Financing a UK listed fashion retailer

| March 27, 2014

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Fashionista plc (fictional company) is a long established clothing retailer which is listed on the London Stock Exchange. A new management team has re-focussed the business on the ‘ladies fast fashion’ segment of the market, and over the last two years it has seen significant growth. Management has identified an opportunity to treble the number of retail outlets over the next five years, and is considering how this growth should be financed.
The company currently has a market capitalisation of just over £2billion, and its shares trade on a Price to Earnings (P/E) ratio of 18.5. It owns most of the retail premises from which it trades, and having grown organically over a long period, has very little debt. This practice is unusual, as most retailers rent their premises.
You are required to prepare a report for presentation to the directors of Fashionista plc, making recommendation as to the types of finance which should be used to fund the proposed expansion. Your report should critically evaluate the types / sources of finance that are available to a company of the size and nature of Fashionista plc, and should include a discussion of the merits of raising debt versus equity. Within the appraisal you are required to select a UK listed company of a similar market value and provide an evaluation of how that company’s market value has changed over the last 3 years, together with how its finance needs were met during that period. Your report should be supported by references to academic papers, textbooks, journals and internet sources, in accordance with ‘good academic practices’.
Assessment criteria (weightings indicated for each criterion)
1. (30%) Critical evaluation of the difference between debt and equity from the perspective of a UK listed company.
2. (20%) Critical appraisal of the types of finance available for a UK listed company.
3. (30%) Evaluation of a UK listed company’s market value, over the last three years together with its finance needs.
4. (20%) Justification and articulation of a recommended approach for the types of finance to be used for the given scenario.
Additional guidance:
‘Fast fashion’ is a term used by clothing retailers to describe the situation where products based on the latest catwalk fashion trends are sourced quickly, and sold cheaply, to primarily young female customers.
Please note that it is important to mention the limitation of ratios.
You can choose a similar company of the market value to compare to.
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