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Evaluation of Share Price of A.G. Barr PLC

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ABSTRACT

The main aim of this dissertation is to evaluate the share price of A. G. Barr Plc. and to provide

recommendations to investors. For this, the existing literature is reviewed and various theories on

capital structure decision are analysed. The traditional approach and MM approach of capital

structure are examined under this. sing weighted average cost of capital, A.G. Barr!s capital

structure is evaluated. "t is mainly composed of e#uity and reserves and only $.% of the capital is

de&t. As the company is less depending on de&t, its interest rates are very low. The profita&ility,

li#uidity and financial performance of the company are good. The cash flow statement analysis

reveals that the company efficiently meets its operating activities without any &urden.

sing 'ividend 'iscount Model, discounted cash flows and a&normal earnings method, A. G.

Barr!s share price is evaluated as per which the company!s current trading price is overvalued.

(owever, all these method have certain limitations. "t mainly depends on the historic dividend

and forecasts the future dividends which may not &e accurate in the real scenario. This method is

also not ideal for firms that do not pay dividends. The procedures of &oth discounted cash flow

method and discounted a&normal earnings are different, and the values mainly depend on

forecasts which may not &e accurate in true situations. The trends of share price reveal that the

price is volatile to ma)or up hills and down trends constantly. Furthermore, the forecasted share

price is far ahead of the current mar*et price. (ence, ideally it is recommended &uy the share.

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+ontents

%. "ntroduction................................................................................................................ 8

%.%. &)ectives............................................................................................................. 8

%.-. tructure............................................................................................................... 8

%./. +ompany verview.................................................................................................8

%.0. 1imitations of Analysis...........................................................................................10

-. The utloo* for the 2conomy........................................................................................12

-.%. Glo&al 2conomy................................................................................................... 12

-.-. 3 2conomy....................................................................................................... 14

-./. "mplications for A. G. Barr Plc..................................................................................16

-.0. +onclusion.......................................................................................................... 16

/. The tructure and utloo* for the "ndustry........................................................................17

/.%. The 3 oft drin* "ndustry......................................................................................17

/.-. The utloo* for oft drin* "ndustry...........................................................................18

/./. The Five Forces.................................................................................................... 19

/./.%. Threat of 4ew 2ntrants.....................................................................................19

/./.-. 5ivalry among the 2xisting Firms........................................................................20

/././. Bargaining Power of uppliers............................................................................21

/./.0. Bargaining Power of Buyers...............................................................................21

/./.6. Threat of u&stitutes.........................................................................................21

/.0. +onclusion.......................................................................................................... 22

0. 1iterature 5eview....................................................................................................... 23

4.1 Introduction.....................................................................................................23

4.2 Dividend Policy theoretical framewor............................................................24

4.3 !y"othe#i# of Dividend Irrelevance.................................................................26

4.4 $ommon Irrelevance %he#i#............................................................................26

4.& '(' Irrelevancy Proof.....................................................................................28

4.6 %he conce"tion of earnin) theory....................................................................29

0.7 Theoretical review of Macroeconomic factors and 'ividends.............................................310.8 'ividends and Models of 2#uili&rium.........................................................................31

0.9 'ividend policy ignaling effect................................................................................32

0.%$ 'ividend Policy &ehavioral models...........................................................................33

6. The +apital tructure 'ecision.......................................................................................3&

6.%. "ntroduction......................................................................................................... 3&

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6.-. :arious Theories on +apital tructure.........................................................................36

6./. The Traditional Approach........................................................................................40

6./.%. 2xplanation....................................................................................................40

6./.-. Aside............................................................................................................ 40

6.0. The 2conomic Approach.........................................................................................41

6./.%. MM Propositions without Taxes..........................................................................41

6./.%. MM Propositions with +orporate Taxes.................................................................43

6.6. "mperfections....................................................................................................... 44

6.;. Additional 5esearch...............................................................................................4&

6.7. +onclusion.......................................................................................................... 4&

;. +ompany Analysis...................................................................................................... 46

;.%. "ntroduction......................................................................................................... 46

;.-. trategic +apa&ilities.............................................................................................46;./. Board of 'irectors and +orporate Governance..............................................................47

;.0. +apital tructure................................................................................................... 48

;.0.%. hareholding..................................................................................................49

;.0.-. 1everage.......................................................................................................49

;.6. Financial Performance............................................................................................&0

;.6.%. Profita&ility....................................................................................................&0

;.6.-. 1i#uidity.......................................................................................................&2

;.6./. +ash Flow Analysis..........................................................................................&3

;.;.

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8.-. hare Price Performance.........................................................................................72

8./. 5ecommendations................................................................................................. 72

Appendices.................................................................................................................. 73

Appendix % Assumptions for :aluation Models...................................................................73

Appendix - Predicted "ncome tatement and Balance heet...................................................7&

Appendix /

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List of Tables

Ta&le % hows the Profita&ility 5atios of A. G. Barr in -$%/ and -$%0 /8

Ta&le - hows the Profita&ility 5atios of A. G. Barr and its +ompetitors /8

Ta&le / hows the 1i#uidity 5atios of A. G. Barr in -$%/ and -$%0 /9

Ta&le 0 hows the 1i#uidity 5atios of A. G. Barr and its +ompetitors /9

Ta&le 6 hows the 'iscounted +ash Flows of A. G. Barr 06

Ta&le ; hows the 'iscounted A&normal 2arnings of A. G. Barr 08

Ta&le 7 hows the Pro&a&le 2#uity :alues with :arying

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List of Figures

Figure % Glo&al outloo* for G'P during -$%0 = -$-6 %-

Figure - Trends of hare price of A. G. Barr Plc. for the last six months 0%

Figure / Trends of hare price of A. G. Barr Plc. for the last five years 0-

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%. "ntroduction

%.%. &)ectives

This dissertation is written as part of Master!s degree. The o&)ectives of this dissertation are to

evaluate the share price of A.G. Barr Plc. and ma*e a forecast &ased on the annual reports of last

five years. "t is also aimed to ma*e recommendations to current and prospective investors

whether to &uy, hold or sell the shares of the company.

%.-. tructure

This dissertation consists of total seven chapters. The first chapter &egins with the o&)ectives of

the dissertation and consists of the structure of dissertation, company overview and limitations of

analysis. +hapter - descri&es the outloo* of economy and its implications for A.G. Barr Plc.,

chapter / states the structure and outloo* for the industry, chapter 0 examines the existing

literature on the topic i.e. the capital structure of the company, chapter 6 indicates the analysis of

A.G. Barr Plc. with the help of ratios and

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line here can produce ;9$ million cans per year. The company is commonly *nown as Barr!s.

The company is renowned for its "54>B5 for more than a century. "t has a huge mar*et

throughout the 3. ther &rands of A.G. Barr Plc. include 3A, 5u&icon, Barr, imply, t

+lements, Findlays, A&&ot!s, un exotic, trathmore

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"n terms of &rands, "54>B5 is the ma)or &rand that is sold more in -$%0 and accounted for

0./C0

growth in sales. "n terms of geography, cotland contri&uted to a&out 0$C of sales

revenue.

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%.0. 1imitations of Analysis

The share price valuation is done using 'ividend 'iscount Model which is useful only for the

companies that pay dividends. ther models are also descri&ed &ut not done due to constraints

li*e time.

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-. The utloo* for the 2conomy

nder this chapter, the outloo* of glo&al economy as well as the 3 economy are studied. The

conse#uences of them on the chosen company i.e. on A.G. Barr Plc. are also discussed. The

glo&al economy and the macro>economic factors that influence the industry are analy@ed and the

3 economy as well. This chapter concludes with the conse#uences of these economies on A.G.

Barr.

-.%. Glo&al 2conomy

The G'P for glo&al economy after ad)usting for inflation has increased to /./C7 in -$%0 from

-.9C in -$%/ which is significant in developed economies. Though the 2uro@one is expected to

grow, it is reversed in -$%0 due to &ad weather. The growth of G'P in developing economies has

decreased slightly in -$%0. The economic transformations of +hina slowed down its increase.

