Monday 23 November 2020

Business Financial Plan for 7 Digital PLC

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Business Financial Plan for 7 Digital PLC 

Table of Contents

1.      Music industry overview.. 5

1.1        Music Industry. 5

1.2        Comparative market cap of Music Industry. 5

2.      Company overview (7 Digital group PLC). 5

3.      Company risk overview.. 6

3.1        Financial Risk. 6

3.2 Business Risk. 6

3.2        Altman Z score. 7

4.      Ratio Calculation.. 8

5.      ATO calculation.. 9

5.1        WACC & cost of equity calculation. 10

5.2        DDM method (Share price calculation). 10

5.3        Share price using FCFE (Free cash flow to equity approach). 11

FCFF is free cash flow that is used to paid out dividends. If we retain this amount we have share price of 2.81. that means free cash flow retention is increasing the share price. 11

6.      Summary of Findings. 12

7.      Conclusion.. 14

8.      References. 15

9.      Appendices. 16


 

Executive Summery

7 digital group is a business to business music and radio services company. This company wants to build up their capital. For that reason, they are evaluating alternative of Debt & Equity. So, the company wants to evaluate different method to value share price. Revenue has decreased from 2018 to 2019. It is a negative sign for company. Right financial structure will retrieve the company financial position. Company is grey zone during the year of 2017, 2018, 2019. But the company is going to distress according to Altman standard Z score in 2019. This is also a major concern. Because investors are reluctant to provide fund this companies. So, the challenge must be meet to finance of the company. We will evaluate alternatives to meet the challenge

Introduction[SK1] 

Purpose:

The purpose of this report is to find the best possible alternative for financing decision making of debt & Equity. It is in such way that the company & its stakeholders can benefitted from financing


Method of Investigation:

a.    Financial & Business Risk Analysis

b.    Altman z score

c.     Ratio calculation

d.    Forecasting income statement & Balance Sheet

e.    WACC calculation

f.      FCFF calculation

g.    Share price determination

Get the results


Scope:

The scope of working on this area has been limited because we have to work on secondary data that is available. If first hand data is available then it may be easier to make the accurate report.

1.    Music industry overview

Music industry is moderately large in size. Top 5 top companies capture around 38% market share in the industry. Competition is pretty high in this industry. To compete in this industry, sound capital structure is must.

1.1  Music Industry

Music industry, especially service-based music industry is quite large in size. To compete in this industry sound financial structure is needed. So, we will review financial structure to get the best possible results.

 

1.1 . Comparative market cap of Music Industry

Company

Market cap

Employees

Media holding PAO

1.15m

2

Tele vista SA

3.55m

14

Grand Vision Media Holdings PLC

3.85m

--

4fun Media SA

4.00m

4

Tele typos S.A.

5.32m

475

7Digital Group PLC

5.40m

147

Catalyst Media Group plc

11.25m

0

OTT One Nyrt

16.85m

--

Impresa Sociedad Gast D Prtcps Socsl SA

20.76m

900


Here we can find the market cap of the peer industry of 7 digital group PLC. Market cap of 7 life digital is comparatively lower than other industries. Number of employees is at acceptable level.

1.    Company overview (7 Digital group PLC)

7digital Group plc, previously UBC Media Group plc, is a business-to-business digital music and radio facilities company. The Company is tangled in providing technical infrastructure and musical rights used to generate music streaming and radio services for a variety of clients. including consumer brands, mobile operators, broadcasters, automotive systems, automotive systems, record labels, artists and retailers. It has net loss of -2571 million in 2017.

1.    Company risk overview

Every company has risk. Company has to measure risk to plan for future. We will look inside both business risk and financial risk.

1.1  Financial Risk

DFL (Degree of Financial Leverage) is shown here. DFL trend is downward from 2018 to 2019. But the degree of financial leverage is high in 2018. It becomes lower in 2019. It means company is going in better position.

3.2 Business Risk

Business Risk

Particulars

 Historical Years (Euro in mn)

2015

2016

2017

2018

2019

Revenue

51058

50710

40984

42446

38659

Mean of Revenue

44771.40

SD of Revenue

5742.42

Revenue Variability (CV)

0.1283

 

From the sales data we can see that standard deviation of revenue is 5742.42. Revenue has decreased from 2018 to 2019. Revenue variability is (CV) is lower that means company is in better position regarding risk return trade off. But standard deviation is very high regarding to revenue.

