Enhancing firm value through capital structure: A case study of marks and spencer PLC

Abstract

The research is centered on examining the intricate relationship between a company's capital structure and its overall value, with a specific focus on the case of Marks and Spencer plc. Capital structure essentially pertains to the allocation of resources within a firm and can be significantly affected by various factors, including long-term debt and cash flow. In order to comprehensively explore the connection between capital structure and a firm's value, several crucial factors must be taken into consideration: Gearing Level, Weighted Average, Cost of Capital (WACC), Modigliani and Merton Theory, Trade-Off Theory. Analysis of Marks and Spencer plc's annual reports spanning from 2014 to 2016 consistently demonstrates a positive correlation between gearing levels and capital structure, which is further substantiated when considering seven years' worth of data for Marks and Spencer plc in England. However, it's imperative to acknowledge that real-world managerial decisions, exemplified by the actions of Marks and Spencer's CFO, extend beyond merely striving for high gearing levels and firm value. They also prioritize considerations such as shareholder funds and cost-reduction strategies. The research findings underscore the influence of gearing levels on capital structure and, consequently, a firm's value. Nevertheless, in practical scenarios, companies do not adopt a one-size-fits-all approach of aggressively pursuing higher firm values. Instead, managers meticulously formulate strategies to adapt their capital structure in response to the ever-evolving economic landscape.