2merging economies such as 5ussia, Bra@il and +entral Asia exhi&it a deceleration in growth

rates, whereas "ndia, Mexico and other emerging nations in Asia witness minor improvement in

their performance +onference>&oard.org, -$%0.

For a third year in row, developing countries are facing a disappointing growth &elow 6 percent.

This is due to the wea*ness in first #uarter of -$%0 which hindered an anticipated increase in

economic activity according to recent Glo&al 2conomic Prospects report of

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expected that these economies will grow &y %.9 percent in -$%0. The growth is expected to

increase to -.0C and -.6C in -$%6 and -$%; respectively The

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high income countries will account for half of the worldwide growth in the years -$%6 and -$%;

where as they accounted for less than 0$ percent in the year -$%/ The

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"t is expected that 3 economy could grow around / percent in -$%0 which is an increase from

the %.7 percent growth in -$%/ Pwc, -$%0. (owever, the growth might slightly ad)ust to around

-.;9 percent in -$%6. "t is expected that all the regions of 3 to have a faster growth rate in the

year -$%0 as opposed to -$%/. "t is also estimated that 1ondon will see the fastest growth rate of

/.0 percent and that 4orthern "reland will see the slowest growth rate of -.- percent Pwc, -$%0.

(owever, there are still some significant downside ris*s that could affect the recovery of 3

economy. These include the slowdown in activity in the 2uro@one, the unrest in *raine and the

Middle 2ast which could have a potential impact on glo&al energy prices, and potential pro&lems

in some ma)or emerging mar*ets. n the other hand, there are some upside possi&ilities. These

include &usiness investments &eing stronger than expected and an increase in real wage growth

which has led to the increase spending of consumers than predicted.

At present, the level of inflation is &elow the Ban* of 2ngland!s target of -%$ percent and it is

expected that the level will remain mostly sta&le over the next %8 months. "t is however expected

that the interest rates might start to increase from the late -$%0 or early -$%6. This is to overcome

longer term inflationary ris*s which include overheating in the housing mar*et.

"n the year -$%/, the 3 had the sixth largest economy in the world and the third largest

2uropean economy. "t was right &ehind Germany and France. "t is estimated that &y the year

-$/$, the 3 is expected to remain the sixth largest economy in the world &y falling &ehind

"ndia &ut overta*ing France with which there is already a narrow margin.

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-$-$ as it overta*es France. "t is also expected that the gap &etween Germany and 3

economies will &e narrowed &y the year -$/$ Pwc, -$%0.

"t is found that the 3 has ran*ed 6 th in the G7 in -$%/. This means it was down from /rd in -$$$

and -$$7. This is &ecause of the deep recession suffered &y the 3 during the years -$$8 =

-$$9. This downfall in ran* shows the slow recovery &efore -$%/ Pwc, -$%0.

-./. "mplications for A. G. Barr Plc.

ince the glo&al economy has expected to grow in the future years, A. G. Barr Plc. can expect

increase in its revenue. Though there are some significant downside ris*s in the 3 economy, it

is anticipated to grow%% in the future years. The management of A. G. Barr is ready to ma*e

ad)ustments to the capital structure according to the economic conditions. Their revenue &y the

end of Danuary in -$%0 grew &y ;.9C%-, &eating the wider soft drin*s mar*et. The volume of the

company grew more than dou&le the mar*et rate &y 6.$C%/.

-.0. +onclusion

This chapter descri&es the outloo* for glo&al economy and 3 economy as well. "t also reveals

the implications for A. G. Barr Plc. The glo&al economy performance has &een increased in -$%0

from the previous year. +ompared to developed economies, emerging economies have improved

their performance. A. G. Barr improved its revenue in -$%0 even in the adverse economic

11 Pwc. 2014. UK Economic Outlook Jul 2014.

12 ./. arr Plc. Annual Report and Accounts 2014+ ". 7


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conditions. 2xpecting the growth of glo&al economy and 3 in the future years, A. G. Barr Plc.

expects &right future.

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/. The tructure and utloo* for the "ndustry

oft drin* industry is a highly profita&le industry. "t is especially more profita&le for concentrate

producers than the &ottler!s. This can &e ama@ing due to the fact that the product that is sold as a

commodity can even &e made with ease. (owever, there are numerous reasons for this. +ola, the most dominating company of the sector. "t has mar*et of share of almost 6$%0

percent. "t increased glo&al exposure &y &eing the official sponsor of 1ondon lympics. A. G.

Barr, one of the leading soft drin* sellers in the 3 mar*et and popular for its "54 = B5.

Though +oca>+ola is a ma)or company it is led &y Pepsi in the on trade. Pepsi ma*es &est use of

its improved distri&ution with the help of partnership with Britvic. They have invested in staff

training which focused on serving consumers perfectly.

14 ain5rid)e. 2012. !ector "nsi#$t% &arbonated !o't drinks.

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The value of chweppes has fallen &y %.6%6 percent &etween -$$9 and -$%%. 'ue to the price

rises in the mar*et its lemonade was affected. This made it hard to compete against colas and

other fruit car&onates. thers include minor companies li*e wn>la&el.

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advertisement as it influences the sales and there&y profits. This ma*es them &rands that come to

the mind of consumers when they thin* of soft drin*s.

(ealth conscious is growing among consumers. "t is found that two out of five users have stated

that they try to avoid car&onated soft drin* &ecause they are not good for health. n the other

hand, more than half users drin* sugar free variants of the car&onated drin* for the sa*e of

health. The sales of sugar free variants has increased &y -6 percent from -$$9 to -$%%

Bain&ridge, -$%-.

/./. The Five Forces

Michael Porter!s five forces are *ey to any &usiness and industry. They are mentioned as &elow.

/./.%. Threat of 4ew 2ntrants

The following are the &arriers to entry for new competition to enter the soft drin* mar*etE

Bottling 4etwor*E +o*e and Pepsi+o have agreements of franchisees with their respective

&ottler!s. The &ottlers have certain rights in certain geographic area. sing these agreements the

&rands prevent the &ottler!s in ma*ing similar products. Thus, they prevent new competing

&rands from entering in the mar*et for same products. +o*e and Pepsi have &ought the

significant percent of &ottling companies. This, com&ined with the recent consolidation among

the &ottler!s has made it very difficult for new companies entering the mar*et to find &ottlers.

The alternative for finding a &ottler is to try and &uild their own &ottling plants which would &e

highly capital intensive.

Advertising pendE

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"n the year -$$$, the money spent in advertising and mar*eting in the soft drin* industry was

around -.;%8 &illion. This money was mainly spent &y +o*e, Pepsi and their &ottler!s. "n the

year -$$$, 8./%9 million was spent in the form of advertisement per point of mar*et share

:ulpala, -$$7. uch a high num&er ma*es it difficult for any new entrants to compete and gain

visi&ility.

Brand "mageloyaltyE 'ue to the long history of heavy advertising &y Pepsi and +o*e, they have

gained a lot of &rand loyalty and image from customers across the world. This means that any

new entrant cannot virtually match up to their scale in the mar*et place.

5etailer helf paceE

Generally, retailers get a significant margin of soft drin* for the shelf space they offer usually %6

= -$-$ percent. This margin ma*es it difficult for new entrants as they cannot influence retailers

to carry their products instead of +o*e and Pepsi.

Fear of retaliationE

A new comer entering a mar*et in which giants li*e Pepsi and +o*e already exist is not easy as it

could to lead to price wars which could affect the new comer.

/./.-. 5ivalry among the 2xisting Firms

"n the concentrate producer industry, Pepsi and +o*e are the two main firms competing and it

can &e classified as a duopoly. The rest of the competition in this industry has a mar*et share

which is too small to ma*e any upheaval of pricing or industry structure. The competition

18 ul"ala+ ./. 2007. &ola (ars% )i*e )orce Analsis.



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&etween Pepsi and +o*e has mainly &een regarding differentiation and advertising instead of

pricing except for a period in %99$s. This helped in the prevention of a &ig dent in profits

:ulpala, -$$7.

