Financial Analysis and Investment Recommendation for JD Sports Fashion Plc

On successful completion of this assignment you will be able to:

1. Summarise key principles, trends and tools in accounting and corporate finance.
2. Demonstrate effective approaches to the analysis of corporate finance structure and analysis of corporate financial statements.
3. Assess the value of practical value of models and theories on making decisions on corporate financing in context.
4. Critically evaluate the benefits of various types of financing for different kinds of organisations.
5. Utilize internal and external financial information to appraise business performance.

Tasks

Question 1 to perform a detailed financial analysis of a listed company using key financial ratios and analysis of company financial statements. Critical evaluation of the financial health of the company, including the company’s approach to capital structure, should be submitted. (2,500 of the word count.)

Question 2  to prepare a report to the investment board of JD Sports Fashion Plc that recommends the appropriate funding choice for an investment project that will be evaluated based on the information provided below for question 2. (1,000 of the word count.) Important: The two components of this assessment are independent of each other.

Question 1

The annual reports are in a consolidated format, and relevant financial statements can be found under the latest results (results archive) section. Do not forget to review the notes to the financial statements.

Required:

1. Brief introduction of the company and the current mid-term (5 years) outlook. Maximum of 300 words. Be sure to include an analysis of the company’s share price to the present.
2. JD Sports Fashion Plc’s key financial ratios (for at least 3 years) need to be calculated and included in the report in table or chart format. Key ratios must cover all categories: profitability, liquidity, efficiency, investment, and gearing (leverage) ratios.
3. Support the above analysis with vertical analysis of JD Sports Fashion Plc’s consolidated balance sheet and then critically assess the company’s approach to capital structure. What is the largest figure for JD Sports Fashion Plc’s liabilities in 2020? Why? Comment on your finding.
4. Interpret and assess the trend of the financial performance of JD Sports Fashion Plc in the most recent year (the newest annual report) in comparison to the previous years and to its competitors/industry. Make sure to justify any significant differences (trends) you observe here.

Notes:  The accompanying analysis should be detailed and provide reasons for any changes. Use both internal and external (financial and non-financial) information to support your analysis. Simply stating that a certain ratio has changed and by how much is not sufficient for analysis at this level. All equations and findings must be included in the report.

Question 2

JD Sports Fashion Plc is currently evaluating a new project that will expand its lines to include a designated golf line that will offer not only clothing but also golf equipment and accessories. The project will require an initial outlay of £20m on production machinery and other costs. The project is expected to have a three-year life span and the cash flows associated with the projected are projected in the below table:

Table 1: JD Sports Fashion Plc potential project’s cash flow information

Investment in Working  capital

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortisation.

EBIT: Earnings before Interest and Taxes.

EBIAT: Earnings Before Interest and After Taxes. For simplicity, taxes calculated assuming no interest expense.

Annual capital expenditures in addition to the initial outlay, and assumed to cease at the end of the project.

The project has a debt capacity of 60% of the cost of the project, with an annual interest charge of 5%. The company currently has £3m of retained earnings available for this project, and the remainder would potentially be financed with a rights issue. The rights issue incurs additional costs of 2% of the amount raised, and the debt issuance is a bit cheaper, costing 1%, where both issue costs are tax deductible.

Table 2: Additional information

You will need to research the other values needed to complete Table 2 above.

Required:

The company believes it will be a successful project and will help to distinguish it from its competitors. However, the company would like you to evaluate the project using different methods and present a proposal to the investment committee in order for them to approve it.

1. JD Sports Fashion Plc is considering financing the project with 60% debt. Using the Internal Rate of Return (IRR) and Net Present Value (NPV), appraise the project. Hint: calculate the free cash flow of the project and use CAPM to compute the discount rate.
2. Evaluate the project using Adjusted Present Value (APV).
3. Assuming the market risk of the project is similar to the overall market risk of the firm, revise the project’s NPV using the Weighted Average Cost of Capital (WACC). Compare the answer to part a).

Note: Assume the same level of debt is held until the end of the project. Do not consider the repayment of the debt principal in any of the above valuations in parts.

Compare the methods used and give a final recommendation to the investment committee. Make sure you critically evaluate all methods and discuss other risk factors that were not included in the analysis.