Module Title: International Finance

Module Handbook 2020/21

Module Code: BMG704 (86966)

Course/s: MSc International Business

Department of Global Business and Enterprise

Ulster University Business School

Salman Iravani
Module Coordinator
Email: [email protected]

Office Hours: Online via email

 Table of Contents
1 Introduction.........................................................................................................................................1
2 Section A: Recent Development affecting Performance of Sainsbury Plc............................................1
2.1 Development One........................................................................................................................1
2.2 Development Two.......................................................................................................................2
3 Section B: Dividend Policy and Sources of Finance..............................................................................2
3.1 Dividend Policy............................................................................................................................2
3.1.1 Three Divined Theory:..........................................................................................................3
3.1.2 3-Years Dividend of Sainsbury’s Plc:....................................................................................3
3.1.3 How Sainsbury manages the risk associated with dividend.................................................4
3.2 Sources of Finance.......................................................................................................................4
3.2.1 Two Capital Structure Theory:.............................................................................................4
3.2.2 Source of Finance of Sainsbury Plc.......................................................................................5
3.2.3 How Sainsbury Plc manages its’ risk associated with borrowings........................................6
4 Section C: Ratio Analysis......................................................................................................................6
4.1 Profitability Ratio.........................................................................................................................6
4.1.1 Return on Capital Employed................................................................................................6
4.1.2 Operating Profit Margin.......................................................................................................7
4.2 Efficiency Ratio............................................................................................................................7
4.2.1 Inventory Turnover Days......................................................................................................7
4.2.2 Receivable Days...................................................................................................................8
4.3 Liquidity Ratio..............................................................................................................................9
4.3.1 Current Ratio........................................................................................................................9
4.3.2 Acid Test Ratio/Quick Ratio.................................................................................................9
4.4 Shareholders’ Ratio....................................................................................................................10
4.4.1 Earnings Per Share.............................................................................................................10
4.4.2 Dividend Payout Ratio........................................................................................................11
5 References.........................................................................................................................................12
6 Appendices........................................................................................................................................14
1 Introduction

Sainsbury Plc is the second largest super chain shop in United Kingdom. The company is
established in 1869 in London. Currently it is doing business in UK and Ireland with 1428 shops
(J Sainsbury Plc, 2020). Sainsbury do business aiming to deliver best with less money. This
assignment is assigned to me to find the financial risk and opportunities in terms of capital
structure. Choosing optimal sources of fund is another vital decision for finance manager. This
assignment is aimed to enable us to be familiar with this topic.

2 Section A: Recent Development affecting Performance of Sainsbury Plc

2.1 Development One

In 2019, November 17 first Coronavirus case was traced. In due course Covid-19 pandemic has
attacked London in late January 2020.

During the Covid-19 pandemic Sainsbury assumed that it will cost them £500 million profit
reduction (Harris, 2019). Besides Sainsbury Plc has faced £500 million additional cost to manage
safety for the customers and employees, absence of the employees, declaring protective plan for
the vulnerable employees (Butler and O'Carroll, 2020). To comply with the government rule,
Sainsbury has closed its’ Physical Argo shop. Now this shop is running completely on internet.

To cope with this unusual situation Sainsbury Plc’s strategic measurements are

 To prevent the employees being affected, Sainsbury limited the customer entry in its’
physical shop.
 To deal with this situation Sainsbury formulated an Incident Response Team which
provide strategic direction time to time (J Sainsbury Plc, 2020)..
 Sainsbury Plc’s management has proposed a series of guideline in Capital Market Day
(Coupe, 2019).
 To deal with situation Sainsbury Plc has started to implement its’ business recovery plan.
 Treasury Committee of Sainsbury formulated strategy focusing of revenue generation and
funding requirement.
 Sainsbury has developed new purchase plan to meet the unusual demand of the customer
so that the company can boost its sales during pandemic.

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2.2 Development Two
United Kingdom has decided to leave EU and EAEC which will be effective after 31 st December
2020 known as Brexit. After the back and forth discussion between EU and UK, finally UK has
decided to leave EU without any agreement about future commercial agreement.