/././. Bargaining Power of uppliers

There are several &asic commodities which are re#uired as raw materials for the production of

concentrate. These are color, taste, caffeine or additives, sugar and pac*aging. These products are

produced &y producers who have no power over the pricing. For this reason, the suppliers in this

industry are wea* :ulpala, -$$7.

/./.0. Bargaining Power of Buyers

"n order to sell soft drin*s there are several channels that are typically used in the oft 'rin*

"ndustry. These include food stores, vending machines, Fast food fountains, convenience stores-%.

2ach of these has variations in the power of &uyers. Food stores are mainly commanded &y

&uyers with lower prices. Fountains ena&le &uyers to have freedom to negotiate. (ence, they are

also considered to have the power of &uyers. The power of &uyers is fragmented in convenience

stores and hence they pay higher prices. Buyers have no powers on vending channel.

/./.6. Threat of u&stitutes

oft drin* "ndustry has several su&stitutes li*e &eer, water, coffee, )uices etc. These are availa&le

to end consumers with ease. (owever, these products are countered &y the concentrate producers

&y huge advertising, &rand reputation, and increasing the availa&ility of their products to


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consumers-- :ulpala, -$$7. These strategies cannot &e matched &y the su&stitutes mentioned

a&ove. Furthermore, the soft drin* companies use diverse su&stitutes themselves to shield

themselves from competition.

/.0. +onclusion

This chapter explains the structure and outloo* for the soft drin* industry and the 3 industry as

well. "t also descri&es the Porter!s five forces that influence the soft drin* industry. Advertising,

&rand image, retailer shelf space and retaliation are some &arriers that prevent new entrants in

soft drin* industry. The soft drin* industry is mainly leading &y +o*e and Pepsi. The threat of

su&stitutes is more in the industry. The threat of suppliers is wea* and the threat of &uyers

depends on the channels the companies use to sell them. Buyers have more power in food stores

and fountains, lower power in convenience stores and no power on vending channels.


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0. 1iterature 5eview

4.1 Introduction'ividend policy has an utmost relevance to AG Barr Plc. 'ividend policy has always &een a

crucial corporate finance area which can &e analy@ed with the help of rigorous model. There are

various theories associated with the policy of dividend and there are lesser evidences gained

from empirical studies. The conceptions &ehind the theories of corporate dividends are also very

different in nature. AG Barr Plc on the other hand has &een using dividend policy only &ecause it

has a responsi&ility to provide signal for its shareholders with respect to the status of capital

investment of their organi@ation. "n addition, this chapter has &een prepared in order to discuss

the signals that AG Barr plc sends to its shareholders &y the applica&le dividend policies usage

and certain evidences for supporting those theoretical framewor*s. There are various theories

associated with the policy of dividend and there are lesser evidences gained from empirical

studies. The conceptions &ehind the theories of corporate dividends are also very different in

nature.

'ividends are the payments that companies such as A.G Barr plc ma*e from the total profit made

&y the company to the associated shareholders either on annual or interim &asis. The following

figure helps in understanding that the company, AG Barr has tried to enhance it!s per share

dividends at an average of %$ percent. "t is also evident that in two years that is -$$9 and -$%-,

the company undertoo* cutting down the dividends.

ourceE 'ividend max, -$%0

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Additionally, during the year -$%%, A.G Barr consistently made efforts to contri&ute to the

scheme of pension wherein total dividends distri&uted were 9 million euros. The resulting

dividend for the year attri&uta&le to shareholders e#uity totaled to --.686 million 2uros. A

dividend interim for -$%% was of ;.76 p for every general share. The final dividend proposed was

%8.;; p per general share to &e given if approval is given to this amount. From this perspective

and as evident from the annual report of the company for the year -$%%, the distri&ution of

dividends at A.G Barr plc to its shareholders has &een recogni@ed as a financial statement

lia&ility wherein the shareholders are responsi&le for the dividends approval. "n addition, the

dividend policy advantage for AG Barr Plc lies in the fact that the company uses the policy to

manage capital ris*s. The capital structure and ad)ustments to &e made &y the company are done

&y considering the changing economic conditions. For mainaining or even for ad)usting the

capital structure, the company uses the dividends. These dividend payments are modified to

return the capital for the shareholders or they are issued new shares. This is the manner &y which

AG Barr &alances the shareholder returns &etween growth in long term and present returns

wherein capital discipline maintenance is related to activities of investment.

A dividend cut can ta*e place when A.G Barr Plc was ma*ing an effort for reducing the payout

amount. This made A.G Barr Plc to experience stoc* prices to decline sharply. According to

(older et al, %998, dividends are cut due to reasons such as wea* company earnings and limited

fund availa&ility for meeting the payment re#uired as the dividend policy. Furthermore, he also

stated that usually sharp declining stoc* prices imply wea* position of finances with regard to a

specific company. At AG Barr plc the dividend reduction explains the lower price of stoc*

amounts after -$%-. From this perspective the importance of dividend policy to A.G Barr plc can

&e explained implying that it is the simple way that A.G Barr Plc adopts for communication its

well>&eing financially to the shareholder.

4.2 iterature eview

The corporate dividends issue has a wider historical perspective and as o&served in the theories

of Fran*furter and

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policy literature has led towards producing a wide variety of theoretical research and empirical

research specifically &eing following &y the dividend irrelevant pu&lication presented in the

hypothesis &ased study of Miller and Modigliani, %9;%. "n the initial corporate history stages, it

was reali@ed &y the managers that an essential position is held &y dividend payments that are

highly sta&ili@ed in nature. "n certain ways, the reason &ehind this were the investor!s analogy

which with government &onds (older et al, %998. A regular and sta&ili@ed payment of interest

was paid through these &onds and further corporate managers engaged in finding that shares with

the performance similar to &onds are preferred &y investors.

(owever to the ma)or extent, capital dividend theory helps in understanding that dividends are

not crucial when an organi@ation needs to finance its actions whether in a&sence or presence of

taxes. "t was the same period when researchers such as Miller>Modiliani, %9;% and Miller>

choles, %978 presented their documentation to highly the statistically important relationship

present &etween the yields of dividends and prices of stoc*. The main issue however has still

remained unsolved that why dividends are paid &y the companies (older et al, %998. 'ividend

policy in Finland for example has &een the main issue in relation to certain studies of empirical

nature. There are various models which explain theoretical share in the mar*et pricing value.

Most of the assumptions are &ased on separate security with intrinsic value on the &asis of the

firm!s economic conditions. These conditions have their &asis on earning, dividends, structure of

capital and potential growth from which the economic development conditions can &e evaluated

(older et al, %998. This is *nown as the fundamental analysis of stoc*. +ommon method used

in the analysis of fundamental methods are formulated &asically for developing distinct types of

models of valuation which usually have their &asis on 0 main criterion inclusive of earnings,

flowing cash, total assets and dividends. The analysis of fundamental stoc*s helps in explaining

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that the share value can &e divided into - classifications which are inclusive of dividend and

earning theories. The share value can &e evaluated then &ased upon the dividends discounted.

4.3 Dividend Policy theoretical frameworThe most commonly applied model is *nown as the share prices model of dividend having its

&asis on the total earning that are gained &y a shareholder over the shares. Future dividends are

presumed to &e &ought &y private investors when shares are &ought &y them and the value of the

share then &ecomes only limited to what value it can offer to the shareholder on its selling. The

share prices mar*et esta&lishment is done &y discounted the future dividends anticipated stream.

Models which have their &asis on this perception are for example model of Bower, %97$. These models have their &asis completely limited on dividend

discounts. The presumption here is that the investor is already *nowledgea&le of the dividends in

future streams and so these models have complete information. The 3isord model,

%9;/ does not have a &asis on dividends discounting &ut also within their dividend &ased model

is one of the main factors. A dividend signally model was developed &y 2ades, %98- with regard

to cost type dissipative signaling Gaver et al, %99/. The stochastic process mar*et value on the

other hand was determined &y (agen in the year %97/ wherein the process was illustrated to

represent the dividend policy of a company. "t was reviewed &y hlson, %99$ after synthesi@ing

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the security valuation theory for various uncertain settings that the result determined the value of

security to &e an expected dividend ad)ustment function which has &een modified in order to

ad)ust the ris*s. The discounted price here is done through the ris* free rates structure Gaver et

al, %99/. +APM is one such model which is evident from historical literature review to &e in

limited state. The view of earnings is of a data varia&le sufficing for determining the payoff of

security, the cost in addition to the dividends. "t was postulated &y hlson that dividends only

have the capa&ility of serving as a common valid capital attri&uted with respect to security.

