Similarities and Differences between the Long-term Funding of Cadbury PLC and Standard Chartered PLC - Essay Example

This is a study about the long-term sources of finance for two companies. It is aimed at making a comparison of two UK companies of which one is a manufacturing company while the other is a banking institution. These must also be members of the London Stock Exchange. The study is going to consider the cases of Cadbury PLC and Standard Chartered PLC. To this there will be a comprehensive answer to be provided for the study question, “Which are the similarities or differences between the long-term funding of Cadbury PLC and Standard Chartered PLC?” Before embarking on the main study’s aim there will be a look at the backgrounds of the two companies in context. These will be the history, revenues and the major operations of the particular business. One of the globe’s biggest confectionery business is called Cadbury and besides its being one of the world’s largest it occupies the first or the second position in about 20 of the global 50 largest confectionery markets. It also holds position one as the most vastly spread as well as largest upcoming markets business as far as confectionery companies are concerned. It is home to approximately 45,000 employees as well as having direct business operations in around 60 nations. Cadbury Company was founded in 1824, courtesy of John Cadbury. He began by selling cocoa and tea in the United Kingdom. The operations of the company revolve around gum, chocolate and candy today. Some of the brands going across the globe, local and regional areas as favourites are with the inclusion of Flake, Dairy milk, Green & Black in chocolate, Crease Egg, Dentyne and Trident among others. As per 2009’s half annual results, the revenue of the business base improved by 4%. The 4% growth was as a result of a sturdy growth in the sales of chocolate while the trends showed improving candy and gum business. These half year results of revenue from confectionery business were shared as follows: Table 1: Percentage share of revenues of Cadbury Company by regions Region Percentage share of confectionery revenue Britain and Ireland 23 North America 23 Europe 18 Pacific 13 South America 8 Middle East and Africa 8 Asia 7 Figure 1: Chart showing the percentage share of revenues of Cadbury Company by regions The share of the same half year 2009’s result of revenues was shared as follows by the three major operations: Table 2: Operations’ share of Cadbury’s Company revenue in percentages Operation percentage share of confectionery revenue Candy 20 Gum 35 Chocolate 45 (Cadbury.com, 2009) Figure 3: Chart showing the Operations’ share of Cadbury’s Company revenue in percentages On the other hand, there is the Standard Chartered Bank which was established in the year 1869 following a merger of Standard Bank and Chartered Bank. Thus, Standard Bank was founded in 1863 in British South Africa while the Chartered in 1853 in India, China and Australia. The aim of the two companies was to maximise upon expanding largely on trade and to gain worthwhile profits through financing the goods movement across Asia, Africa and Europe. This bank has a branch network translating to about 1,600 branches as well as outlets and around 5,500 Automated Teller Machines in well above 70 nations and territories in the world. The bank’s employees represent 125 nationalities and they are approximately 70,000 in number. Of the 70,000 almost half are female. The international diversity in the employees is aimed at giving an effective and efficient service to its customers. More than 90% of the Standard Chartered Bank’s profits and revenues emanate from Africa, Asia and the Middle East. These come from the customer banking and wholesale operations. In the recent past, the profits and revenues have fundamentally doubled due to the organic growth coupled with the support of acquisitions. (standardchartered.com, 2009) Sources of long-term financing refer to the sources of funding to a company’s operations over a period of more than one year. It is needed for many reasons by a company like the expansion of its projects- opening up of new offices, purchasing other companies or buying some additional premises. Generally, a firm will apply several sources of capital to achieve this of which one may be a dominant source. Usually, the sources of long-term funding for businesses include shares (preference and common), Grants from government, venture capital, loans from banks, owner’s capital, mortgage, retained earnings, assets disposal, and lottery. Shares; these represent ownership of a business. A single share, therefore, means a part company ownership. They relate to both private and public limited companies. It is a possibility for a business to have just two shareholders. If the same company decided to make an expansion, more shares can be issued. A private limited company is disadvantageous since the shareholders carry with themselves some limitations. One of these is that a share issue requires a full support from the already existing shareholders. Public limited companies are different since any person can purchase shares in the company through a public share issue. Services of a Merchant bank are essential in aiding a new share issue. (bized.co.uk, 2009) When looking at the Balance sheet of Cadbury Company, shares are a major source of long-term financing. Cadbury has no preferred stock over the period of five years since 2004. For the same period, the value of Common share stock has been as follows: Table 3: Cadbury’s Company common stock Year Common stock (million USD) outstanding 2008 340.19 2007 473.38 2006 470.23 2005 467.76 2004 465.07 (finance.aol.com, 2009) According to the Cadbury Public Limited Company’s Balance sheet, common shares have also been divided down into common stock, common equity and minority interest. The