Due to the uncertainty in Brexit, Sainsbury Plc will face supply shortage of meat, fish and dairy
products (Eley, 2019). Because above mentioned products will be checked and rechecked while
entering into the territory of Britain in the absence of any agreement. A lot of paper work and
physical inspection will be conducted then. This tedious process will add extra cost to the
product’s retail price. Sainsbury Plc’s half year profit has decreased to £9m from £107m because
of store closure resulting from Brexit uncertainty (Eley, 2019). Since Brexit decision is upon the
government of UK, Sainsbury has little room to do. But hence Sainsbury Plc has taken
measurements. Those are:

 Sainsbury Plc has created a new in managerial level named as “Head of Brexit Response”
and recruiting an efficient manager on that post (Calnan, 2020). The duties of that
manager will be identifying the threat and opportunities due to Brexit and formulates a
strategy based upon identified risks and opportunities.
 Sainsbury Plc could cut almost 2000 jobs to tackle Brexit uncertainty. (Mulier and
Chambers, 2017)
 Sainsbury Plc has formulated a Brexit Response Team which will mitigate the Brexit risk
from three stand point:-
o Delaying in borders, reducing fresh product availability, customer choices
o Tariff and currency fluctuations
o Supply chain
 Sainsbury continuously arranges discussion with government personnel to get updated
about Brexit and to mitigate the potential risk in Brexit.

3 Section B: Dividend Policy and Sources of Finance

3.1 Dividend Policy

Dividend policy is a set of strategies developed by a firm stating the rules, terms and condition
and the policy of declaring dividend.

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3.1.1 Three Divined Theory:
Dividend Irrelevance Theory: Merton Miller and Franco Modigliani developed dividend
irrelevance theory stating that pattern of dividend has not effect on share values or values of
firm. Miller & Modigliani also claims that shareholders create own profit plan in the form of
capital gain if the parent company does not declare dividend for any particular year (Brigham
and Ehrhardt, 2002).. For that reason the interest of shareholders does not become hampered
though dividend are not paid. They also claim that firm’s value depends upon the earning
capability and the business risk exposure.

Walter’s Model: Walter’s model is quite opposite model of Dividend irrelevance theory.
Professor James E Walter develops this model and claims that dividend policy has effect on
firms value (Samiksha, 2017). He also proposes that investment policy is an integral part of
dividend policy and interlinked with each other. He suggested that optimum dividend policy can
be formulated by the comparison between required rate of return and cost of capital.

Gordon Model: Gordon model is developed by professor “Myron Gordon” stating that firms’
value is sensitive to the dividend. Policy Myron Gordon assumed that investors are risk averse
and prefer certain returns over uncertain return (Samiksha, 2017). And so investors prefer current
dividend rather than future gain and willing to pay premium to receive current dividend.

3.1.2 3-Years Dividend of Sainsbury’s Plc:

Sainsbury Plc declared dividend every year from very beginning. It declares one interim and one
final dividend every year. But due to Covid-19 pandemic, Sainsbury decided not to declare any
final dividend in 2020. When earnings volatility will be removed, the management will declare
dividend then. Dividend payout history of Sainsbury Plc is as follows:

Year Dividend Growth

2018 9.7p N/A
2019 10.2p 5.15%
2020 (interim) 3.3p N/A

Current Yield (Data, 2020) 4.77%

Sources: Annual Report

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3.1.3 How Sainsbury manages the risk associated with dividend
If a company pays dividend every year it will cause the cash reserve to decrease. So declaring
dividend indiscriminately may satisfy some of the investors. But prudent investor will see this
incident as a red signal for the company. Because in future the company may face liquidity
deficit. So to cope with this situation, Sainsbury Plc has taken some necessary measurement.

 Sainsbury Plc has decided not to inject after £35 million any capital in this year. They
believe it will help them to reduce additional cost of capital any more (J Sainsbury Plc,
2020).
 Free cash flow achieving target is set as £500 million on an average within 2025 (J
Sainsbury Plc, 2020).
 Sainsbury Plc will try to reduce operating cost to fuel investment.
 Delivering net operating profit benefit will be stopped and thus it will reduce additional
cost of £20 million per year (J Sainsbury Plc, 2020).
 Sainsbury Plc plans to achieve double digit ROCE within next year.

3.2 Sources of Finance

Sources of finance are peoples, banks, lending institutions and financial institutions from where a
firm can raise its’ required capital. These sources can either be internal or external. Whether the
cost of external finance or internal finance is costly is a matter of argument.

3.2.1 Two Capital Structure Theory:

Net Income Approach: Professor David Durand proposed net income theory of capital
structure which states that a firm can increase its’ value by minimizing cost of capital. Cost of
capital is measured through Weighted Average Cost of Capital (WACC) (Brigham and Ehrhardt,
2002).. Because debt capital is cheaper than equity capital as a source of finance. This theory
stands upon some assumptions, those are: there is no taxes, cost of equity is higher than cost of
debt, proportion of debt in capital structure does no increase the risk of investors and dividend
payout ratio is 1.