According to the re>examination done &y Goet@mann>Dorion in the year %996, it was illustrated

that the dividend a&ility for yielding long stoc* returns over the hori@on are present Gaver et al,

%99/. Two considera&le series were used &y them starting in the year %87/ wherein they too*

. monthly series and the 3 annual series. The result from this led towards depicting that only

marginal a&ility display is yielded &y dividends for predicting the return of stoc* mar*et in either

or in 3. "n Tor**o, Finland, %970, Gordon models application was tested Fran*furter et al,

-$$-. The sample selected constituted of -/ participating organi@ations selected &etween the

years %97%>%98; &ut the results appeared to &e very discouraging in nature &ecause positive

correlation was found to &e present &etween the growth rate of dividends and the mar*et returns

on the stoc* mar*et.

4.4 !y"othe#i# of Dividend IrrelevanceThere was a &asic &elief of an increment in the value of a firm if the dividends are higher, this

&elief was in the place &efore the Miller and Modigliani!s seminal paper was pu&lished on the

policy of dividend. The &ird>in>the>hand was considered to &e the &asis of this &elief. Moreover,

in the very initial stages of the corporate history, it was considera&ly reali@ed &y the managers

that an essential position is held &y dividend payments that are highly sta&ili@ed in nature. "n a

very certain way, the reason &ehind this were the investor!s analogy which with government

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&onds (older et al, %998. A much sta&ili@ed amount of interest was paid through the &onds and

further corporate managers engaged in finding that shares that have the performance similar to

the &onds are the ones that are preferred &y the investors. As per various researchers in the years

of %9/$s clearly mentioned that the corporations! only purpose was to pay for the dividends in

order to increase the prices of the shares.

4.& $ommon Irrelevance %he#i#"t was a common &elief that the organi@ations that pays higher amount of dividends must price

their shares at a higher level accordingly. (owever, the demonstration a&out calculated

assumptions on the capital mar*ets, made &y the MHM in the years of %9;$!s, actively declared

the dividend policy to &e of no relevance.

Applied the same in a capital mar*et of assumed perfection as per MHM, the dividend policy

showed no change in an organi@ation!s cost of capital or the stoc*. Moreover, the wealth of a

shareholder is not effected &y the decision of the dividends which drives them to remain

indifferent &etween the capital gains and the devidents. The reasoning &ehind the indifference of

the shareholders was given &y MHM that their wealth is primarily affected &y the generation of

income from the investiment decisions that an organi@ation ta*es. (ence, there is no affect &y the

method of distri&uting the same income, &y which the dividends &ecome irrelevant. "t was also

argues that the value of the firm is only determined &y the core earning power that an

organi@ation possess and &y the decisions of its investments. The argument of MHM was entirely

&ased on the investors &eing rational and upon the perfect capital mar*et!s assumptions there

were idealistic. "t was also stated that the capitali@ed value of an organi@ation!s future earnings

were the &asis &ehind the calculations of evaluating an organi@ation &y the investors.

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MHM strongly suggested the investors to loo* at all of the dividend policies as effectively same,

due to the a&ility that can &e made in use &y the investors to create dividends that can &e

classified as homemade &y the simple procedure of portfolio ad)ustments which can &e carried

out &y the investors in order to meet with their own preferences.

There are certain assumptions of the capital mar*et &eing perfect that are necessary for the

hypothesis of dividend irrelevancy. The first is the indifferences &etween the taxes on capital

gains and dividends, the second factor as*s for a&solutely no costs of floatation or transaction

added &etween the duration of securities trade. 2#ual and free access to all of the participants in

mar*et for the same information is considered to &e the third. Fourthly, there is not supposed to

&e any interests! conflict &etween the security holders and the managers. "t is also of a very vital

importance that all of the participants that are present in the mar*et are considered to &e the price

ta*ers.

4.6 '(' Irrelevancy Proof "n order to further understand the dividend irrelevancy proposition &y the MHM, the valuation

model of common stoc* is presented &elow that is the model of dividend discount. "t implies the

stoc*!s value is future dividends! function and the stoc*!s rate of return is

also re#uired. The sample of the study in this research was focused with

calculations only on those firms wherein the policy of not paying dividends was applied already.

Generally, the results were in alignment to the hypothesis of the research with regard to the

decision of issuing newer securities imply data on the assessments done on managers for an

organi@ation as it is also the firm!s asset and the value is possessed for a firm in an employee as

well.

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(owever, in the perfect capital mar*et, the rate of return on the shares of e#uity for the investor

is e#ual to dividends adding the gains from the capital. As per the MHM the

dividends do not appear while calculating along with the operational cash flows, rate of return

re#uired and the investments are not considered to &e the functions of the policy of dividend.

Moreover, the common hypothesis with regard to this study was ta*en up in the study performed

&y Fama, Fisher, Densen and 5oll, -$$9 where price reactions were explained in order to analy@e

the nature of dividend stoc*s and divided stoc*s. The signal of these announcements was higher

than the future earnings as per the expectation which also has the tendency to afterwards impose

the dividends of higher value.

4.7 %he conce"tion of earnin) theoryThe propositions given &y Modihliani>Miller, Finland were tested further &y Ili>lli, %979 and

uvas, %990. According to their researches, they found a lin* to &e present &etween capital cost

and the valuation mar*et with regard to an organi@ation especially when the theory provided &y

Modigliani and Miller was applied. Ii>lli sought for more measures &y which assumptions can

&e modified with regard to the theory in comparison to the mar*ets of capital nature Adams et

al, %990. This depicted the results to imply that according to the dividend policy given &y

Modigliani>Miller, there was no impact of the same over any firm!s value in the mar*et.

A different perception however was adopted &y uvas, %990 wherein it was illustrated that the

e#uity value of a firm &ecomes e#uivalent to $ when cash flow expectation with regard to the

sta*eholders has a positive nature 'iamond, -$$7. A su&stitutive definition was provided &y

uvas of the e#uity cost which is free from the Modigliani>Miller!s models draw&ac*s.

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Furthermore, valuation models were also derived &y uvas with regard to finding out more

opportunities of growth for the organi@ations.

0.8 Theoretical review of Macroeconomic factors and 'ividends

There are various researches which have tried to provide explanation on the share!s mar*et price

with the help from several information sources. The division of this information can &e done in

the form of - categories inclusive of data under the manager!s control and data out of the control

of management Gaver et al, %99/. The inclusion in second group is of factors of

macroeconomic considerations. "t has &een assumed that efficiency &eing semi>strong implies

that the mar*ets for stoc* involve all information in pu&lished form. "t simply seems from this

perspective that these mar*et has a tendency towards reacting to earnings made and possess

some characteristic elements of economy. Announcements of dividends have o&tained mixture of

results 2aste&roo*, %980. Factors of macroeconomic nature have a varia&le of explanatory

having their concern over stoc* prices as evident from the stoc* mar*et of &ut the same is

not the situation in other countries such as Finland wherein performed studies &y 3)ellman>

(ansen have found managers of Finland view the issues of microeconomic as more essential

than the issues of macroeconomic perspectives and therefore the macroeconomic considerations

are not important for them especially when dividend decisions are to &e made. "na accordance to

the study performed &y 3allun*i>Marti*ainen, -$$8, the connection &etween factors of macro>

economy and returns from stoc* are instead specific to samples and are variants of time 2ades et

al, %980. As per the considerations on macroeconomic factors in Finland, there is no &asis of

these factors on policy of dividends.

