Introduction: Theory
Business Overview
Drafting a business plan is essential when a company is seeking capital. Potential lenders anticipate a succinct and well-contemplated plan. The plan should explain where the organization has been, is expected to go, the means, strategies and actions it will take. Besides, the business overview section should explain how the company has been performing in the industry compared to other market competitors. This is supported by the fact that it is a summation of the organization’s history, products, administration, industry, vicissitudes, and current position. It does not include where the organization plans to proceed to in the next financial years. It only indicates how the organization runs and utilizes its capital.
Risk
In business literature, risks refer to the likelihood of a shareholder to incur losses arising from factors that affect the general performance of markets. In the financial circles, investment risks are classified into two main classes namely marketplace threats and particular threats. Marketplace risks are also referred to as ‘methodical risk’. This risk cannot be eradicated through diversification. However, marketplace risk can be circumvented by devising viable risk mitigation strategies.
Illustrations on marketplace threats are that an ordinary calamity might lead to a slump in financial activities. Other aspects that may lead to market risk include economic depressions, political instabilities, variance in interest rates and security threats. Particular risk is also referred to as ‘unmethodical risk’. This risk is openly associated with the performance of a specific security. This risk can be guarded by diversifying investment. An organization may for example be a retailer and invest in services.
Short Term Financial Policies of the business
In order for any business to thrive, financing must be done. Such modes of funding are apparently both short-term and long-term in nature. On the other hand, corporate managers must ensure that sources of finance match with the assets of the business including monetary flows as well as the scheduling of activities. Short-term financing comprises of commercial papers, credit scripts, re-procure contracts, asset-supported loans, and promissory letters. Typically, short-term financing is utilized for duration of up to one year. This facilitates a company to boost stock, payrolls and every day supplies.
Commercial Papers
This financial instrument has a rigid maturity of one year. It is an unsecured promissory letter. Typically, the paper is given by huge companies to receive financing to settle short-term debt requirements. The paper is only supported by the assurance of the issuing company or bank undertaking to settle the amount on the paper by the date indicated on the note. The paper is not backed by collateral of any nature. In this case, only companies with outstanding credit ranking possess the capacity to settle reasonable prices on these papers. Asset-based commercial paper is a letter that carries with it collateral on other financial assets. It matures within six months of issuance.
Promissory Note
The note is among the negotiable financial tools. The issuer makes an unrestricted pledge in text regarding the payment of a specific amount to the receiver. This can be on a specific future date or as the receiver may claim. The conditions are placed on specified terms.
Asset-Supported Loan
This kind of loan requires collateral in terms of corporate assets. Company stock, equipment and landed property are primary assets accepted by the lender.
Repurchase Agreements
These loans are repayable in less than a fortnight. Typically, they are repaid in a single day. The loan required by the company is received after the company sells securities to the creditor. The investor then agrees to resell the securities to the company at a specific price on a fixed day.
Current Capital Structure
Capital structure is the method a company uses to fund its property including a mixture of equity, liability or securities. In this regard, the mode of capitalization appears to be the makeup of the company’s legal responsibilities including temporary and long-term obligations. The company’s ratio of debt to funding is the dubbed as leverage. Practically, capital structure is extremely multifaceted and comprises of diverse sources. The capital structure is a brainchild of Merton Miller and Franco Modigliani.
The theorists developed the Modigliani-Miller theorem. However, the theorem is largely observed as only being theoretical due to its ignoring of multiple factors in arriving at the capital structure. According to the theorists, how a company is funded is unrelated to the company’s worth in an ideal market. This approach initiates the basis for examining the actual explanations why capital structure is significant. An organization’s value is influenced by the capital structure it utilizes. Explanations include levies, agency expenses and insolvency costs.
