Module Title: International Finance

Module Handbook 2020/21

Module Code: BMG704 (86966)

Course/s: MSc International Business

Department of Global Business and Enterprise

Ulster University Business School

Salman Iravani
Module Coordinator
Email: salman.iravani@qa.com

Office Hours: Online via email

 Table of Contents
1 Introduction.........................................................................................................................................1
2 Section A: Two Recent Development that have affected Vodafone’s Performance............................1
2.1 Development One........................................................................................................................1
2.2 Development Two.......................................................................................................................2
3 Section B: Dividend Policy and Sources of Finance..............................................................................2
3.1 Dividend Policy............................................................................................................................2
3.1.1 Three Dividend Policy..........................................................................................................3
3.1.2 3-Year’s Dividend of Vodafone Group Plc:...........................................................................3
3.1.3 How Vodafone manages risk associated with paying dividend............................................3
3.2 Sources of Finance.......................................................................................................................4
3.2.1 Two Capital Structure Theory..............................................................................................4
3.2.2 Sources of Finance of Vodafone Group Plc:.........................................................................4
3.2.3 How Vodafone Plc manages risk associated with borrowings.............................................5
4 Section C: Ratio Analysis......................................................................................................................6
4.1 Profitability Ratio.........................................................................................................................6
4.1.1 Return on Capital Employed................................................................................................6
4.1.2 Operating Profit Margin Ratio..............................................................................................6
4.2 Efficiency Ratio............................................................................................................................7
4.2.1 Inventory Turnover Days......................................................................................................7
4.2.2 Receivable Days...................................................................................................................7
4.3 Liquidity Ratio..............................................................................................................................8
4.3.1 Current Ratio........................................................................................................................8
4.3.2 Acid Test Ratio/Quick Ratio.................................................................................................8
4.4 Shareholder’s Ratio......................................................................................................................9
4.4.1 Earnings Per Share...............................................................................................................9
4.4.2 Dividend Payout Ratio........................................................................................................10
5 References.........................................................................................................................................11
6 Appendices........................................................................................................................................13
1 Introduction
Vodafone is one of the largest multinational telecommunication companies of British origin.
Currently it is operating its business in almost 26 countries. From its’ very beginning Vodafone
has attracted a lot of customer with its’ diversified cost cutting products offering. This
assignment is assigned us to make us familiar with sources of fund and its theories. In this
assignment, Vodafone Plc’s sources of fund has been analyzed. Finally the company
performance has been evaluated through ratio analysis.

2 Section A: Two Recent Development that have affected Vodafone’s

Performance
2.1 Development One
Last year in December 2019, first coronavirus outbreak was seen. Very soon coronavirus attack
started to spread out. Like any other countries UK and Europe has been affected by Coronavirus
in late January.

Due to Covid-19 attack Vodafone Plc’s market has been contracted, areas of business has been
shrunk. A lot of employees of Vodafone Group Plc had been working from home till the first
outbreak of Covid-19 in UK.

Vodafone’s service revenue growth has been decreased by 1.3 percentages point (Stone, 2020).
Group CEO Nick Read claimed in an interview that due to Covid-19 the company base has
decreased by 50000 (Reuters, 2020) and retail activities had to cut short (Thomson, 2020). He
also clarified that various travel restrictions, delaying in business project in UK, Spain and Italy
caused this revenue to decline.

To deal with this unexpected situation Vodafone has taken “resilience plan” and according to
Nick Read, the company is responding with this strategy properly (Vodafone Group Plc, 2020).

Vodafone Group Plc has decided not to increase further debt capital. Group’s maturity of debt is
longer and allows the Group not to take any debt capital (Vodafone Group Plc, 2020).

Interest expenditure of Vodafone is in fixed stream, it will help them to reduce cost and to avoid
unexpected expenditure in near future (Vodafone Group Plc, 2020).

1|Page
Vodafone maintains stable and sufficient liquid fund (FCF £13288 in 2020, £13605 in 2019 and
£5394 2018)to tackle unexpected cash outflows.

During lockdown Vodafone data plan purchasing rate has increase significantly which helped
them to increase sales revenue (see appendix for details).

2.2 Development Two

Vodafone and Huawei are in a long term strategic relationship from 2017 (Goss, 2019). Recently
Huawei has been accused for breaching of sensitive data to Chinese government. When
contacted, Huawei assured that this faulty engineering was first discovered in 2012 and resolved
then (Garside, 2019). But Recently in 2019, Vodafone identified backdoors in Huawei mobile
network equipment and home routers (Lepido, 2019). Noticing this scandal UK government has
banned Huawei in their 5G network installation project. Consequently mobile network
companies in UK are facing uncertainty a lot. Since Vodafone is a strategic partner, the company
is not outside of this uncertainty.