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0.9 'ividends and Models of 2#uili&rium

- models of e#uili&rium explain mostly the &ehavior of stoc* mar*et inclusive of the model of

pricing the capital assets and the pricing theory ar&itrage. The relationship present &etween the

firm value and dividends involve testing mostly in the perspective of the pricing model of

+apital Assets Fran*furter et al, -$$-. The most inherent presumption &eing made is the

application of general +APM with regard to policy of dividend. se of +APM in an implicit

manner ta*es the assumption that hypothesis is irrelevant providing an indication towards a

strong capa&ility of the researchers for accepting their irrelevant status. 2xpected returns from

e#uity and anticipated yields of dividends are related together leading towards a positively

related hypothesis to develop. The &efore tax return differential testing has also &een done in

various studies such as Brennan, -$$% wherein formulation of the model of pricing &ased on

capital assets after payment of tax was developed.

0.%$ 'ividend policy ignaling effect

The dividends signaling effect ta*es up the assumption that dividends have the capa&ility of

conveying data on earnings that can &e gained &y a company. 'ividend changes provides a

message for the investors on the future flow of cash for an organi@ation. "t was further

hypothesi@ed in the critical study presented &y Modigliani>Miller, %9;% that the reduction of

dividend helps in conveying data that provides assurance on earning prospects for a firm in the

future Friend et al, %9;0. The general hypothesis however is inclusive of earnings in the future

and dividends &eing inter>related. Further the studies proceeded on examining the fundamental

reason &y which the impact on future earnings can &e laid &y the policy of dividends. These

studies were inclusive of the propositions presented in the research study of 1intner, %96; and

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&een various studies performed to analy@e the stoc* mar*et reaction towards the announcements

in dividends. "n fact, these studies have also presented analysis on the mar*et of stoc* efficiency

in the semi>strong nature.

The results from empirical studies have depicted that the dividends signaling effect is visi&le

efficiently from the data ta*en from .. The &asic hypothesis with regard to this study was

ta*en up in the study performed &y Fama, Fisher, Densen and 5oll, -$$9 where price reactions

were explained in order to analy@e the nature of dividend stoc*s and divided stoc*s. The signal

of these announcements was higher than future earnings expectation which also has the tendency

to later impose higher dividends on cash.

n the testing of dividends as per the study of Taylor, %979, it was found that there is lesser

unanimity present in the concluding section rather than in several areas to test the reactions.

There was a further possi&ility that the announced earnings in the same stipulated time was

e#uivalent to the dividends raising concerns for the effect of signaling to develop.

0.%% 'ividend Policy &ehavioral models

'ividend policy &ehavioral models have ta*en up the assumption that the changing dividends are

explaina&le &y the dividends in the last period and the dividends targeted which can lead towards

&eing expressed in the form of periodic earnings fraction (older et al, %998. The initial

pu&lication of 1intner, %96; illustrated the general model in order to investigate the application

of dividend policy. The &asis of this model was on interview sets ta*en as a data collection

instrument wherein the participants were managers and they were providing their perspective

a&out their firm!s policies of dividend. "t was further illustrated in the study that across firm!s

dividend policies do not have any uniformity (owe et al, %99-.

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The #uestion of sta&le policy of dividends was tested &y Mantripragada, %97; in order to identify

the relationship of this policy with the prices of shares in the mar*et. The hypothesis of sta&le

dividend argued that the share!s mar*et price with sta&le payments of dividends need to &e *ept

at a high position that the similar share prices in the mar*et with regard to payments &ecause

they involve considera&le fluctuation. There was however only less support gained &y this

theoretical hypothesis as the dividend policies insta&le nature was evident to mostly all the

researchers.

By using the analysis of discriminants, a model was developed &y 3ol& %98% on the &asis of

economic factors and institutional factors for determining the dividends payment and for

predicting the annual cash changes dividend with regard to any particular firm Gerald et al,

%99-. The most crucial factor however in this study was given to li#uidity and a&ility of profit

ma*ing of a firm.

+onclusion to the chapter

A.G Barr Plc has, what can &e descri&ed as a progressive dividend policy, which implies that the

decision ma*ers at the company wish to maintain or *eep increasing dividend pay>outs year after

year. This year, the dividend payout has increased &y a&out 7.7C. This does not imply that

earnings will not fluctuate over time, however, it can &e seen as the Board!s confidence in the

future propositions of the &usiness and the sta&ility in its investment cycles. "n doing so, they

endeavor to stri*e the perfect &alance &etween the interests of the company for future

expansions etc. as well as managing the external sta*eholders of the company such as

creditors and also providing confidence for the shareholders. Moreover, after ensuring there is

enough surpluses for &usiness related investments, and financing the progressive dividend policy,

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and handling the de&t o&ligations of the company, the company may decide to give &ac* some

extra cash to its shareholders in the form of &uy &ac* or repurchase of shares.

As discussed in the review of the literature on dividend policies and models, a growing dividend

payout is generally a sign that the company!s finances are in a good health. (owever, there is

also a ris* of Jwindow dressingK of the Financial tatements. (owever, higher dividend pay outs

do not suggest a window dressing, especially in the case of A.G Barr plc as the Total "ncome of

the company has seen consistent growth on a year to year &asis, and this has resulted in &etter

compensation to its owners.

The dividend policy at A.G Barr plc gives a &oost to share holder confidence. As evidenced &y

Mantripragada, %97;, growing dividends point to sta&ility in a company!s operation and hint at

good prospects for the future.

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Moreover, in order to maintain its progressive dividend policy, the company may sacrifice some

of its future expansion or operational plans, to meet its dividend re#uirements. This &ecomes a

sort of a paradox for the company, as it may declare higher dividends today, which may signal

some good health in the finances of the company, &ut, it is actually sacrificing future profits on

the &asis of decision not to invest in such operations in the future, which, in turn may lead to

lesser profits in the future, and hence, a lower capacity to pay dividends.

To conclude, while growing dividends are a good sign of health at a company, and a move that is

welcomed &y its shareholders, and loo*ed upon favora&ly &y its external sta*eholders, it is a

mista*e to loo* at it solely as a sign of prosperity. A greater analysis into the operations of the

company, in this A.G Barr plc needs to &e called for, and not )ust a loo* at its growing dividends.

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6. The +apital tructure 'ecision

6.%. "ntroduction

The capital structure is the mixture of de&t and e#uity of a company. "n other words, the capital

structure reveals the proportion of de&t and e#uity. (ence, the capital structure can &e considered

as the ratio of total de&t to total e#uities. n the other hand, leverage is somewhat different from

the capital structure, yet it has association with the capital structure. 1everage can &e measured

&y the dividing the firm!s de&t with its capital. "t can &e used to chec* the proportion of the de&t

level in a firm. (ence it is used alternatively to explain the capital structure. Both de&t and e#uity

methods are used to measure the firm!s capital structure. "dentifying the proportion of

components of capital structure helps the company to maintain cost of capital. The optimal

capital structure varies with firms and sectors in which they operate.

+ertain conditions influence the capital structure. These may or may not affect the firm!s value.

This can &e identified with the help of theoretical and empirical wor* &ased on the Modigliani

and Miller %968. This approach proposes the value with irrelevance of leverage. "t is reasoned

&y many researchers such as cott %97; and 1eland %990 that a &alance &etween tax &enefits

and the &usiness disruption costs also *nown as &an*ruptcy of de&t results in a perfect mix of

de&t and e#uity. The reasoning that optimal mix of finance may&e resulted from &alancing tax

&enefits of de&t and the distress costs of de&t is further supported &y the studies &y Altman

%980 and pler and Titman %990. Another type of reasoning argues that a &alance &etween

agency costs and &enefits of de&t will help in resulting an optimal financing mix Densen and

Mec*ling, %97;L Densen, %98;.

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+apital structure is important to value the firm as it affects the cost of capital. +ost of e#uity can

&e calculated &y using the current dividend that the company pays, the current mar*et price of

the company!s share and expected growth rate of dividend. As per the dividend discount model

the value of stoc* is determined &y dividing the dividend per share &y su&tracting the dividend

growth rate from the present value at discount rate. This model is used &y investors to estimate

the future dividends &ased on the historic dividend growth rate.