Current Dividend Policy
Dividends are the imbursement paid to shareholders from the income generated by a company. The income does not matter whether it has been generated in the current or past financial period. It has been established that dividends typically influence the capital structure of a company. When a company chooses not to give dividends to the shareholder, the common equity is increased compared to the debt the company owes. When the retained income (which otherwise would have been distributed as dividends) is used to fund other company projects, it is less costly than when the company opts to issue new common equity.
Typically, a dividend policy is often based on the value of common stock. However, different presumptions attempt to give details on the correlation between the companies common price of stockpile and dividend strategies.
Dividend Irrelevance Theory
The theory contends that dividend does not have any effect on either the company’s value or the cost of the capital employed. It asserts that the shareholders place worth on both dividends and increase in capital. That is, whether the shareholders receive dividends periodically or not does not matter so long as the company capital keeps increasing.
Optimal Dividend Policy
The supporters of this theory hold the position that a dividend policy exists to front the equilibrium between current dividends and the prospective growth or reduction of capital. The reduction in the distribution of dividends leads to future growth in the employed capital and consequently the stock price. Conversely, increasing and distributing dividends to the shareholders lead to the reduction in capital employed and consequently the price of stock.
Dividend significance premise
This assumption holds that the worth of any company is affected by the share plan the corporation proposes and build up. The most valuable share plan a company adopts apparently guarantees that the worth of that corporation is optimized. This is in terms of capital employed while at the same time putting into consideration the expectations of the shareholders.
Theory related to companies and analysis
The current situation of Target Corporation and Wal-Mart
The major force in this sector accrues from the rivalry amongst market competitors. Target Corp and Wal-Mart appear as leaders in the overall retailing of merchandizes. Whereas Target operates domestically, Wal-Mart makes its presence felt worldwide. Wal-Mart Corp can now obtain funds, negotiate with sellers, and benefit from economies of scale. Compared to Target Corp, its operational magnitude is just about six-times. Regardless of such merits, the competition between these two corporations can be matched fairly (Hahn, Lisa, & John, 2005). Both the companies deal in differentiated products. However, they are market rivals when contending for the disposable consumer income. Such an antagonism occurs in the commodity segment.
In the 1990’s, the Wal-Mart had become the leading retail store in the United States both in size and profitability. The growth of the company expanded exponentially to international markets starting with Mexico. After the death of Walton in 1992, the company’s profitability declined significantly. The introduction of Wal-Mart’s Great Value brand one year later contributed to the rebound of the company into the market.
Despite the presence of substitute commodities, minimal threat is experienced. The discount retailers have lower prices than the departmental stores. Thus, the latter category seems to be unappealing to clients who seek to buy low priced products. On the other hand, both the recycled supplies as well as prudence supplies present merchandises at very low prices. Nevertheless, they are unattractive to the clientele as well as to the consumers.
In the retail market, consumers have strong powers to bargain. Various alternatives are available for buyers to access. However, in the industry, rivalry amongst firms is substantial. This brings about the industrial price competitions. Most of these actions tend to increase the buyers bargaining powers (Hitt, Ireland & Hoskisson, 2010). Thus, the clientele choose merchandizes to be purchased, and businesses organizations they will visit regularly. When market rivalry takes place, the commodities that clients demand and are willing to purchase seem are acquired at low prices. When this occurs, corporations will be able to maintain both low margins as well as low prices.
Wal-Mart: Company Overview
Sam Walton founded the company in 1962. Initially, the company operated in rural areas to avoid competition from giant retailers. Wal-Mart is a globally renowned retail stores operator. This corporation manages the shops in assorted set-ups depending on the clientele and location. In fact, within the United States, this corporation’s outlet arrangements entail Sam’s organization, souk-side, zonal souks, fabulous centers, and price cut outlets. It is in Arkansas Bentonville where this corporation has its head offices. The company operates in many other international locations. Globally, the company employs more than 2.1 million workers.
