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Whitbread Case Summary

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Whitbread have been expanding their two main brands Premier inn and Costa. The graph above shows the relationship between the gearing ratio and the company’s share price, from 2011 to 2014 the share price has been increasing as the company lowers its debt. This suggests that the value of the company increase as it utilises available internal finance. This could be result of the company following the Pecking Order Theory. The Pecking Order Theory suggests that the company looking to finance its investments will firstly utilise available internal funds before seeking external sources of finance (Donaldson 1961). After all the internal funds have been exhausted the company will then look for external sources of finance to fund investments. Myers (1984) suggests that firms prefer to use internal funds to avoid informational problems. When internal funds are insufficient to meet the financial needs firms will turn to debt and then equity which is at the top of the pecking order. The asymmetry of the information between the company and the capital market will make managers aware that the company has been undervalued. The theory assumes that managers have private information of the market …show more content…

Over the past five years the dividend pay-out ratio has been increasing steadily and they have managed to pay out preferred dividends more than 2 times in a year. Using Whitbread’s financial data, the writer will be calculating the dividend pay-out ratio (dividends per share/ earnings per share*100) and dividend cover (earnings per share/ dividends per share). The dividend pay-out ratio provides an indication of how much money a company is returning to its shareholders versus how much money they are reinvesting into growth. The dividend cover ratio measures a company’s ability to pay off its preferred

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