Net Operating Income Approach: This theory is also proposed by David Durand and
considered one of the most popular theories of capital structure. But this theory differs from Net
Income Approach in various ways. This theory claims that changes in leverage or debt capital in

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capital structure does not affect the value of the firm. Because the benefit from increasing debt
capital will be equated through the increase required rate of return of the equity shareholders
(Brigham and Ehrhardt, 2002).. If debt capital is increased it will increase the bankruptcy risk of
the firm and thus equity shareholders will increase their required rate of return. Consequently
values of the firm will remain unchanged.

3.2.2 Source of Finance of Sainsbury Plc

From the balance sheet, it is obvious that Sainsbury Plc is highly leverage firm. Annual Report of
2020 reveals that the company raised its’ capital with 27% of equity capital and 73% of debt
capital

Capital Structure of “Sainsbury Plc” £m

Trade & Other Payable 4275
Amounts due to financial services and other deposits 6890
Borrowings 48
Lease Liabilities 510
Derivatives financial liabilities 53
Taxes payable 163
Provisions 108
Total Current Liabilities 12047 43.12%
Other payable 11
Amounts due to financial services and other deposits 1204
Borrowings 1248
Lease Liabilities 5264
Derivatives financial liabilities 36
Deferred Income tax liabilities 265
Provisions 89
Total long term liabilities 8117 29.88%
Total liabilities 20164 73%
Called up share capital 634
Share premium 1159
Merger reserve 568

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 Capital redemption reserve 680
Other reserve 168
Retained earnings 4068
Perpetual capital securities 248
Perpetual convertible bonds 248
Total stockholder’s equity 7773 27%
Total liabilities and stockholder’s equity 27937 100%
3.2.3 How Sainsbury Plc manages its’ risk associated with borrowings
This highly leveraged capital structure cause the bankruptcy risk to increase. Besides
profitability can also be decreased due to the interest expenditure. If lenders find that the
company is highly leveraged then lenders can include restrictive provision in loan terms
consequently Sainsbury will lose the opportunity to get access in debt market. To deal with the
situation Sainsbury Plc took some steps:

 Sainsbury Plc has planned to reduce cost to income ratio up to 5% (J Sainsbury Plc,
2020)
 Debt reduction target has been upgraded to £700 million to £650 million within three
years.
 Sainsbury Plc has stopped selling mortgage sale which will help to reduce periodic
expenditure (J Sainsbury Plc, 2020).

4 Section C: Ratio Analysis

4.1 Profitability Ratio

4.1.1 Return on Capital Employed
Return of capital employed is considered as one of the best profitability measurement. It
measures the firm’s efficiency to generate profit using its’ deployed capital (Kieso, Weygandt
and Warfield, 2015). It is found through dividing Earnings before Interest and Tax by the Capital
employed.

Return on Capital Employed (ROCE)

2020 2019

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 ROCE=Earnings before interest ∧Taxes ¿ ¿650 320
×100
×100 × 100
Total equity+ NonCurrent
7773+8117 Liabilities
8456+3668
4.10% 2.64 %
Sources: Annual Report 2020

Explanation:

Sainsbury’s Plc has achieved 2.64% and 2.10% ROCE ratio in 2019 and 2020 respectively. It
implies that per £100 capital generated £4.10 and £2.64 of profit. Annual Report of Sainsbury
Plc reveals that degradation of various administrative expenses and increment of sales revenue
cause the ratio to increase.

4.1.2 Operating Profit Margin

Operating profit margin is a profitability ratio which measures the capability of the firm to earn
profit prior to applying tax and interest expenses (Kieso, Weygandt and Warfield, 2015). It is
calculated through dividing operating profit by sales revenue.

Operating Profit Margin

2020 2019
Operating Profit 650 601
OPM= × 100 ×100 ×100
Total Sales 28993 29007
2.24% 2.07 %
Sources: Annual Report 2020

Explanation

From the above calculated it can be said that Sainsbury Plc is able to generate £2.24 of profit
when the company made £100 of sales. This ratio increase from 2.07% to 2.24% in 2020 though
this ratio is quite lower for the company.

4.2 Efficiency Ratio

4.2.1 Inventory Turnover Days
Inventory turnover days is an efficiency ratio which calculates how many days a company needs
to sell its’ inventories. Larger inventory turnover days ratio days implies that the company needs
to wait a lot to sell its’ product and thus indicates the deficiency of cash and cash equivalent

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assets (Kieso, Weygandt and Warfield, 2015). It is calculated through dividing inventories times
365 by cost of goods sold.