To comply with the government decision, Vodafone has decided to wipe out Huawei technology
from its 5G project over five years. Vodafone CEO Nick Read claimed that it will cost them over
£170 million (Field, 2020).

To cope with this uncertainty Vodafone has taken multidimensional attempt. Those are

Vodafone warned the government that this decision of banning Huawei will delay the 5G project
(Cellan and Jones, 2019).

Vodafone is arranging discussions and consultation with government and various agencies to
resolve this issue quickly so that financial loss can be minimized (Goss, 2019).

Vodafone Plc has already contracted with alternative suppliers which will be effective in absence
of Huawei (Vodafone Group Plc, 2020).

3 Section B: Dividend Policy and Sources of Finance

3.1 Dividend Policy
Dividend Policy is a management’s decision on the retention of profit or distributing the profit in
the form of dividend. Legal constraints, dividend policy in the industry, tax brackets are
considered before declaring dividend policy (Sanni, Momodu and NGerebo, 2009).

2|Page
3.1.1 Three Dividend Policy
Walter’s Model: Walter’s Model is developed by Professor James E Walter. According to
Professor Walter, management’s decision about dividend policy always affect the firm’s value. If
management sees some good investment opportunity then management does not declare any
dividend (Verma, 2020). On the other hand when there is no investment opportunity available
management choose to declare dividend.

Gordon’s Model: Gordon’s Model is quite similar to Walter’s Model. Professor Myron Gordon
claims that dividend policy is relevant and firm’s value largely depends on the dividend policy of
a firm. Professor assumes that investors are risk averted and thus prefer present certain dividend
over future uncertain capital gain. So they make their investment decision based on dividend
declaration (Verma, 2020).

MM Hypothesis: MM Theory or MM Hypothesis or Dividend Irrelevance Theory is considered

as a traditional theory of dividend policy is first proposed by “Merton Miller & Franco
Modigliani”. They claim that dividend theory is irrelevant in determining firm’s value under
perfect market condition (Verma, 2020). They opined that investors do not rely upon the
dividend policy of the firm for earnings rather they formulate their own earning policy to get
desired profit.

3.1.2 3-Year’s Dividend of Vodafone Group Plc:

Annual report of Vodafone Group Plc reveals that the company declared divided every year in
February (interim) and August (Final). Historically Vodafone Group Plc has declared dividend
every years in recent days.

Year Dividend Growth

2018 15.07€c 2.03%
2019 9.00€c -40.28%
2020 9.00€c 0.00%
2021 (interim) 4.50€ N/A

Current Yield (Data, 2020) 6.45%

3|Page
3.1.3 How Vodafone manages risk associated with paying dividend
Paying dividend continuously causes the cash reserve to decrease, expenditure to increase and
create bad perception in investor’s mind. So to cope with this situation

 Vodafone proposed a new digital transformation plan which will reduce net operating
cost up to £0.4 billion (Almeida, 2020).
 Vodafone has proposed another new three years plan which will reduce expenditure up to
£1 billion (Almeida, 2020).
 Vodafone Group Plc has generated enough free cash flows in recent years which will be
sufficient to support cost of paying dividend (Vodafone Group Plc, 2020). (see appendix
A)

3.2 Sources of Finance

Source of finance are the mixture of origin of funds form where a business organization can raise
its’ required fund. Broadly sources of finances are of two types: internal and external. It is up to
management to decide which sources will be cheaper for a business organization.

3.2.1 Two Capital Structure Theory

Signaling Theory: Signaling theory is very similar that of Gordon Model. Signaling theory
claims that management’s decision about capital raising policy could signal about the firm’s
financial performance (Brigham and Ehrhardt, 2002). So looking over the decision, an investor
can take his investment decision. This theory proposes that management issues new stocks only
when they think future is not good and to distribute the prospected loss over shareholders.
Conversely management will not issues new stocks when future prospect deems good.

Net Income Approach: Professor David Durand vocalized this theory claiming that cost of
capital or Weighted Average Cost of Capital has significant impact over optimal capital structure
ratio. According to this theory, optimal capital structure for a firm can be found by minimizing
cost of capital or WACC. This theory assumes that cost of debt is cheaper than cost of equity
capital (Brigham and Ehrhardt, 2002).