"f firms evaluate the income>&ased valuation methods li*e discounted cash flow, they apply a

present value discount rate. The expected cash flows are turned into present value using the

discount rate which is &ased on the weighted average cost of capital

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&etween owners and the holders of &onds. This can &e done for the pro&lems of underinvestment

or su&stitution of assets. Mason %99$, the pro&a&ility that the firm will issue de&t will &e lessened

due to the existence of non>de&t tax shields. This is pointing to how important the tax is to the

capital structure decision.

"t is o&served negative relationship &etween de&t and growth options in certain instances. "n such

instances, there has &een indirect evidence which suggests the relevance of underinvestment

pro&lems to de&t policy Graham, %99;L Dohnson, %997. Based on the results from Titman and

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The results have found that generally the more profita&le the firm, the less li*ely it is found to &e

dependent on external sources of financing. This theory has &een further supported &y Masulis

and 3orwar %98; and Mi**elson and Partch %98; which show a negative mar*et reaction to

seasoned e#uity issues.

The recent literature that has &een produced in the corporate finance sector found that there has

&een an increasing interest in financial management practices among firms which are in

emerging economies as well. The desire to compare the financial &ehavior of firms which are

placed in very different institutional settings is one of the main motivations for conducting such a

study. This comparison is now &ecoming easy with the help of the increasing availa&ility of

trustworthy data. ne of the examples of such study is the study on capital structure decisions

which are made &y small and medium si@ed &usinesses in :ietnam, conducted &y 4guyen and

5amachandran -$$;.

The results of the study have found the :ietnamese average leverage ratio is similar to that of

firms in the .. an approximate of 0$ percent even though the country is characteri@ed &y a

&an* &ased financial system. Furthermore, it is also found from the study that the :ietnamese

have a strong dependency on short term credit almost to the extent of completely ignoring long

term de&t. The :ietnamese enterprises with higher amount of growth options tend to have a

higher leverage when compared with their counterparts of the .. 5a)agopal, -$%$.

Moreover, it has &een found that the tangi&ility of assets which are presumed to mitigate the

asset su&stitution pro&lem have a negative effect on leverage. And on the other hand, the

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&usiness ris* and firm si@e are found to have a positive effect to de&t use. These findings have a

lot of variation with the theory and with the common &ehavior of firms in the .. corporate

sector. The variation o&served in the findings a&ove shows the value of a comparative study of

firms which are operating under different organi@ed, governing, and structural regimes.

"n order to o&tain the value of e#uity, expected cash flows are discounted to e#uity. This includes

the residual cash flows are all the expenses have &een met, tax o&ligations and interest and

principal payments at the cost of e#uity 5a)agopal, -$%$. "f the expected cash flows are

discounted to the firm, the value of the firm can &e found out. This includes the residual cash

flows after all the operating expenses and taxes have &een met.

From the variation o&served in the findings, the importance of the comparative studies of firms

which operate under different institutional regulatory and structural regimes. 'epending on the

climate in which a firm operates, the financing policy may &e influenced in mar*edly different

ways &y a give set of explanatory factors.

"n order to contrast the results of the :ietnamese study, the results of upanvan)i -$$;, can &e

cited. This study has tested various received theories of capital structure &y using data for firms

in Dapan, 3orea, (ong 3ong, ingapore, Malaysia, Philippines, Thailand, and Taiwan. The study

has given results which are in line with the results for the firms in the .. "t is found in the

study that the financial leverage of the Asian firms! studies is positively related to tangi&ility, and

negatively related to growth options 5a)agopal, -$%$.

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6./. The Traditional Approach

"n traditionalist theory, people generally consider that a company!s value will &e influenced when

the cost of the company is changed. They consider that the cost of capital will &e the lowest for

the moderate level of de&t. "n this situation the value of a company will &e the maximum. This is

the optimal capital structure of a firm.

6./.%. 2xplanation

As per this model firm has an optimum capital structure and the value of firm increases if the

financial leverage increases. This implies the lower cost of capital with a rise in the de&t share in

firm!s capital structure 3aviyani et al., -$%0. 3anani Amiri, -$$6. As per this approach firm

raise their de&t to increase their mar*et value. The increase of de&t retains the capital structure in

an optimum due to which weighted cost of capital is minimum and mar*et value is maximum.

nder this approach, it is assumed that the returns of shareholders are taxed at a mixed rate, the

distri&utions are su&)ect to dividend tax rate and retained earnings are lia&le to capital gains tax.

(owever, the rate is reduced to depict the deferral tax advantages Auer&ach, -$$6.

6./.-. Aside

The traditional approach is logically defective for the grown>up firms whose e#uity capital

source is retained earnings. This is &ecause this approach overloo*s the primary tax &efits of

retained earnings and avoids current taxes on dividends Auer&ach, -$$6.

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6.0. The 2conomic Approach

nder this approach the MM approach is analy@ed. According to the Modigliani>Miller

proposition, if there were no costs of separation along with no government dairy support

program, then the cream plus would result in giving the same price as the whole mil*. The

argument &asically states that if the amount of de&t is increased as the cream in the a&ove

situation, the value of outstanding e#uity which can &e e#uivalent to s*im mil* in the a&ove

situation will &e reduced :illamil, -$$8. This means that if the safe cash flows are sold off to

de&t holders, the firm will have a lower value e#uity while *eeping the total value of the firm

unchanged.

The a&ove mentioned theorem has given two important and &asic contri&utions. The first is that

it represent one of the first formal uses of a no ar&itrage argument in the context of modern

theory of finance even though the law of one price is longstanding. Furthermore it has

contri&uted fundamentally why irrelevance fails around Theorem!s assumptions which areE there

will &e un&iased taxesL there will &e no capital mar*et frictionsL credit mar*ets can &e accessed

symmetrically and the financial policy of firms do not disclose any information :illamil, -$$8.

6./.%. MM Propositions without Taxes

Modigliani>Miller theory MM theory is the foremost theory to encounter the traditional

thin*ing and the effect of capital structure of the firms. According to Modigliani and Miller

%968, it was assumed that each firm &elongs to a ris* class. A ris* class is a set of firms which

have common earning across states of the world. (owever, tiglit@ %9;9 has shown that this

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assumption is not needed. "t is stated that the relevant assumptions are vital &ecause they set

conditions to have an effective ar&itrate.

According to the Modigliani>Miller approach &oth the value of firm and its cost of capital are

independent. (ence, the de&t and e#uity mix is not relevant for determining the value of the firm.

(ere the capital mar*et is assumed as perfect without transaction costs, and corporate taxes.

The a&ility of the investors to undo the financial actions of a firm has given life to the #uestion

whether firms which issued e#uity were losing stoc*holder money in the form of corporate

income tax payments. (owever this #uestion has &een resolved &y Miller %977. "t has &een

shown that higher after tax income can &e generated &y a firm if the firm increases the de&t

e#uity ratio. "t is also said that this additional income can &e used to give higher payout to

stoc*holders and &ondholder &ut cannot &e used to increase the value of the firm.

The main core of the argument made is that the more de&t is su&stituted for e#uity, the more the

proportion of firm pays in the form of interest on its de&t increases relative to dis&ursements in

the form of dividends and capital gains on e#uity. "t is also argued that higher amount of taxes on

interest payments when compared to e#uity returns will lessen or completely remove the &enefit

of de&t finance to the firm.

From the studies of Modigliani and Miller %9;/ and Miller %977 have resulted that the value

of a firm is not dependent on the dividend policy. n the other hand, Bhattacharya %979 and

others have shown that the dividend policy of a firm is one of the expensive indicators of the

state of a firm and hence it is relevant in a class of models which haveE stochastic firm earnings

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have asymmetric informationL the li#uidity of shareholder a re#uirement to sell ma*es firm

valuation relevantL and iii deadweight costs that are re#uired to pay dividends, refinance cash

flow shoc*s or protection under>investment :illamil, -$$8.

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shown &y Alchian and 'emset@ %97- that due to the separation of ownership and control of

capital, leasing involves agency costs. "t is an important point to note that a lessee might not have

the same motivation to use or maintain the capital as opposed to the owner.