Inventory Turnover Days

2020 2019
Inventory 1732 1929
Inventory Turnover= × 365 ×365 ×365
Cost of Goods Sold 26977 27000
23.43 days 26.07 days
Sources: Annual Report

Explanation:

From the calculation it is easily understood that Sainsbury Plc can sell its’ inventory within one
month. This ratio are 23.43 days and 26.07 days in 2020 and 2019 respectively. This
alternatively means the company almost sell its’ inventory 14 to 16 times in a year. It is quite
frequent and helps to generate more cash asset for the company.

4.2.2 Receivable Days

Account receivable days ratio measures the number of days a company takes to get paid from its’
net credit sales (Kieso, Weygandt and Warfield, 2015). Lower value of this ratio indicates that
the company generate cash income from its’ net credit sales frequently. Thus is an indication of
sufficient cash reserve. It is calculated through dividing receivables times 365 by net credit sales.

Receivable Days

2020 2019
Receivables 811 661
Receivable Days= ×365 ×365 ×365
Sales Revenue 28993 29007
10.21 days 8.32 days
Sources: Annual Report 2020

Explanation

Above chart reveals that Sainsbury Plc become able to cash its’ credit sales within 10 days. This
ratio is quite lower for both of 2020 and 2019. It indicates the management efficiency to earn
cash reserve.

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4.3 Liquidity Ratio
4.3.1 Current Ratio
Current ratio measure the firm’s efficiency to meet short term debt obligation using short term
asset. It is also known as working capital ratio. It measures the financial health of a company and
indicates the magnitude of liquidity of a firm (Kieso, Weygandt and Warfield, 2015). It is
calculated through dividing current asset by current liabilities. If current ratio for any particular
firm becomes below 1, then it is considered as less liquid firm.

Current Ratio

2020 2019
Current Asset 7582 7581
Current Ratio=
Current Liabilities 12047 11417
0.63 0.66
Sources: Annual Report 2020

Explanation

Sainsbury Plc has current ratio 0.63 and 0.66 in 2020 and 2019. This ratio should be above 1 . It
indicates that Sainsbury Plc has almost £0.60 of liquid asset to meet £1 of current liabilities.
Since the ratio is below 1, it is very likely that the company may fail to meet its’ short term
obligation like accounts payable and other payable.

4.3.2 Acid Test Ratio/Quick Ratio

Acid test ratio is also a measurement of liquidity but it defines liquid asset in more narrow way.
Consequently it can measure the firms’ ability to meet very short term obligation with its’ short
term liabilities (Kieso, Weygandt and Warfield, 2015). To calculate this ratio is takes current
asset less inventories as numerator and divides the resultant with current liabilities. As a result it
reveals the more vivid picture of the liquidity of the firm.

Acid Test Ratio

2020 2019
Current Asset−Invenories 7582−1732 7581−1929
Acid Test Ratio=
Current Liabilities 12047 11417
0.49 0.49

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Sources: Annual Report

Explanation

Since current ratio of Sainsbury became lower (i:e below 1) then it is expected that acid test ratio
will also be lower. Sainsbury Plc has acid test ratio 0.49 for both of the years. It means the
company has £0.49 of most liquid asset to meet its’ £1 of short term obligation.

4.4 Shareholders’ Ratio

4.4.1 Earnings Per Share
Earnings per share is a financial ratio which measures the available earnings which can be
distributed to the common shareholders. Higher ratio indicates the higher earnings will go to the
shareholder. It is a crucial ratio for the investors, because a larger portion of the investors invest
in particular stock to enjoy promising earnings of that company time to time (Kieso, Weygandt
and Warfield, 2015). This ratio is calculated through dividing net income available to the
common shareholders by the number of ordinary shares.

Earnings Per Share

2020 2019
Net Income( Attributed¿Ordinary Shareholders) 129 201
EPS=
Number of Oridinary Shares 2207.6 2197.6
5.8 p 9.1 p
Sources: Annual Report 2020

Explanation

From the above it is clear that common shareholders of Sainsbury Plc will get 5.8 pence and 9.1
pence for per £1 value of shares. Though this earnings is very lower but it will not be prudent act
to comment depending on merely some numbers. From the annual report of Sainsbury Plc it can
be said that the company has a lot of share outstanding in share market. So it is very usual for the
company to have EPS ratio lower. Investors who have a lot shareholdings of that company will
be benefitted.

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4.4.2 Dividend Payout Ratio
Dividend payout ratio measures the amount of net earnings paid to shareholders in the form of
dividend. It is a very crucial ratio for any company. Because most of the investors take their
investment decision based upon this ratio (Kieso, Weygandt and Warfield, 2015). Besides some
experts argue that value of a firm depends on dividend payout ratio. This ratio is calculated
through dividing total dividend by net profit.

