topic a detailed discussion on the financial performances and metrics, risk management of Vodafone Plc has also been conducted, where the investor standpoint indicates a higher chance of market volatility as well as higher possibilities of returns from investment.

References

Books

Sheppard, D 2018, Dividends of Decency : How Values-Based Leadership will Help Business Flourish in Trump's America, Figure 1 Publishing, La Vergne. Available from: ProQuest Ebook Central. [14 April 2022].

Wu, X 2019, Reforming China's Capital Market (2-Volume Set) : The Future Development Path, Enrich Professional Publishing (S) Private, Limited, Honolulu, HI. Available from: ProQuest Ebook Central. [14 April 2022].

Journals

Ahmad, G., Widyastuti, U., Susanti, S. and Mukhibad, H., 2020. Determinants of the Islamic financial literacy. Accounting6(6), pp.961-966.

Ahmed, Z., Ramakrishnan, S. and Noreen, U., 2018. Two sides of a coin: effects of perceived and actual financial literacy on investment decision making behavior mediated by financial risk tolerance. International Journal of Engineering & Technology7(428), pp.499-504.

Almilia, L.S., 2019. The effect of visualization and complexity tasks in investment decision making. Holistica Journal of Business and Public Administration10(1), pp.68-77.

Gherasim, Z. and Ionescu, L., 2019. The financial accountability of e-government: the information transparency of decision-making processes in public organizations. Annals of Spiru Haret University. Economic Series?3, pp.23-32.

Heydari, M. and Abdoli, M., 2019. The Effects of the CEO’s Perceptual Bias in Economic Decision-Making and Judgment on the Capabilities of the Financial Reporting Quality. Advances in Mathematical Finance and Applications4(4), pp.99-127.

Srinivasan, S. and Kamalakannan, T.J.C.E., 2018. Multi criteria decision making in financial risk management with a multi-objective genetic algorithm. Computational Economics52(2), pp.443-457.

Svatošová, V., 2019. Proposal and simulation of dynamic financial strategy model. Future Studies Research Journal: Trends and Strategies11(1), pp.84-101.

Websites

investopedia.com, 2022, Working Capital Ratios [online], Available at: https://www.investopedia.com/ask/answers/041015/what-does-low-working-capital-ratio-show-about-companys-working-capital-management.asp [Accessed on: 13.04.2022]

investors.vodafone.com, 2022, Annual Report [online], Available at: https://investors.vodafone.com/sites/vodafone-ir/files/2021-05/vodafone-annual-report-2021.pdf [Accessed on: 13.04.2022]

wallstreetmojo.com, 2022, Working Capital Ratios [online], Available at: https://www.wallstreetmojo.com/working-capital-ratio/ [Accessed on: 13.04.2022]

Online Articles

firstpost.com, 2022, Dividend Policies [online], Available at: https://www.firstpost.com/india/youth-will-make-democratic-institutions-more-accountable-participatory-meaningful-says-om-birla-10549111.html [Accessed on: 13.04.2022]

globenewswire.com, 2022, Dividend Policies [online], Available at: https://www.globenewswire.com/news-release/2022/03/21/2407143/0/en/Urbanfund-Corp-Declares-Dividend.html [Accessed on: 13.04.2022]

irishexaminer.com, 2022, Gearing Ratios [online], Available at: https://www.irishexaminer.com/news/politics/arid-40838966.html [Accessed on: 13.04.2022]

nst.com.my, 2022, Gearing Ratios [online], Available at: https://www.nst.com.my/business/2022/04/787928/swift-haulage-post-high-single-digit-net-margins-2022-2023%C2%A0 [Accessed on: 13.04.2022]

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