EBIT

8029

4972

1227

2071

-1096

Mean of EBIT

3040.60

SD of EBIT

3533.95

EBIT Variability (CV)

1.1623


EBIT variation is high of the company according to co variance. Though there is sign of improvement. Company has to focus in this area to reduce this variability.

EBIT

8029

4972

1227

2071

-1096

Change in EBIT

-38.07%

-75.32%

68.79%

-152.92%

Revenue

51058

50710

40984

42446

38659

Change in Revenue

-0.68%

-19.18%

3.57%

-8.92%

Degree of Operating Leverage

55.86

3.93

19.28

17.14

Degree of operating leverage is calculated using change in EBIT and change of Revenue. We can see that revenue will change around 17.4% in response to sales. That is quite lower than other industries. A great amount of focus must be given in this area.

3.2  Altman Z score

Z score shows the financial ability of the company to recover from bankruptcy.Altman Z score also measures financial position of the company. If the z score is less than 1.8, that means company is heading towards bankruptcy. Company is grey zone during the year of 2014, 2015, 2016. But the company is going to distress according to Altman standard Z score.[SK1] 


 [SK1]All this section is not required. Focus on the financial ratio analysis to assess your company’s recent past financial performance

1.   4.  Ratio Calculation

 

Liquidity Ratios

2015

2016

2017

2018

2019

Current ratio

1.55

1.55

1.46

1.43

1.38

Quick Ratio

0.58

0.70

0.62

0.68

0.70

Cash as % of Total Asset

0.25

0.31

0.30

0.34

0.37

 

 

Profitability Ratios

2015

2016

2017

2018

2019

Gross Profit Margin

32.36%

30.20%

29.28%

27.53%

25.99%

Operating Profit Margin

2.99%

4.88%

-2.84%

-4.15%

-7.06%

Net Profit Margin

2.17%

4.36%

-3.01%

-4.01%

-6.60%

Basic Earnings Power Ratio

3.43%

5.29%

-3.03%

-4.56%

-7.79%

Return on Total Assets (ROA)

2.49%

4.73%

-3.22%

-4.37%

-7.23%

Return on Equity (ROE)

6.04%

11.40%

-8.36%

-11.38%

-18.58%

Earnings Per Share

0.24

0.5

-0.31

-0.41

-0.68

 

 

Solvency/Leverage

2015

2016

2017

2018

2019

Long term debt ratio

0.12

0.11

0.11

0.10

0.09

Debt-to-Equity

0.59

0.59

0.62

0.62

0.64

Equity Multiplier

2.42

2.41

2.60

2.66

2.75

Interest Coverage Ratio

4.63

7.27

-10.75

-14.99

-28.41

 

 

Efficiency Ratios

2015

2016

2017

2018

2019

Total Asset Turnover

1.15

1.08

1.07

1.02

0.98

Fixed asset turnover

4.12

4.40

4.78

5.09

5.42

Interest Burden Ratio

0.78

0.86

1.09

1.22

1.38

Tax Burden ratio

0.93

1.04

0.97

1.02

1.05

 

From the liquidity ratio analysis, we can see that company is in moderate liquidity position. Current ratio and cash ratio both decrease slightly from 2018 to 2019.

From solvency ratio we can see that debt to equity ratio decreased slightly from 2018 to 2019. It decreases interest burden also. But it decreases the benefit of tax shield. Because higher debt to equity ratio, higher the tax shield. Company takes the benefit of reduced tax burden.

 Return on asset (ROE) is -7.23% on investment. This shows bad position. It indicates how effectively company management is using asset to generate a positive return from investment on shareholders equity.

Fixed asset turnover ratio is 5.42. This means that fixed assets are turning 5.42 times to produce revenue. Higher the ratio, higher the return on asset. This is ratio is moderate regarding criteria.