3.2.2 Sources of Finance of Vodafone Group Plc:

Annual report 2020 reveals that Vodafone Group Plc is highly leveraged with debt capital. In
2020 almost 63% of its’ capital is raised from debt capital and rest of 37% came from equity
capital. Details breakdown of capital structure and sources of funds is presented below:

4|Page
 Capital Structure and Sources of Fund of Vodafone Group Plc €m
Called up share capital 4797
Additional share capital 152629
Treasury shares (7802)
Accumulated losses (120349)
Accumulated other comprehensive income 32135
Non-controlling interests 1215
Total Equity 62625 37%
Long term borrowings 62892
Deferred tax liabilities 2043
Post employment benefits 438
Provisions 1474
Trade and other payables 5189
Total Long term liabilities 72036 43%
Short term borrowings 11826
Financial liabilities under put option arrangements 1850
Taxation liabilities 671
Provisions 1024
Trade and other payables 17085
Liabilities held for sale 1051
Total short term liabilities 33507 20%
Total liabilities 105543 63%
Total equity and liabilities 168168 100%
3.2.3 How Vodafone Plc manages risk associated with borrowings
High leverage causes bankruptcy risk to increase, decreasing cash flows and hardening to enter
to debt market. So to mitigate these risks Vodafone Plc has taken initiatives

 Vodafone has decided to monetize European TowerCo in 2021 within 18 months.

Proceed from monetizing will be used to reduce debt capital (Almeida, 2020).
 Vodafone has decided to sell its’ New Zealand Operation’ and make a proceed of £2.1
billion to reduce debt (Lennighan, 2019).

5|Page
  Vodafone Group has long term debt its’ capital structure and thus does not need to raise
debt capital any more (Vodafone Group Plc, 2020).

4 Section C: Ratio Analysis

4.1 Profitability Ratio
4.1.1 Return on Capital Employed
Return on Capital Employed is a long term profitability measurement which measures the
efficiency of a firm to generate profit using its’ capital employed. It measures the efficiency of
the asset to generate cash (Kieso, Weygandt and Warfield, 2015). This ratio can be calculated
dividing Earnings before Interest & Tax by Capital Employed. Here capital employed refers as
the sum of total equity and non current liabilities.

Return on Capital Employed (ROCE)

2020 2018
ROCE=Earnings before interest ∧Taxes ¿ 4682
¿ 4427
×100
× 100 ×100
Total equity+ NonCurrent Liabilities
62625+72036 67640+37980
1.02% 4.19 %
Sources: Annual Report

Explanation

Vodafone Group Plc has achieved ROCE ratio 4.19% and 1.02% in 2018 and 2020 respectively.
This alternatively implies that Vodafone generated £1 and £4 of profit using £100 of capital. In
2020 this ratio decreased almost by 4 times. The reason for this degradation is the increment of
non current liabilities in 2020

4.1.2 Operating Profit Margin Ratio

Operating profit margin measures the efficiency of a firm to convert its sales revenue into profit.
In income statement operating expenses are deducted from sales revenue and the remainder is
called as operating profit. Higher the ratio, higher the efficiency of the firm (Kieso, Weygandt
and Warfield, 2015).

Operating Profit Margin

2020 2018

6|Page
 Operating Profit 4099 4299
OPM= × 100 ×100 ×100
Total Sales 44974 46571
9.12% 9.23 %
Sources: Annual Report

Explanation

Operating profit margin ratio of Vodafone Group Plc is 9.12% and 9.23% in 2020 and 2018
respectively. It implies Vodafone Plc converts per £100 sales into £9 of profit. The reason for
decreasing the ratio is the degradation of both profit and sales revenue in 2020.

4.2 Efficiency Ratio

4.2.1 Inventory Turnover Days
Inventory turnover days measures how efficiently a company manages its’ inventories.
Elaborately it calculates the days need to convert inventories into sales revenue (Kieso,
Weygandt and Warfield, 2015). Lower inventory days ratio means it takes less time to generate
sales and thus reduce storage and holding cost. Mathematically this ratio can be found dividing
inventories by cost of goods sold.

Inventory Turnover Days

2020 2018
Inventory 585 581
Inventory Turnover= × 365 ×365 ×365
Cost of Goods Sold 30682 32771
6.95 days 6.47 days
Explanation

Inventory Turnover Ratio for Vodafone Plc is 6.95 days and 6.47 days in 2020 and 2018
respectively which is very lower. That indicates Vodafone’s efficiency to manage inventory.
Since this ratio is lower, Vodafone can generate enough revenue within a fiscal year.