During the fiscal year that ended in January 2013 (FY2013), Wal-Mart generated revenues totaling to $421,849 million. This was an increase of more than 3.3 percent relative to the fiscal year 2012. During the fiscal year 2012, the company’s net profit was recorded as $16,389 million. This was an increase of more than 14 percent relative to the 2011 fiscal year. The company continues to be profitable and expanding overseas.
Conversely, Wal-Mart is a diversified retailer. The company deals in consumables. These include grocery, home products, toys and apparel as well as other products. The company management structure was developed and implemented by Walton. The management style places priority on customer satisfaction, expense controls and effective supply network.
Risk
The retail market is volatile and many competitors keep emerging. Following the death of the founder, the company financial performance declined. The management opted to accumulate organizational debt. This would facilitate the company to fund new corporate strategies. These included opening of new Wal-Mart Supercenters. This high financial risk eventually bore fruits. By 1995, the company’s sales doubled. By 2000, the company emerged as the global biggest private employer. There is a wide range of risks in the retail industry. The company recognizes the fact and put measures in place to mitigate these risks. The risk management employed by the company was formulated and implemented by John Lewis. The company developed a five-step process based on four fundamental questions (Atkinson 2005, p.1).
Short Term Financial Policies
The company manages its finances soundly. Since the 1992 low performance and the eventual introduction of the Great Value brand, Wal-Mart utilizes short-term instruments to retain customer loyalty. It ensures its customers benefit from the instruments. The company is rarely issued with the instruments since it is financially endowed.
Current Capital Structure
The company has managed to increase its market capitalization for the last two decades. The debt is kept at a minimum with equity constantly increasing. From the 2013 balance sheet, the company has a current market capitalization of 243.75 billion, total debt equivalent to 54,136,000 million, and $7,781,000 in cash and equivalents as shown in the figure below.
Current Dividend Policy
The company has a history of a shareholder friendly dividend strategy. The company is a reliable dividend payer. This attracts shareholders who compete to invest in the company. The company increasing disbursements have assisted the shareholders to maintain speed with the Dow Jones Industrial Average to stay ahead since 2008. Currently, the company pays $ 1.59 annual dividend per share. This takes place in parts quarterly. The BOD determines and communicates the declared dividends via hearsay releases.
Target Corporation: Business Overview
Target is another name that refers to Target Corporation. This company is a retail corporation found in America. The first retail store was opened in 1902, in Minneapolis, Minnesota. During its inauguration, this store was named Dry Dayton Goods Corp. Target Corp currently operates under two distinct divisions namely the retail segment, and the credit card segment. The retail division incorporates all the integrated online businesses and the merchandizing business operations of Target Corp. The retail division in the United States enables clients to establish the stores where the products are, and buy them online.
The credit card division provides credit services to eligible clients or consumers via the RED cards such as the Target Visa, and Target Corp Card. In the United States, Wal-Mart Corporation is the largest discount retail company followed by Target Corporations, which is ranked second. From the departmental stores, Target Corporation has overwhelmingly grown to make its first appearance in Canada. The merchandizes offered by this corporation have prices that are discounted. Target is now reportedly offering branded debit cards.
History of Target Corporation
Dayton John finished constructing a building that had 60 stories in the fiscal 1902. The successfully finished structure was situated in Minneapolis city center and was leased to Goodfellow Corporation. This corporation transferred its departmental stores to this newly built Dayton structure. John later in the fiscal 1903 had Dayton Dry Goods Corp, which took the name of the Goodfellow departmental stores (Lehman, 2002).
The company, Hudson-Dayton Corp through expansion purchased various departmental stores situated in West Coast. Nevertheless, in the fiscal 1971 the company expanded rapidly, but reported a decline in returns because it had inexperienced staffs managing the subsidiaries. Since this period, Hudson-Dayton and Target have been affluent in this industry. Target Corporation was the name given to Hudson-Dayton in the fiscal 2000, and the company still operates Target departmental stores to generate income (Lehman, 2002). In the United States, Target Corp currently generates over $63.38 billion in sales returns, and operates 1,592 departmental retail stores.
