3. The forecast period and interpretation data
The value drivers are considered as the crucial factors affecting to the shareholder value including of sales growth, operating profit margin, tax rate, incremental fixed capital investment, incremental working capital investment, require rate of return, debt, market capitalization and number of prediction years. Beacause Thorntons Plc has fundamental operation in retail and manufacture, so the sales growth and profit margin are known as crucial factors impact on shareholder value. The forecasting ratios will base on the historical figures during the five years from June 2006 to June 2010 and interim results ended January 2011 by the trend analysis.
3.1. Sales Growth
The future sale growth is set by 8 % per year basing on the trend analysis of historical figures. This ratio was average between the sales growth of retail and commercial trading.
3.2. Operating profit margin
The operating profit margin is determined being 3% per year though the trend analysis during five years from June 2006 to June 2010 and interim results ended January 2011. In the fact, the operating profit margin intends to increase in the next period by the real situation like Easter day and Mother’s day.
3.3. Tax Rate
In UK, the official corporate tax rate on the operating profit has been 28% since 2008.
3.4. Incremental fixed capital investment
The incremental fixed capital investment is set by 3% per year, the company still remains the investment in fixed capital but having a gradually decrease.
3.5. Incremental working capital investment
The incremental working capital investment is determined being -1% based on the trend analysis of historical figures.
3.6. Year
Number of forecasting year is five years from March 2011 to March 2015.
3.7. Required rate of return
Required rate of return was calculated by working out the weighted average of cost capital which is 10%.
3.8. Debt and Marketable securities
These data was took out from Thorntons Plc Annual Report.
4. The analysis of value drivers
The analysis of forecasting sales growth indicated that sales growth is an important factor to influent the shareholder value, also it has been positively correlated with shareholder value. The increase of sales growth predicted lead to the increase of shareholder value, although the percentage of increasing shareholder value is not large.
Table 1
The analysis of operating profit margin indicated the obviously relationship between it and shareholder value, the change of operating profit margin created the definitely fluctuation of shareholder value. The shareholder value is raised by the rise of operating profit margin, however the level of rose of shareholder value and the increase of profit margin is in adverse direction.
Table 2
Apart from sales growth and profit margin, the others value drivers affecting Thorntons Plc shareholder have to mention being incremental fixed capital investment and incremental working capital investment. Though the analysis relationship between incremental fixed capital investment and incremental working capital investment and shareholder value indicated that shareholder value is large when incremental fixed capital investment and incremental working capital investment are small.
Table 3
5. Discussion
The analysis of free cash flow by using Excel model has the advantages and disadvantages as well. Seven value drivers have the big effect on shareholder value, however the consideration of these factors are different in different sectors or industries. Moreover the analysis of value drivers is based on forecasting ratios by historical figures, so the exact of prediction doesn’t ensure due to the market is always change and ensuring of impact real situation in the world. For example, Thorntons Plc is a company which engaged the retailing and manufacturing the sweet food, so its sales will significant increase in Eater holiday or Mother’s day soon. If its sales raised leading to change others ratios and the prediction will go wrong.
6. Conclusion
The analysis of value driver of Thorntons Plc indicated the important role of sales growth and profit margin to shareholder value. Although the excel model using for analysis has the drawback but it is helpful for investors and firm in the valuation of shareholder value. The consideration of value drivers will help the firm in enhance of management and having the more effective decision business.
Appendix
1. Required rate of return
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
2. Working capital percentage of sales (WCP)
WCP= (Current Asset-Current liabilities)/Sales
3. Fixed capital (FC)
FC=Fixed capital Investment/Sales
References
1. Investors Chronicle, (Online), [Accessed: 2 – 7th March, 2011]
Thorntons Plc, Annual Report 2010
Thorntons Plc, Annual Report 2009
Thorntons Plc, Annual Report 2008
Thorntons Plc, Annual Report 2007
Thorntons Plc, Annual Report 2006
2. Investors Chronicle, (Online), [Accessed: 2 – 7th March, 2011]
3. Alfred Rappaport, (1998), Creating Value, Simon & Schuster, 2nd Edition
4. Glen Amold, (2001), Corporate Financial Management, Prentice Hall, 2nd Edition