4.2.2 Receivable Days

Receivable Days ratio measures the efficiency of a firm to collect accounts receivables. It
measures how quickly a firm can collect cash from its debtors. In other words, it measures the
firms efficiency to interact with its customer (Kieso, Weygandt and Warfield, 2015).
Mathematically this ratio can be found dividing accounts receivable by sales revenue.

7|Page
 Receivable Days

2020 2018
Receivables 10378 4026
Receivable Days= ×365 ×365 × 365
Sales Revenue 44974 46571
84.22 days 31.55 days
Sources: Annual Repot

Explanation

Vodafone Group Plc has receivable turnover days ratio 84.22 and 31.55 days. It means the
company needed almost three months to collect cash of its sales while the ratio was 31.55 days in
2018. This ratio was quite satisfactory in 2018, but increase abruptly in 2020. The reason for this
increment is the sudden increase of credit sales.

4.3 Liquidity Ratio

4.3.1 Current Ratio
Current ratio is synonymously known as working capital ratio measures the short term solvency
of a firm. It measures the firms ability to meet short term obligations (Kieso, Weygandt and
Warfield, 2015). Lower current ratio indicates the higher chance of being insolvency and
liquidity crisis. Mathematically this ratio can be calculated dividing current asset by current
liabilities.

Current Ratio

2020 2018
Current Asset 34248 37951
Current Ratio=
Current Liabilities 33507 39024
1.02 0.97
Sources: Annual Report

Explanation

Vodafone Plc has current ratio 0.97 and 1.02 in 2018 and 2020 respectively. It implies that the
company has £1.02 and £0.92 of short term asset to meet its’ £1 of short term liabilities. So it can
be concluded that the company has lower chance of falling in liquidity crisis in 2020 and the
company had recovered its deficit of 2018 in 2020.

8|Page
4.3.2 Acid Test Ratio/Quick Ratio
Acid test ratio is also a liquidity measurement ratio which measures liquidity in more narrow
sense. It defines short term asset with narrow definition compared to current ratio. It deducts
inventories from current asset and thus depicts more vivid picture of liquidity of the company.
Because inventories require some time to be sold and to generate cash. So deducting this
inventories will result pure ready cash available to the company(Kieso, Weygandt and Warfield,
2015).

Acid Test Ratio

2020 2018
Current Asset−Invenories 34248−585 37951−581
Acid Test Ratio=
Current Liabilities 33507 39024
1.01 0.96
Source: Annual Report

Explanation:

Acid test ratio needs to be understood in the light of current ratio. Since current ratio of
Vodafone Group in 2020 was above 1 point, acid test ratio has done similar performance. This is
a sign of hope that Vodafone Plc has the ability to pay its’ short term liabilities just then and
there.

4.4 Shareholder’s Ratio

4.4.1 Earnings Per Share
Earnings per share measures the amount of earning which will go to the common shareholders. It
measures the earning based on per share and thus called as earnings per share. Higher earnings
per share ratio makes the stock price lucrative to the shareholders(Kieso, Weygandt and
Warfield, 2015). Mathematically this ratio can be found dividing available earnings to common
shareholders by number of ordinary shares.

Earnings Per Share

2020 2018
Net Income( Attributed¿Ordinary Shareholders) (920) 2439
EPS=
Number of Oridinary Shares 29422 27857
(3.13 c ) 8.78 c

9|Page
In the year of 2020, Vodafone Group Plc has net loss after tax and that is why the company has
negative earnings per share ratio. Which implies that the company could not distribute any
profits to the common shareholders. But in2018, this ratio was 8.78 per cents. Annual report of
2020 reveals that the reason for this net loss is unusual £2000 million of interest expenditure in
2020.

4.4.2 Dividend Payout Ratio

Dividend payout ratio measures the efficiency of a firm to distribute its’ profit to the shareholder
in the form of dividend (Kieso, Weygandt and Warfield, 2015). It is an important indicative tool
for the investors. If any company pays dividend regularly, investors usually consider that firm
has enough free cash flows to pay dividend and thus become willing to invest in that firm.
Mathematically this ratio can be found dividing total dividend by net profit.

Dividend Payout Ratio

2020 2018
Total Dividend 2317 3961
DPO= ×100 × 100 ×100
Net Profit (455) 2788
−509.23% 142.07 %
Sources: Annual Report 2020

Explanation

As already mentioned that Vodafone has net loss in 2020 and so it has negative dividend pay out
ratio in 2020. Though the company had net loss, it declared dividend in 2020. Alternatively it
indicates that the company has enough reserve or provisions set aside to deal with such
unfavorable situation.