Years

2015

2016

2017

2018

2019

Net Profit Margin

0.1411

0.0195

0.0217

0.0436

-0.0301

 

 

 

 

 

 

Total Asset Turnover

1.3580

1.2811

1.1468

1.0849

1.0678

 

 

 

 

 

 

ROA

0.1916

0.0250

0.0249

0.0473

-0.0322

 

 

 

 

 

 

Financial Leverage

2.1686

2.3975

2.4231

2.4104

2.6017

 

 

 

 

 

 

ROE

41.56%

5.98%

6.04%

11.40%

-8.36%

Du Pont analysis is to evaluate component part of ROE. Profit margin has decreased slightly from 2018 to 2019. Bur it led towards negative in 2019.

ROA (return on asset) is also negative. That means management has failed to utilize the asset to generate revenue.

1.  5.   ATO calculation

Particular

(in mn)

2015

2016

2017

2018

2019

Operating Assets (OA)

37599

38582

35738

39123

36205

Operating Liabilities (OL)

18987

17696

15541

17166

16485

Net Operating Assets (NOA)

18612

20886

20197

21957

19720

Change in NOA

 

2274

-689

1760

-2237

Total Stockholder's Equity

17338

16510

14749

16231

13916

Financial Assets (FA)

0

0

0

0

0

Financial Liabilities (FL)

1274

5376

5448

5726

5804

Net Financial Obligations (NFO)

-1274

-5376

-5448

-5726

-5804

 

 

 

 

 

 

ATO

 

2.7246

1.9623

2.1016

1.7607

Average ATO

 

 

 

 

2.1373















We can see that net financial obligation is negative from year to year. Average ATO is 2.1373. That is quite good.

WACC & cost of equity calculation

Risk-free Rate

4.00%

 

Cost of debt

9.00%

Risk Premium (Baa Rated)

2.00%

 

Tax rate

25%

Beta

1.6

 

After tax Cost of Debt

6.75%

Adjusted Beta

1.40

 

D/E Ratio (Average)

 

Business Risk

1.0%

 

Weight of Equity

4.00

Financial Risk

2.0%

 

Weight of Debt

6.00

Cost of Equity

9.80%

 

WACC

79.72%


Here we can see that cost of equity of 7 digital company is 9.80%. That is higher than cost of debt of 9%.

Company has higher debt and lower equity ratio. We can see that weighted average cost of capital is 79.72%. Debt reduces cost because of tax shield.

1.1  DDM method (Share price calculation)

Particulars

Time 0 (2019)

 Projected Years 

2020

2021

2022

2022

2023

SGR

 

-6.30%

-6.30%

-6.30%

-6.30%

-6.30%

Net Sales

38659

36221.95

33938.52

31799.05

29794.44

27916.20749

NPM

 

2.16%

2.16%

2.16%

2.16%

2.16%

Net Profit

 

781.7969

732.5126

686.3351

643.0687

602.5298389

DPR

 

52.52%

52.52%

52.52%

52.52%

52.52%

Dividend

 

410.5918

384.7082

360.4563

337.7332

316.442578

Cost of Equity

 

9.80%

9.80%

9.80%

9.80%

9.80%

Year

 

1

2

3

4

5

PV of discount factor

 

     0.9107

     0.8294

     0.7553

     0.6879

            0.6265

PV of dividend

 

     373.93

     319.08

     272.27

     232.33

            198.25

Summation of PV of dividend

       1,395.85

 

 

 

 

 

Terminal growth rate

 

 

 

 

 

13%

Continuing value

 

 

 

 

 

        2,750.00

PV of terminal value

2750

 

 

 

 

 

Equity value

       4,145.85

 

 

 

 

 

Less: Cost of Financial Distress

 

 

 

 

 

Real Equity value

       4,145.85

 

 

 

 

 

Number of shares outstanding

3710

 

 

 

 

 

Value per share

      1.12

 

 

 

 

 


According to DDM model share price is higher than current stock price, that means share is undervalued. So, there is scope of improvement & the shareholders can benefit long time from this company.