figures as per the Balance Sheet and corresponding to each of these common share components are given as below: Table 4: Cadbury’s Company Minority Interest, Common stock and Common Equity Year Minority Interest (Million $) Common stock (Million $) Common Equity (Billion $) 2008 17.52 198.54 5.14 2007 21.83 523.81 8.26 2006 15.66 512.72 7.22 2005 46.39 446.73 5.17 2004 439.54 497.12 3.98 (finance.aol, 2009) Minority interests refer to a scenario where a given parent company owns less than 100% of a subsidiary’s shares, the rest of the shares in the subsidiary that a parent company does not hold, are called a minority interest in the subsidiary. Thus, for example, the situation where a parent company owns 70% of the subsidiary company’s shares, the holder of the rest 30% of the shares of the subsidiary are referred to as minority shareholders in the subsidiary. In this case, even though the parent company does not own the subsidiary totally, the consolidated accounts of the parent company usually report 100% of the turnovers of the subsidiary, profits as well as expenses. The section of the consolidated report profits, which happen to be owned by the minority interests in the books. (Pendlebury and Groves, 2003 p46) Common stock is said to be that category of stock that majority of individuals purchase and own. This is according to Orman. Here a company often has two options, to issue a common or preferred stock. Preferred stock refers to Partial Corporation’s ownership. The main difference comes in where the preferred shareholders have a prior legal claim upon the earnings of the company with the inclusion of dividend payments. Thus, in the times when the company goes into trouble, preferred stockholders are paid their dividends first and then the common stockholders follow. Common stock dividends vary unlike those of a preferred stockholder. If the company goes into liquidation, common stockholders are given their share of the assets remaining after preference shareholders. That is, if any assets are left. Most people prefer preference stock to common stock. (Orman, 2008 p380) Common equity, according to Koller and others, is the value of a company left after the rest of the non-equity claims have been deducted from the value of the company. Non-equity items can be classified into four items. These are; Debt- short and long-term loans from bank, Hybrid claims like convertible bonds and employee stock options, minority interests and debt equivalents like pension, leases, preferred stock, particular kinds of provisions as well as contingent liabilities. The non-equity claims are those claims that show the financial claims in entirety besides the claims by current common shareholders. Therefore, for example, employee options and convertible debt can be transformed into equity. (Goedhert, et al, 2005 p339) Loans from bank; banks are usually a very good source of a company’s financing. They can lend loans for up to 25 years. These loans always have interest rate attached. The interest rates vary depending upon the interest rates set by the Bank of England. Bank loans are easily obtainable for companies but these are capable of presenting too high repayment amounts. Interest rates basically escalate the costs of the business and thus a company has to be careful before using the same. (bized.co.uk, 2009) Cadbury Company utilizes this source of long-term funding or capital. It is the main source of capital for the company. The last five years since 2008 were financed by the long-term debt as follows: Table 5: Long-term debt trends in Cadbury Company Year long-term debt (Billion USD) 2008 1.74 2007 2.24 2006 3.61 2005 5.27 2004 6.88 (finance.aol.com, 2009) Retained earnings; this source of long-term funding is only applicable to a business which has already been operating. Gains by a company may either be utilised for personal liabilities by its owners or be ploughed back into the company. Company owners of a public limited company are usually paid in terms of dividends whenever a company reports profits at the end of a financial year, but the same profit could be retained in the business to aid in daily operations. Owners have to choose between the two options, therefore. (bized.co.uk, 2009) Cadbury Company uses retained earnings as a source of its long-term financing. From the Balance sheets presented it also indicates that retained profits from another major source of the company’s financing. For instance; for the five years since 2004 retained earnings in Cadbury Company were as follows: Table 6: Cadbury’s retained earnings for the past five years Year retained earnings (Billion USD) 2008 3.65 2007 5.31 2006 4.66 2005 2.39 2004 1.43 (finance.aol.com, 2009) On the other hand, Standard Chartered Bank reflects in its consolidated balance sheet that it also uses debt to finance its long-term operations. The consolidated balance sheet shows the following amounts: Table 7: Standard Chartered Bank Debt amounts Year debt securities in issue (million USD) 2008 22, 075 2007 27,137 The company also uses share capital to finance its longterm operations. The year 2008’s share capital was 8,746 million US dollars. Due to its consolidated operations the contribution to the equity of the company courtesy of minority interest was as follows: Table 8: Standard Chartered Bank Minority Interest Year minority interest (million USD) 2008 2,021 2007 601 (standardchartered.co.jp, 2008) Before taking on the conclusion it is also good to note that both companies have categories of both authorized share capital and issued share capital. Cadbury’s report of year 2008 showed that its authorised share capital was 2,500 million shares of £10 per share in 2008 while 2007’s was 3,200 million shares of £12.5 per share. On the other hand the part of authorised share capital that was allotted, called up as well as fully paid for of the company’s