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H&M - Burberry

Satisfactory Essays

Problem 4: H&M and Burberry’s non-current assets

Question 1
(a) Ratio of land, buildings and equipment to sales
H&M: (420+222+7134) / 78346 = 9.9%
Burberry: (58.2+99.2) / 995.4 = 15.8%

(b) Ratio of depreciation to sales
H&M: (14+1750) / 78346 = 2.25%
Burberry: (1.9+27)/ 995.4 = 2.9%

The above ratios can be used to measure the efficiency of a firm’s investment policy. Burberry has a higher land, buildings and equipment to sales ratio as well as a higher depreciation to sales ratio. The higher the ratio of land, buildings and equipment to sales, the smaller the investment required to generate sales revenue and therefore the higher the profitability of the firm. Moreover, the ratio of depreciation to sales provides a measure of …show more content…

Therefore, Cost of Sales would increase by 2422 million.
Question 4
a.
In order to specify the adjustments to the beginning book value of H&M’s and Burberry’s land, buildings and equipment required after the capitalization of the retailers’ operating leases, we need to calculate the present value of the rent payments.
 H&M
With a discount rate of 4.4%, the present values of the rental payments for the years 2006 and 2007 are as follows: 2007 2006
Within one year 6514.4 5909
Over one year 30852.5 28047.9
Total 37366.9 33956.9
The beginning book value of H&M’s land, buildings and equipment for the year 2007 will increase by 33956.9.
 Burberry
Assume that the annual payments in the sixth year is equal to the rental payment in the fifth year ( 112.9 and 86.0) and the remainder of the lump sum values (54.6 and 17.8) is due in the seventh year. With a discount rate of 5.4%, the present values of the rental payments for the years 2006 and 2007 are as follows: 2007 2006
Within one year 37.1 29.9
Over one year 266.03 180.1
Total 303.13 210
The beginning book value of Burberry’s land, buildings and equipment for the year 2007 will increase by 210.
b.
If

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