A dura&le goods monopolist, it is argued &y +oase %97- and Bulow %98;, might lease in

order to avoid time inconsistency. n the other hand (endel and 1i@@ari %999, -$$- made the

argument and showed that the dura&le goods monopolist might lease in order to lessen

competition or contrary choice in secondary or used goods mar*ets. "t is shown &y 2isfeldt and

5ampini -$$6 that while compared to &uying via secure lending, leasing has a repossession

advantage. They argue that this advantage is a trade off against the cost of standard ownership

versus control agency pro&lem.

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48

of traditionalism &etween the capital structure determinants in developed economies and 2gypt.

+ontrasting the results &y 2ldomiaty -$$7, 'elcoure -$$7 has found that some of the capital

structure theories esta&lished mainly for developed countries are convenient to the emerging

nations also especially in central and 2astern 2uropean emerging economies. These economies

include 5ussia, Poland, the +@ech 5epu&lic, and lova*ia. Moreover she has find small amount

of evidence which supports the trade off and agency theories of capital structure. Furthermore the

firms used in her study seem to follow a modified pec*ing order in their financing choice. These

firms had the order of preference of retained earnings, external e#uity, &an* de&t, and mar*et

de&t.

6.7. +onclusion

This chapter reviews the earlier literature on the capital structure decisions. "t provides a

theoretical &ac*ground to meet the aims and o&)ectives of research. :arious approaches li*e

traditional approach and MM approach are studied in this chapter. The wor* of several

researchers on capital structure decisions and various theories on it are also examined.

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49

;. +ompany Analysis

;.%. "ntroduction

This chapter reviews the strategic capa&ilities of A. G. Barr, &oard of directors, capital structure,

share holdings, leverage, its financial performance, profita&ility, li#uidity, cash flow analysis and

term &rand &uilding activity. The company also focuses in increasing their employees to meet

their &usiness o&)ectives-6. "t also ta*es several steps to improve their executional capa&ility. ne

such example is the initiation of centralisation to improve reaching their customers A.G. Barr

Plc. Annual 5eport, -$%0.

A. G. Barr constantly tries to improve their &rands &y focusing on consumers and geographical

areas.

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&0

operating efficiencies &y controlling costs. The company follow leadership principles toward

their employees. "t implements various social responsi&ility plants to sustain in the long>term

A.G. Barr Plc. a, -$%0.

A. G. Barr has increased its operational efficiency &y overcoming the challenges in the initial

states of upgrading its production plants. For instance when the company wanted to upgrade its

+um&ernauld production plant, it faced various operational challenges. Iet, the company

overcame them &y considering them as short>term issues and increasing their manufacturing

capacity. "n certain cases the company has to &ear high raw material costs, &ut even in such cases

it does not pass them to their consumer rather trying to offset them &y improving their

operational efficiency. 2ven the soft drin*s mar*et is volatile. The company!s successful strategy

is that popular &rands and effective capa&ilities gain them good reputation in the mar*et and

achieved success. The constant efforts of the company to offer fruitful innovations to the mar*et

and customers helped them to grow and esta&lish themselves as a successful player in the sector

Mc+ulloch, -$%%.

;./. Board of 'irectors and +orporate Governance

A. G. Barr has 9 &oard of 'irectors. 5onald G. (anna, 5oger A.

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&1

success of the Group. The directors can exercise their powers with su&)ect to the +ompany!s

Articles of Association-7. Both the +hairman and +hief 2xecutive act in separate roles. The

+hairman leads the Board. The +hief 2xecutive is responsi&le for all &usiness of Group-8.

A. G. Barr has good standards of corporate governance which are compati&le to the 3

corporate governance and +orporate Governance +odes wherever is applica&le. The +ode

regularly monitors the activities of the +ompany Board and its committees to ma*e sure that they

are effectively performing their duties A.G. Barr Plc. Annual 5eport, -$%0.

The +ompany has three Boards = the remuneration committee, the audit committee and the

nomination committee. Ade#uate training will provided to new mem&ers of the &oard. These

&oards review the performance to chec* the internal performance of all the individual directors.

A. G. Barr has regular interactions with their shareholders. The +hief 2xecutive conducts

meetings twice a year. All shareholders can avail this opportunity to interact and *now more

clearly a&out the performance and operations of the company 4xt&oo*.com, -$$8.

"nternal control system is maintained in the company to protect the investments of shareholders

as well as company assets. The company follows the procedures of Turn&ull report approved &y

27 ./. arr Plc. Annual Report and Accounts 2014+ ". 34.


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&2

the .3. 1isting Authority. As per the specifications, the company monitors, recogni@es,

estimates and controls the pro&a&le ris*s from time to time. Furthermore, the internal auditors of

the company evaluate the internal control throughout the company and provide statements on it

4xt&oo*.com, -$$8.

;.0. +apital tructure

A. G. Barr Plc. has many options to ad)ust its capital structure. These include the issuance of new

shares, modification of dividend payments to shareholders, and returned capital to shareholders.

Thus, the company maintains &alance &etween the current and long>term growth to yield returns

to their shareholders A.G. Barr Plc. Annual 5eport, -$%0.

&earing loans, the net of cash and cash e#uivalents and &orrowings

are used to calculate the net de&t. This ratio aids A. G. Barr in planning its capital re#uirements

in the time of re#uirement A.G. Barr Plc. Annual 5eport, -$%0. "t is &elieved &y The Group

that, an efficient capital structure and a satisfactory level of financial flexi&ility can &e achieved

while maintaining capital discipline in relation to investing activities &y the current net

de&t2B"T'A ratio along with existing shares in issuance-9. More than two>thirds of the capital

structure of A. G. Barr is constituted with e#uity and reserves. The remaining part is constituted

with loans, &orrowings, trade and other paya&les and provisions.


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&3

;.0.%. hareholding

The Group has %%;,7;8,778 issued and fully paid shares worth of 0,8;6,/;;, $$$. A. G. Barr

contains shareholding as ma)or part of its capital structure. The e#uity part consists of share

premium, share options reserve, retained earnings in addition to the share capital/$.

;.0.-. 1everage

The leverage of A. G. Barr is very low when compared to its e#uity. As per

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;.6.%. Profita&ility

The gross profit margin of A. G. Barr is 06.06C and 06./%C in -$%/ and -$%0 respectively. The

gross margin of its competitors, Pepsi is 6/C/-

, 4ichols 08.0-C//

and Britvic 6%.-;C/0

. The net

profit margin of A. G. Barr is %$.;9C and %%.$9C in in -$%/ and -$%0 respectively. The net

profit margin of +ad&urys is ;.87C/6. The operating margin of A. G. Barr is %/./8C and %/.;6C

in -$%/ and -$%0 respectively. The operating margin of +ad&urys > 7.0/C/;, Pepsi > %6C/7,

4ichols >%7.8$C/8 and Britvic > 9.%%C/9. The profita&ility ratios of A. G. Barr indicates that the

company!s gross margin decreased from -$%/. Iet, its operating profit margin and net profit

margin are slightly improved from the previous year.

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&&

Gross Profit

Margin

06.06C 06./%C

4et Profit

Margin

%$.;9C %%.$9C

perating Profit

Margin

%/./8C %/.;6C

Ta&le % hows the Profita&ility 5atios of A. G. Barr in -$%/ and -$%0

4ame of the

5atio+ompany

name

A. G. Barr Pepsi Britvic +ad&ury 4ichols

Gross Profit

Margin

06./%C 6/C 6%.-;C > 08.0-C

4et Profit

Margin

%%.$9C %$./8C 0.79C ;.87C 7.9C

perating

Margin

%/.;6C %6C 9.%%C 7.0/C %7.8$C

Ta&le - hows the Profita&ility 5atios of A. G. Barr and its +ompetitors

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&6

;.6.-. 1i#uidity

The current ratio of A. G. Barr is $.8- and %.;9 in -$%/ and -$%0. The #uic* ratio is %./0 and

$.;% in -$%0 and -$%/. The current ratio and #uic* ratio of +ad&urys are $.8; and $.;/0$

and

Pepsi are %.-0 and $.9/0% respectively. The cash ratio of A. G. Barr is $.-9 and $.$% in -$%0 and

-$%/. The cash ratio of Pepsi is $.6;0-. The li#uidity ratios indicate that A. G. Barr has slightly

improved its ratios from -$%/. Iet, the ratios of 4ichols are far ahead of it. +ompetitors such as

+ad&urys and Pepsi have poorer ratios than A. G. Barr.