ordinary shares was 1,361 million in 2008 and these shares were issued at £10 each. In 2007, the number of shares was 2,109 million and the issue price was £12.5 each. During the time period starting from January 2008 to May 2008, the ordinary shares of Cadbury Schweppes that were allotted as well as issued by way of share options were 4,939,337 of £12.5 each. The nominal value of this issue was £0.6 million. In April 2008, the Cadbury Schweppes shareholders authorised a special resolution that allowed the company to issue a deferred share worth £12.5 in Cadbury public limited company and also a scheme of arrangement in which with a High courts sanction, the company’s capital was reduced to £3,199,999,999 ordinary shares from £400,000,000 dividend, of £12.5 per share. Also the sanction led to a deferred share of the value of £12.5 to the dividend of £135,744,028.625 into 1,085,952,228 ordinary shares worth £12.5 per share as well as a deferred share worth £12.5 by cancelling the entire ordinary shares issued. The scheme arrangement also raised the company’s capital to £400,000,000 dividend into 3,199,999,999 ordinary shares worth £12.5 by way of authorizing and issuing a similar share number of £12.5 per share. (investis.com, 2008) Standard Chartered bank’s authorised share capital as at the end of the calendar year of 2008 was US$4,933 million while in 2007 it was US$ 5,269 million. This was made up of US$0.50 each and they were 2,632 million shares. There was also a component of cumulative preference shares that are irredeemable and these are 500 million in number and they were worth £1 each. The other part was that of 300 million non-cumulative preference shares that are redeemable and these were 300 million and their worthiness was US$5 each. Besides, there were 1 million preference shares that were non-cumulative redeemable worth €1,000 per share. As at December 31st 2008 the non-cumulative preference shares that were in issue were 477,500 and the issue price was US$5. In the same year on May 16th, the company also made an issue of new ordinary shares which were 8,142,490 in number in place of 2007’s final dividend. In October of 2008, Standard Chartered Bank also issued another 2,940, 049 ordinary shares in place of the 2008’s interim dividends. On October 24th 2008, there was an announcement that the company was to issue 470,014,830 new ordinary shares. This was to be done through rights to those shareholders that were qualifying. These shares were to be issued at 390 pence per share. This rights issue led to the company getting an additional US$2.7 billion to its long-term capital sources. (shareholder.com, 2009) Just to make it easier to understand, authorised share capital is also called nominal share capital according to Kelly and Holmes. This term (authorised share capital) refers to that figure that is stated in the memorandum of association of a company. It shows the maximum number that a company can issue as shares alongside with the value per share. It is of essentiality to note that companies are not obliged to issue shares to equal the amount of authorised share capital. Issued share capital, as mentioned before, is the authorised value of those shares that a company has actually issued. It is deemed as more important in comparison to authorised share capital since it is the true measure to gauge the company’s substance. A company can register with any authorised capital, but most of public corporations have a minimum of £50,000 of issued share capital. (Kelly and Holmes, 2002 p360) While offering a conclusion for the study it is good to note the various sources of long-term funding for each of the companies in question. Firstly, Cadbury- a manufacturing company uses these sources of long-term capital; common share capital, loans from bank, and retained earnings. It mostly utilises the debt source of capital. On the other hand Standard Chartered Bank uses share capital and debt. This is noted in the process of answering the study question, “Which are the similarities or differences between the long-term funding of Cadbury PLC and Standard Chartered PLC?” Reference list: bized.co.uk. (2009). Long Term Sources of Finance. Retrieved November 2, 2009 http://www.bized.co.uk/educators/level2/finance/activity/sources13.htm cadbury.com. (2009). Corporate Factsheet. Retrieved November 2, 2009 http://www.cadbury.com/ourcompany/ouroverview/Pages/ourcompany.aspx finance.aol.com. (2009). CADBURY PLC Balance Sheet. Retrieved November 2, 2009 http://finance.aol.com/financials/cadbury-plc/cby/nys/balance-sheet Goedhart, Marc. et al. (2005). Valuation: Measuring and Managing the Value of Companies. John Wiley and Sons. Edition 4, illustrated. p335. investis.com. (2008). Notes to the Financial Statements: Capital and Reserves. Retrieved November 2, 2009 http://cadburyar2008.production.investis.com/financial- statements/notes-financial-statements/capital-and-reserves28.aspx Kelly, David, and Holmes Ann E. M. (2002)Business Law. Routledge. Edition 4, revised. P360. Orman, Suze. (2008). The Road To Wealth: A Comprehensive Guide To Your Money : Everything You Need To Know In Good And Bad Times. Riverhead Books. Edition revised. P380. Pendlebury, M. W. and Groves, Roger. (2003). Company Accounts: Analysis, Interpretation and Understanding. Cengage Learning EMEA. Edition 6, illustrated. p46. standardchartered.com. (2009). About Us. Retrieved November 2, 2009 http://www.standardchartered.com/about-us/en/index.html standardchartered.co.jp. (2008). Consolidated Balance Sheet. Retrieved November 2, 2009 http://www.standardchartered.co.jp/japanese/pdf/Standard_Chartered_Bank_BS_2008.pd f Shareholder.com. (2009). Notes of Financial Statements. Retrieved November 2, 2009 http://files.shareholder.com/downloads/stanchar/764346174x0x276773/E5234B46- 25AC-4160-890C-A4233B062001/Final_Results_2008_Press_Release_Final.pdf Read More