Risk
Target Corp relies heavily on debts. Given that debts are paid in future dates, there are attached risks including income uncertainties as well as inflation that can possibly increase the payment price for such debts. That is, it might be costly to finance debts compared to financing equity.
Short Term Financial Policies of the business
Target Corporation has consistently grown from the start. The company is confident that such growths will persist in the future. For continuous expansion, the company normally sells some of its assets to get additional cash. The board always approves any business plan in order to reduce the borrowing costs. The company ensures that it has right of entry into the capital markets to be able to acquire monetary instruments necessary to increase its liquidity.
The company aspires to preserve an impartial debt-maturity scale while upholding maximum contact to the floating-rates. According to its interim fiscal policies, the corporation aims to surge recurrent stocks, augment the obligation maturity, advance financial credits, repurchase dividend stockpile, and finance additional principal expenses. Target intends to realize these through temporary debt issuing, returns from various fiscal activities, and cash equivalents.
Current Capital Structure
Since its incorporation, Target Corporation appears to have maintained a striking capitalization composition. In fact, this corporation holds a reasonable enterprise value and debt levels equivalent to EBITDA * 6.80 and EBITDA (net cash *1.90) x2.10 respectively. The capital structure of the company is derived from management attitude, monetary suppleness, tax status, and commercial risks. Besides, this reasonable debt level tolerates improved returns on the corporate equity and hardly generates problems during debt servicing. This is derived from the fact that the weighted total debts costs are practically below five percent (5.0%). From the balance sheet, the company has a market capitalization of 40.24 billion, total debt equivalent to 17.639 million, and $784, 000 in cash and equivalents. See table below.
From the table above, the capital structure of Target Corporation includes both preferred and common stocks as well as debts and cash equivalents.
Current Dividend Policy
In the last forty years, Target Corp has consistently increased its dividends. From the fiscal 2007 to 2013, the stakeholders have recouped yearly overall returns equivalent to 12.3 percent as a growth in the dividend stock. From the fiscal 1998, Target delivers standardized increase in the earnings per share totaling to 16.9 percent annually. Besides, in the last ten years, the annual payment of dividends averagely improved by nearly 12.2 percent. Currently and after every six financial years, Target Corp tends to double its dividend growth rate that is equivalent to 12.0 percent. Such growths are translated into the payment of this company’s dividends to the shareholders.
However, the payments on dividends have stayed put below 24.0 percent over a period. As a policy, the BOD normally determines and declares the dividend payout each financial period. Thus, the worse dividend payments to the shareholders are normally an advantage to the company given that they consistently minimize the temporary effects caused by variations in incomes.
Conclusion and recommendations
This review reveals that both Wal-Mart and Target Corporation effectively manage the employed capital. This ensures that the companies stay ahead of competition in the national, international and global retail markets. It has also been revealed that taking risks and having structures in place ensure that the companies remain relevant and more importantly profitable in the increasingly competitive retail industry.
It is imperative for companies to ensure that the capital employed is optimally utilized to reap maximum benefits. Additional, company managements should ensure that the dividend policies match the overall corporate strategy. It is also important for the management to ensure that the expectations of shareholders are met since they also determine the capital value of the company. In this respect, companies should adopt the Relevance Dividend approach to ensure growth both in capital value and shareholder satisfaction.
Practical risk management strategies should be a core element when designing a business plan. This not only helps the business to be proactively to potential risks but also play part in convincing investors that by investing in the enterprise, they will be making a wise decision.
References
Atkinson, W 2005, ‘Enterprise risk management at Wal-Mart’, Risk Management Magazine, Web.
Hahn, L, Lisa, K, & John, P 2005, Target Corporation: strategic report, Web.
Hitt, M, Ireland, D & Hoskisson, R 2010, Strategic management: competitiveness and globalization concepts, Cengage Learning, Boston, MA.
Lehman, B 2002, Target Corporation: over-weigh the target, Web.