Finance Essay Example | Topics and Well Written Essays - 1500 words

Finance - Essay Example Moreover, an increase in EPS is also increasing dividend paid to NEXT plc shareholders, thus satisfying more the shareholders. This increase in EPS is also tested for quality based on the information from cash flows. Increase in EPS is strengthening positive operating cash flows; as increase in EPS is sometimes shown only on income statement and cash flow statement provides real picture with negative cash flows for operations (Next Plc, 2012).. This increase in EPS in line directors stated objective to provide sustainable long term growth in EPS. For this purpose, NEXT has adopted two strategies; one to increase the sales of the company by increasing the product quality and new stores along with increased cost control. The second strategy is buying back of outstanding shares. Buy backed shares reduces the number of shares outstanding in the market and hence, allows greater proportion of net income to individual share, thus it will lead to same earnings with less outstanding shares, t herefore lower EPS. EPS increase also puts positive impact in share price (though not always) and has also benefitted NEXT plc. CORPORATE BONDS FROM BALANCE SHEET For year 2012 NEXT plc has increased corporate bonds liability amounting to 652.1 million as compare to 471.2 million in year 2011. In the current year firm has issued 10 year 325m bond. Increase in corporate bonds has increased interest expense to 28m (Next Plc, 2012). Increase corporate bonds indicate that firm is extending its debt source of financing as against equity financing to take tax benefit. Equity financing is the most expensive source of financing; therefore, firms are more inclined to debt financing that is relatively cheaper as per Pecking theory (Zhao, Katchova, and Barry, 2004). Moreover, increase in debt facilitates firms firm with cash flows without giving any rights of decision making. Since in difficult economic situation firms have to make tough decisions therefore, management is interested to maintai n decision making more in their own hands. In addition to this, increase in debt gives the opportunity to firms to take advantage of the leverage concept which in return increases its Return on Equity (ROE) (Booth, Aivazian, Demirgue-Kunt and Maksimovic, 2001). This makes the firm more attractive for investors against competitors and it gives a positive signal to the investors according to Signal Theory. Benefit of this strategy has started to be reflecting as NEXT plc share has been ranked as the second best performing firms on FTSE-100 companies and has led its earnings per share increased by compound rate of 18 percent. NEXT Plc has been increasing its debt source of financing to facilitate two objectives; first, to tender cash flows for operations and capital investment. And second to gain the sustainable long term growth in EPS. To continue growth strategy in terms of location, product and sales firm and also EPS, NEXT plc has planned to increase the debt further and has also i ncreased its bank facility by 300 million for 5 years. Moreover, NEXT plc has planned to increase debt max by 700m in order to support the share buyback strategy. REPURCHASE OF OWN SHARES FROM STATEMENT OF CASH FLOWS NEXT plc has been following to continue share buy back from on market and off market. In year 2012 firm conducted in investment activity of buying back its own shares