Dividend Payout Ratio

2020 2019
Total Dividend 247 224
DPO= ×100 ×100 × 100
Net Profit 152 186
162.5% 120.43 %
Sources: Annual Report

Explanation

In terms of dividend providing, performance of Sainsbury is quite outstanding. Sainsbury

provided 162.5% and 120.43% dividend in 2020 and 2019 respectively compared to its’
earnings.

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 5 References

Brigham, E. and Ehrhardt, M., 2002. Financial Management. 10th ed. Melbourne:
Thomson Learning, pp.620-648.
Butler, S. and O'Carroll, L., 2020. Brexit May Reduce Our Food Shipments To Northern
Ireland, Says Sainsbury's. [online] The Guardian. Available at:
<https://www.theguardian.com/politics/2020/nov/05/brexit-may-reduce-food-to-
northern-ireland-sainsburys-supermarkets> [Accessed 25 November 2020].
Calnan, M., 2020. Sainsbury’S Hiring Head Of Brexit Response. [online] The
Grocer. Available at: <https://www.thegrocer.co.uk/hiring-and-firing/sainsburys-hiring-
head-of-brexit-response/647416.article> [Accessed 25 November 2020].
Coupe, M., 2019. Capital Markets Day.
Data, D., 2020. Sainsbury (J) (SBRY) Dividend History. [online] Dividenddata.co.uk.
Available at: <https://www.dividenddata.co.uk/dividend-history.py?epic=SBRY>
[Accessed 25 November 2020].
Eley, J., 2019. Sainsbury’S Chief Warns Of Brexit Effect As Profits Plunge. [online]
Ft.com. Available at: <https://www.ft.com/content/78de1628-00b5-11ea-be59-
e49b2a136b8d> [Accessed 25 November 2020].
Eley, J., 2019. Sainsbury’S Warns No-Deal Brexit Will Disrupt Food Supplies.
[online] Ft.com. Available at: <https://www.ft.com/content/b3a2a29a-9d57-11e9-9c06-
a4640c9feebb> [Accessed 25 November 2020].
Harris, M., 2019. Coronavirus: Sainsbury’S Expects £500 Million Impact As Result
Of Covid-19. [online] CILT(UK). Available at: <https://ciltuk.org.uk/News/Latest-
News/ArtMID/6887/ArticleID/27412/Coronavirus-Sainsbury%E2%80%99s-expects-
163500-million-impact-as-result-of-Covid-19> [Accessed 25 November 2020].
J Sainsbury Plc, 2020. Annual Report And Financial Statement 2020. [online] London,
pp.5-40. Available at: <https://about.sainsburys.co.uk/investors/results-reports-and-
presentations/2020> [Accessed 25 November 2020].
Kieso, D., Weygandt, J. and Warfield, T., 2015. Fundamentals Of Intermediate
Accounting. Hoboken, N.J.: Wiley.
King, I., 2019. No-Deal Brexit Will Hit Fresh Food Supplies, Sainsbury's Chief Warns.
[online] Sky News. Available at: <https://news.sky.com/story/no-deal-brexit-will-hit-

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fresh-food-supplies-sainsburys-chief-warns-11808471> [Accessed 25 November 2020].
Mulier, T. and Chambers, S., 2017. Sainsbury Cuts Jobs As Brexit Puts Online Retailers
Off U.K. [online] Bloomberg.com. Available at:
<https://www.bloomberg.com/news/articles/2017-10-18/sainsbury-cuts-jobs-as-brexit-
puts-online-retailers-off-of-u-k> [Accessed 25 November 2020].
O'Byrne, K., 2020. Interim Result & Strategy Updates.
Peyn, T., 2019. Sainsbury’S Warns No-Deal Brexit Will Disrupt Food Supplies.
[online] Ft.com. Available at: <https://www.ft.com/content/b3a2a29a-9d57-11e9-9c06-
a4640c9feebb> [Accessed 25 November 2020].
Samiksha, S., 2017. Theories Of Dividend: Walter's Model, Gordon's Model And
Modigliani And Miller's Hypothesis. [online] Your Article Library. Available at:
<https://www.yourarticlelibrary.com/theories/theories-of-dividend-walters-model-
gordons-model-and-modigliani-and-millers-hypothesis/29462> [Accessed 25 November
2020].

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 6 Appendices

Appendix A: Covid-19 dealing Strategy of Sainsbury Plc

Appendix B: Customer satisfaction growth during Covid-19

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Appendix C: Change in customer buying habit during Covid-19

Appendix D: Reduction of Cost to income ratio during Covid-19

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Appendix E: Cost to sales ratio growth

Appendix F: Didivend Yield History

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Appendix F: Balance Sheet

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