1.1  Share price using FCFE (Free cash flow to equity approach)

Particulars

Time 0 (2019)

 Projected Years 

2020

2021

2022

2022

2023

SGR

 

-6.30%

-6.30%

-6.30%

-6.30%

-6.30%

Sales

38659

36221.9

33938.5

31799

29794.4

27916.2

OPM

 

6.59%

6.59%

6.59%

6.59%

6.59%

Operating income

 

2386.50

2236.05

2095.09

1963.02

1839.27

ATO

 

2.1373

2.1373

2.1373

2.1373

2.1373

NOA

19720

16947.7

15879.3

14878.3

13940.3

13061.5

Change in NOA

 

-2772.3

-1068.4

-1001

-937.92

-878.8

FCF

 

5158.82

3304.43

3096.12

2900.94

2718.07

WACC

 

79.72%

79.72%

79.72%

79.72%

79.72%

Year

 

1

2

3

4

5

PV of discount factor

 

0.5564

0.3096

0.1723

0.0959

0.0533

PV of FCF

 

2870.54

1023.11

533.405

278.094

144.986

Summation of PV of FCF

4850.13877

 

 

 

 

 

Terminal growth rate

 

 

 

 

 

 

Continuing value

 

 

 

 

 

181.878

PV of terminal value

10

 

 

 

 

 

Enterprise Value

4860

 

 

 

 

 

Less: Interest Bearing Debt

5321

 

 

 

 

 

Add: Cash & Cash Equivalent

10902

 

 

 

 

 

Equity value

10441

 

 

 

 

 

Less: Cost of Financial Distress

 

 

 

 

 

 

Real Equity value

10440.84

 

 

 

 

 

Number of shares outstanding

3710

 

 

 

 

 

Value per share

2.81

 

 

 

 

 

FCFF is free cash flow that is used to paid out dividends. If we retain this amount we have share price of 2.81. that means free cash flow retention is increasing the share price.

 

1.1  Issuing of long term debt

Particulars

 

Projected Years

2019

2020

2021

2022

2023

2024

Sales

 

36221.95

33938.52

31799.05

29794.44

27916.21

OPM

 

6.59%

6.59%

6.59%

6.59%

6.59%

Operating Profit

 

2386.50

2236.05

2095.09

1963.02

1839.27

Share of Results of Associated Companies

-23

-30.10

-40.78

-64.37

-76.01

-88.94

EBIT

 

2356.40

2195.27

2030.72

1887.01

1750.33

Less: Financial Income and Expenses

-102

-151.02

-200.04

-249.06

-298.08

-347.1

EBT

 

2205.38

1995.23

1781.66

1588.93

1403.23

Less: Tax (25%)

 

551.34

498.81

445.41

397.23

350.81

Add: Minority Interest

324

140.00

100.00

-88.30

-227.84

-350.02

Net Profit

 

1794.03

1596.42

1247.94

963.86

702.40

Add: Depreciation & Amortization

 

1550

1256

700

700

700

Working Capital

8011

 

 

 

 

 

Less:  Changes in Working Capital

-1594

2097.50

-854.50

-395.75

-26.00

-1272.63

Less: Capital Expenditure

 

700

700

700

700

700

Add: Net Borrowings

 

4300

4300

4300

4300

4300

FCFE

 

4846.53

7306.92

5943.69

5289.86

6275.02

Cost of Equity

 

9.80%

9.80%

9.80%

9.80%

9.80%

Year

 

1

2

3

4

5

PV of discount factor

 

0.9107

0.8294

0.7553

0.6879

0.6265

PV of FCFE

 

4413.80

6060.36

4489.54

3638.91

3931.20

Summation of PV of FCFE

22533.81

 

 

 

 

 

Terminal growth rate

 

 

 

 

 

 

Continuing value

 

 

 

 

 

40097.87

PV of terminal value

25120.6302

 

 

 

 

 

Equity Value

47654.44

 

 

 

 

 

Less: Cost of Financial Distress

 

 

 

 

 

 

Real Equity Value

47654.44

 

 

 

 

 

Number of Outstanding Shares

3710

 

 

 

 

 

Value Per Share

12.84

 

 

 

 

 


If the company issue long term debt of 4300 million than the value per share will be 12.84. which is higher than any other financial instrument.

1.    6. Summary of Findings

Method

Share price

DDM

1.12

FCFE

2.81

LTD

12.84

 1.    Conclusion

From the above analysis we can see that issuing long term debt is giving the highest share price. But we cannot use that because of company bad financial position that we have seen from Altman Z score. Investors may not agree to invest in this company. So, we can use free cash flow to finance the firm needs. That will give the share price of 2.81. This will improve the share price and ultimately investors will be benefitted.

