Question One, a William Hill Plc.

Question One, a William Hill Plc.

            This is a sports gaming and betting company offering a variety of betting opportunities on number-based products like number-based products like lotteries, sporting such as football, virtual racing, horseracing, poker, greyhound racing and bingo among others. William Hill serves consumer from multiple channels i.e. land-based clubs, online gambling, on-course betting at gaming events and mobile text-based services. The company operates in the UK, Ireland, the US, Spain, the Philippines, Bulgaria, Poland and Italy.

Strategic Plan of William Hill

Table I

The main financial purpose of William Hill is to minimise the risk associated with the uncertainty in the industry and the management goal is to improve the profitability nature of the company. This improvement can be achieved by increasing the profitability potential by improving annual sales through diversification of products, opening new markets, advertisement so as to reach its consumer with an aim to achieve a competitive edge over the competitors among others.

Talent acquisition and retention is another goal of management which is achieved by engaging quality talent that will result to create value for any organisation. It is also planning on improving efficiency in the market by investing in high return activities with minimal risk and uncertainty.

The Rank Group Plc.

Rank is a gambling firm located in the UK and was involved in motion picture and cinema industry till 2006 but continues to use the Gongman logo that was used by its subsidiary General Film Distributors. Its headquarters are in the UK, where it operates; Mecca Bingo, Grosvenor Casinos which is UK’s largest casino operator, and Rank Interactive. It has a presence in Spain and Belgium.

Strategic Plan of the Rank Group Plc

Table II

Their main strategic goal of the company is to become a £1 billion revenue international gaming company by 2023, transforming our business and consistently exceeding our customer and shareholder expectations. The company has adopted digital systems to improve financial performance and enhance information security to minimise the risk of losses occasioned by insider information.

The company is planning to create a competitive multi-channel way that will help to attract and satisfy its clients. Management wants to improve on their brand and digital marketing to enhance annual revenue and this will increase their market presence. The management financial goal, it to undertake projects with low risk or uncertainty that offer high returns.

The GVC Holding Plc

GVC is a sports betting and gambling company located in Britain and was founded in 2004 in Luxembourg as Gaming VC Holdings and later in 2010, it was reorganised.

Strategic Plan for the GVC Holding Plc

Table III

The company’s vision is to be the World’s Largest and most responsible sports-betting and gaming Entertainment Company through establishing worldwide brands to scale up in the global market. The management intends to diversify digital technology to help the company grow its brand and achieve the ultimate financial goal of increasing annual revenue.

In the recent past, the company has increased its presence and operations in the American countries and this will see annual revenue and ultimate financial growth. There are also concerns on cybercrime and information security due to susceptibility of betting companies to attacks and insider information trading which results in a company making losses. Thus, making it vital to invest in an information Security System.

Question One, b

Ratio analysis is a critical tool used to compare companies in the same industry over a period of time. The aforementioned companies operate in the UK and in the gambling and gaming industry. An analysis of both financial and non-financial ratios was carried out and analysed as follows;

Profitability Ratios

The gross profit margin of William Hills Plc. was 81.24% in 2018. In the same year, The Rank Group PLC recorded a gross profit margin of 53.55% whereas, the GVC Holding PLC recorded a gross profit margin of 68.28%. In terms of the gross profit, William Hills PLC is the most profitable company with the GVC Holding PLC the second most profitable firm. With the lowest gross profit margin, the Rank Group PLC is the least profitable.

The return on equity ratio is important to potential investors. Rank Group PLC with a ratio of 9.05% is the best followed by GVC Holding PLC with a ratio of -1.79%. William Hills PLC has the least return on equity ratio of -238.91%.

Liquidity Ratios

The current ratio of William Hill PLC was 1.34 in 2018, 0.82 in 2017, and 0.71 in 2016. The Rank Group PLC had a current ratio of 0.36 in 2018, 0.58 in 2017, and 0.58 in 2016. GVC Holding PLC recorded a current ratio of 0.76 in 2018, 1.31 in 2017, and 0.77 in 2016. For creditors, the best company to lend money is William Hill PLC due to a high current ratio. GVC holding is the second-best company in terms of liquidity and The Rank Group PLC is the least liquid.

Efficiency Ratios

In terms of asset turnover, the best company is William Hill PLC with a ratio of 1.09 in 2018 being the highest among the three companies. The second best company is The Rank Group PLC with an asset turnover ratio of 0.95. GVC Holding PLC is the least efficient company with the highest asset turnover ratio of 0.48 in the year 2017

Other Ratios

The solvency ratio based on assets shows the ability of a company to borrow credit facilities. In this regard, the GVC Holding Company is the best with a solvency ratio of 56.7%. The rank Group PLC is the second best company with a solvency ratio of 55.05%. William Hills PLC is the least solvent company in terms of assets with a ratio of 19.77%.