10 | P a g e
 5 References
Almeida, L., 2020. Vodafone Commits To Dividend. [online] Investorschronicle.co.uk.
Available at: <https://www.investorschronicle.co.uk/shares/2020/05/12/vodafone-
commits-to-dividend/> [Accessed 27 November 2020].
Brigham, E. and Ehrhardt, M., 2002. Financial Management. 10th ed. Melbourne:
Thomson Learning, pp.620-648.
Cellan, R. and Jones, 2019. Vodafone: Huawei Ban Will Set Back 5G. [online] BBC
News. Available at: <https://www.bbc.com/news/technology-47482140> [Accessed 27
November 2020].
Data, D., 2020. Vodafone (VOD) Dividend Yield - 6.45%. [online] Dividenddata.co.uk.
Available at: <https://www.dividenddata.co.uk/dividend-yield.py?epic=VOD> [Accessed
26 November 2020].
Field, B., 2020. Vodafone To Pay £170M Over Five Years To Strip Out Huawei Kit.
[online] The Telegraph. Available at:
<https://www.telegraph.co.uk/technology/2020/02/05/vodafone-pay-170m-five-years-
strip-huawei-kit/> [Accessed 27 November 2020].
Garside, J., 2019. Vodafone Reveals Existence Of Secret Wires That Allow State
Surveillance. [online] the Guardian. Available at:
<https://www.theguardian.com/business/2014/jun/06/vodafone-reveals-secret-wires-
allowing-state-surveillance> [Accessed 27 November 2020].
Goss, P., 2019. Vodafone Puts Huawei Rollout In Core Networks On Hold. [online] BBC
News. Available at: <https://www.bbc.com/news/business-47001348> [Accessed 27
November 2020].
Kieso, D., Weygandt, J. and Warfield, T., 2015. Fundamentals Of Intermediate
Accounting. Hoboken, N.J.: Wiley.
Lennighan, M., 2019. Vodafone To Make Billions From Towers Deal. [online]
TelecomTV. Available at: <https://www.telecomtv.com/content/mobile/vodafone-to-
make-billions-from-towers-deal-35875/> [Accessed 27 November 2020].
Lepido, D., 2019. Vodafone Found Hidden Backdoors In Huawei Equipment. [online]
Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2019-04-

11 | P a g e
30/vodafone-found-hidden-backdoors-in-huawei-equipment> [Accessed 27 November
2020].
Reuters, 2020. Vodafone Reports Jump In Broadband Services, Drop In Roaming Over
COVID. [online] NDTV Gadgets 360. Available at:
<https://gadgets.ndtv.com/telecom/news/vodafone-h1-2020-earnings-results-covid-19-
pandemic-2325890> [Accessed 27 November 2020].
Sanni, T., Momodu, A. and NGerebo, T., 2009. Dividend Policy. In: Dictionary of
Finance & Banking, 1st ed. Pitakwa: DavidStones Publishers Ltd, p.124.
Stone, A., 2020. Vodafone Group Organic Service Revenue Impacted By COVID-19 -
Directorstalk Interviews. [online] Directorstalkinterviews.com. Available at:
<https://www.directorstalkinterviews.com/vodafone-group-organic-service-revenue-
impacted-by-covid-19/412845051> [Accessed 27 November 2020].
Thomson, S., 2020. Vodafone Leans On ‘Resilient’ Germany As COVID-19 Hits
Fiscal Q1. [online] Digital TV Europe. Available at:
<https://www.digitaltveurope.com/2020/07/24/vodafone-leans-on-resilient-germany-as-
covid-19-hits-fiscal-q1/> [Accessed 27 November 2020].
Verma, T., 2020. WALTERS MODEL OF DIVIDEND POLICY. [online]
COMMERCESTUDYGUIDE. Available at: <https://commercestudyguide.com/walters-
model-of-dividend-policy/> [Accessed 26 November 2020].
Vodafone Group Plc, 2020. Annual Report 2020. [online] London, pp.64-140. Available
at: <https://vodafone.gcs-web.com/static-files/947ac784-3257-42e4-a543-ad7c5ea31d0e>
[Accessed 27 November 2020].

12 | P a g e
 6 Appendices
Appendix A: 3 Years Free cash flow

13 | P a g e
Appendix B: Vodafone Dividend Yield History

Appendix C: 10 years dividend history

14 | P a g e