4ame of the

5atio

-$%/ -$%0

+urrent 5atio $.8- %.;9

Nuic* 5atio $.;% %./0

+ash 5atio $.$% $.-9

Ta&le / hows the 1i#uidity 5atios of A. G. Barr in -$%/ and -$%0

40 dvfn.com. &adbur !c$+eppes &ompan )inancial "n'ormation.

41 Pe"i#co.com. PEP &ompan )inancials.

42 *D.com. PEP &ompan )inancials.

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&7

4ame of the

5atio+ompany

name

A. G. Barr Pepsi Britvic +ad&ury 4ichols

+urrent 5atio %.;9 %.-0 %.$9 $.8; -.77

Nuic* 5atio %./0 $.9/ $.70 $.;/ -.;%

Ta&le 0 hows the 1i#uidity 5atios of A. G. Barr and its +ompetitors

;.6./. +ash Flow Analysis

The cash flow analysis of the company reveals the following informationE 0%,788,$$$ of cash is

generated from the operating activities of the company. drin* mar*et, A. G. Barr performed well with its renowned &rands

including "rn>Bru, 5u&icon and the Barr &rand. The company!s revenues increased &y ;.6C in

that financial year than the previous year. A revenue growth of 0.;C was achieved in that year.

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&8

The share prices rose &y $.00C which improves its stoc* worth of a&out 6;$m Mc+onnell,

-$%-.

A. G. Barr focuses on increasing its revenue &y selling its popular &rands li*e "rn>Bru, Ti@er and

5u&icon rather than on ac#uisitions. The company!s revenues increased &y 6.-pc till second

wee* of May -$%0 which shows a constant performance. The company is spending heavily to

achieve huge revenue there&y the profit. A. G. Barr efficiently tries to reduce its de&t and plans

to use some portion of the &uilt>up cash to improve its &ottling facilities. This reveals that the

company!s capital expenditure will &e increased to around %9m from the previous year. The

company still has enough free cash flow to cover dividend payments of a&out %/m for the full

year. This is %%.8p per share, nearly - times. This indicates that the company!s dividends are

increasing at a rate higher than the rate of inflation. The company!s long>term investors can have

sound &enefits due to its dou&le digit sales growth Ficenec, -$%0.

The company reported a growth of 6.; percent in its revenue of first half year -$%0. According to

4ielsen, A. G. Barr is ahead of total soft drin* mar*et in the 3 in the first half of the year -$%0.

The value of mar*et has increased &y %.;C yet the volume has decreased &y $./C. "t is

anticipated that high competition will &e continued in the next half of year -$%0 among the top

rivals of the 3 soft drin* mar*et mainly &etween A. G. Barr and Britvic. The shares of the firm

increased %8C than the previous year ma*ing the company!s &usiness value at 7/7m 1ittle,

-$%0.

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&9

The strengths of A. G. Barr are good &rand reputation with many customers in various

geographical areas. "t has s*illful employees and &oard of directors. The wea*nesses include the

followingL it mainly focuses on selling its popular &rands. "t should also focus on creating some

more new &rands and tastes. As the customers can easily change their tastes in this sector, the

company should update according to their emerging needs. The company ta*es some hasty

decisions. ne such example is the proposed merger with one of its competitors, Britvic. But,

later it changed its mind and a&orted the decision. "t has some inefficient &rands such as 3A that

do not contri&ute to a ma)or portion of the company!s revenue. o, A. G. Barr should either

improve the &rand to get more revenues or create a new &rand with more taste according to the

preferences of customers. The opportunities include the franchises and partnerships to improve

its revenue and &rand. The threats are severe competition from the ma)or competitors li*e +oca>

+ola and Pepsi.

;.7. +onclusion

A. G. Barr has various capa&ilities to meet its &usiness o&)ectives. The company also tries to

improve its capa&ilities. The &oard of directors and employees of the company helps it to meet its

strategic o&)ectives. The capital structure of A. G. Barr mainly consists of e#uity capital, retained

earnings and reserves. nly $.% of its capital structure is de&t. The company!s profita&ility and

li#uidity are improved from the previous year. Iet, compared to their competitors, it has to

improve further. The company!s production expenses are increased in the current year due to

which the gross margin of A. G. Barr has decreased. (ence, it should also focus on controlling

these expenses. The cash flow analysis reveals the &etter performance of A. G. Barr in the current

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year as it could meet its current and operating o&ligations with ease. The company should focus

on more efficient strategies to compete with its competitors. sing its strengths such as &rand

reputations and more customers, the company should overcome its wea*nesses.

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7. +ompany hare :aluation

7.%. "ntroduction

This chapter examines the models for share price evaluation and their limitations. ensitivity

analysis and technical analysis are also performed in this chapter. Based on the previous year

figures, this chapter focuses on assuming the figures for the next five years.

7.-. 'ividend 'iscount Model

'ividend discount model is used to evaluate the share price of the firms using the pro)ected

dividends &y discounting them to the present value. 'ividend 'iscount Model is used to find

evaluate discounted cash flow method and discounted a&normal earnings.

Calculation of Pro,ecte" !ivi"en" for the ne-t ' ears

The pro)ected dividend O '$ x % g O 8.%90/%.%9/6 O 9.77p

'% O 9.77 %.$;-% O %$./7p

'- O %$./7 %.$;-% O %$.69p

'/ O %$.69 %.$;-% O %%.-6p

'0 O %%.-6 %.$;-% O %%.96p

'6 O %%.96 %.$;-% O %-.;9p

7.-.%. 'iscount 5ate

'iscount rate is essential to perform valuation and to find out weighted average cost of capital

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r eO r f Q R2r m = r f S

where r e is the return on e#uity, is ris* free rate, is used to measure the systematic ris* of A. G.

Barr and R2r m = r f S is the ris* the premium. The ris* free rate is -.8$00C which is yield on %$

year gilt. The Q for A. G. Barr is $.;;06. The e#uity ris* premium for 3 is 6.%70;C. "nserting the

figures in the formula, the cost of e#uity e#ual to ;.-%--C.

7.-.-. 'iscount +ash Flow Method

+ash flows and discount rates should never &e mixed and matched. ne of the most important

errors is to avoid the mismatching cash flows and discount rates. This is due to the fact that

discounting cash flows to e#uity at the weighted average cost of capital will lead to an upwardly

&iased estimate of the value of the firm.

The discount rate can either &e a cost of e#uity or a cost of capital. "f e#uity valuation is &eing

done, then it is a cost of e#uity or if the firm is &eing valued, then it is considered a cost of

capital. "t should &e noted that discount rate can &e in either nominal terms or real terms. "t

depends on whether the cash flows are nominal or real 'amodaran, -$%-.

The discounted cash flow method assumes that the dividends paid &y the company are e#ual to

the free cash flows to e#uity. This section helps to forecast the free cash flows to e#uity.

44 loom5er). 2014. htt":;;www.5loom5er).com;maret#;rate#

5ond#;)overnment5ond#;u;

4& Di)ital oo. 2014.htt":;;www.di)italloo.com;com"anyre#earch;10937;arr

http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/http://www.digitallook.com/companyresearch/10937/Barr_A_G/company_research.htmlhttp://www.digitallook.com/companyresearch/10937/Barr_A_G/company_research.htmlhttp://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.htmlhttp://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/http://www.digitallook.com/companyresearch/10937/Barr_A_G/company_research.htmlhttp://www.digitallook.com/companyresearch/10937/Barr_A_G/company_research.htmlhttp://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

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The predicted income statement and &alance sheet are constructed &ased on the assumptions in

Appendix % and showed in Appendix -. The change in &oth the net operating wor*ing capital and

net long>term assets were su&tracted from 4PAT from -$%6 to -$%9. 'iscount rate of ;.-%--C

is used to get the present value of the free cash flow to e#uity. The e#uity value using '+F

method is shown &elo

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JOB # AUG6206N (1) (1) (1) (2)