1.    8. References

7 Digital Group PLC(2013, 14). Final Results for the year ended 31 August 2013.[online] Available At: https://www.7digital.com/wp-content/uploads/2020/01/7digital-Group-plc-2014-12-31-FINAL.pdf

7 Digital Group (2015,16,17,18,19). Final Results for the year ended 31 August 2015 & 2016.[online] Available at: https://www.7digital.com/reports/

AIM (2019). 7 Digital Life Plc FUNDAMENTALS. https://www.londonstockexchange.com/raise-finance/equity/aim

https://investopedia.com/resources/

KR Subramanyam ,( 2014). Financial Statement Analysis, 11e, emphasizes effective business analysis and decision
making by analysts, investors.

CH Gibson, PA Frishkoff ,(1989) Accounting Principles and Guidelines Accounting Coach Financial Statement Analysis: Using
Financial Accounting Information

1.    Appendices

a.    Base income Statement

Particulars

 Historical Years (in mn)

2015

2016

2017

2018

2019

Net Sales

51058

50710

40984

42446

38659

Less: Cost of Sales

33754

33337

27720

29629

27340

Less: Operating Expenses

11207

11632

10987

10855

10524

R & D Expenses

5647

5968

5909

5863

5612

Selling & Marketing Expenses

4380

4380

3933

3877

3791

Administrative Expenses

1180

1284

1145

1115

1121

Core Operating Profit

6097

5741

2277

1962

795

Add: Other Income

2312

420

848

476

221

Less: Other Expenses

424

1195

908

368

2089

Operating Profit

7985

4966

2217

2070

-1073

Net Financial Expense/(Income)

-239

2

265

285

102

Share of results of associated companies

44

6

30

1

-23

Minority Interest

459

99

631

507

324

Tax Reported

1522

1081

702

443

290

Tax Savings/(Dissavings)-Financial Activity

-59.75

0.5

66.25

71.25

25.5

Tax-Operating Activity

1462.25

1081.5

768.25

514.25

315.5

After-tax Operating Income

7025.75

3989.5

2109.75

2063.75

-1087.5

Less: Dividend

2083.96

1512

1488.4

1485.2

1484

Transfer to Reserve / Net Profit

4941.79

2477.5

621.35

578.55

-2571.5

a.    Base Balance Sheet

Particulars

 Historical Years (in mn)

2015

2016

2017

2018

2019

Operating Assets

 

 

 

 

 

Cash and Short-term Investments

11753

6820

8873

12275

10902

A/R

11200

9444

7981

7570

7181

Inventories

2876

2533

1865

2523

2330

Prepaid Expenses

3465

5673

4894

4777

5042

PPE

1912

2090

1867

1954

1842

Goodwill

1384

6257

5171

5723

4838

Other Assets

2736

4157

2905

1968

1406

Deferred Income Taxes

2273

1608

2182

2333

2664

Total Assets

37599

38582

35738

39123

36205

Operating Liabilities

18987

17696

15541

17166

16485

A/P

7074

5225

4950

6101

5532

Accrued Expenses

7114

7023

6504

7365

7450

Provisions

3717

3592

2718

2590

2627

Deferred Tax Liabilities

1082

1856

1369

1110

876

Financial Liabilities

1274

5376

5448

5726

5804

Long-term Debt

203

861

4432

4242

3969

Short-term Debt

1071

3591

771

1037

1352

Other Financial Liabilities

0

924

245

447

483

Total Liabilities

20261

23072

20989

22892

22289

Stockholder's Equity

 

 

 

 

 

Share Capital

246

246

246

246

246

Share Premium

644

442

279

312

362

Treasury Shares

-3146

-1881

-681

-663

-644

R/E

13870

11692

10132

10500

7836

Cumulative Translation Adjustments

3159

3709

3112

3989

4073

Minority Interest

2565

2302

1661

1847

2043

Total Stockholder's Equity

17338

16510

14749

16231

13916

Total Liabilities & Stockholder's Equity

37599

39582

35738

39123

36205