The profit per employer ratio indicates the efficiency of employers in the economy. The Rank Group PLC has the best employee per profit ratio of 5%. GVC Holding PLC is the second best with a ratio of -1%. William Hill PLC with a ratio of -45% has the least employee efficiency among the companies.

The cash flow on operating revenue ratio shows the amount of income steaming into the company. The best company in terms of cash flow is GVC Holding PLC with a ratio of 14.28%. Rank Group PLC has the second-best cash flow ratio of 13.24% and William Hills PLC has the worst cash flow ratio of -38.34%

The non-financial ratios can also be used to compare similar companies. In this case, the labour turnover ratio is used to compare the three companies. GVC Holding PLC is the best recording of an increase in the number of employees. Rank Group PLC is the second-best recording with a lesser turnover ratio. William Hills PLC is the worst out of three with a high number of employee turnover.

The best performing company is Rank group PLC with GVC Holding PLC in the second position in terms of performance. William Hills PLC is the lowest-performing company out of the bunch. However, GVC Holding PLC provides the best investment opportunity. The company has a bigger global image and it offers the highest share value. The most profitable company is Rank Group PLC but it has fewer assets compared to GVC Holding PLC. An investor has a better chance of earning returns when investing In GVC Holding PLC due to a higher solvency ratio.

Question Two

The cost of a capital decision is crucial in financing the investment activities of the company. The cost of capital is simply the cost that is associating with raising finances for the company. Different sources of financing have a different cost to the company. The sources of finance are broadly divided into short term and long term sources of finance. The short term sources of finance are financing over a short term period of usually less than a period of one year.

External Short Term Sources of Finance

Trade credit is another short term source of finance for companies. Companies can purchase goods or raw materials in credit paying the amount at a later date. Working capital loans from commercial banks are also classified as trade credit. Advances from customers can be used to finance the investments of the company. The cost of financing through trade credit is minimal but it is not an ideal source of financing for investments recurring huge capital.

Invoice discounting: This is a form of short-term financing, where the banks or financial institutions pays the bill at the discounting time and recovers the money from the customer when it falls due.

Factoring: This is a short term financing issue by either banks or financial institutions. It is an arrangement where accounts receivables are traded to a third party at a slightly lower amount than the attainable value.

Working capital loans: A working capital loan is also referred to as short-term loans. These are loans granted by banks and other financial lending institutions upon thorough scrutiny of the business working capital cycle and creditworthiness. The loans are either repaid in full at the end of the loan period or in partial instalments. Other sources of external finances include commercial paper, and lease financing among others.

Internal Short Term Sources of Finance   

Retained profits or earnings refers to the results generated from an operating business after dividend payout to the stakeholders. Businesses utilize these profits as a source of financing by re-investing back into the business instead of seeking loans from lending institutions such as banks. There are several advantages associated with ploughing back retained earnings such as no cost of capital, they act as a long-term source of finance since they are not repayable, and is cost-effective since there is no issue cost involved.

Working capital is comprised of accounts payables and accounts receivables. A business can strategize on how to use working capital reduction as a source of financing by either; extending the accounts payable cycle through negotiating favourable terms with the creditors which will aid in financing part of trade finance needed by customers, or by speeding up accounts receivables cycle. Benefits accrued by reducing working capital are include saving on the cost of interest on bank overdraft, cash credit, and working capital loans. Other internal sources of finance include debt collection, sale of stock, personal savings from business owners, and contributions from employees among others

Time value of money is an important aspect in finance as it compensates for uncertainty and risk attached to investments. The inflationary nature of money means a pound today is worth more compared to a pound in the future. Debt capital is the best source of finance that a company can use. (Kahn, 2020) By incorporating debt capital in the capital structure, the share value is maximized. When the share value of the company is maximized, potential investors in the economy are attracted to invest in the shares of the company.

The cost of debt= interest (1-tax rate) + (per value – market value of shares)*1/n

(Per value + market value of shares)*1/2

In the case study, the GVC Holding PLC borrowed the highest amount of debt ending up paying 63,900 as interest expense throughout the year of 2018. The decision to finance the investment activities by debt capital resulted in the maximization of the company’s share value. The Rank Group PLC paid 3700 as interest expense in the same year. The management decides to finance the investments project using less debt capital that resulted in a lower value of the shares.

Shareholders prefer debt capital as the source of financing for the company’s investments project. They are willing to give up their voting rights that are associated with equity finance for the maximization of the market share prices. When the share prices are maximized, the shareholders can sell their shares to investors at a profit.