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Going into business

The worth of the Hermes Principles is best evaluated by comparing the same with attainment of firm’s purpose of going into business on whether the same is accomplished. It would be easy to assert that once the firm’s purpose based on its corporate mission and vision and objectives are achieved, then one may be deemed to be capable in sustaining its reason for existence. For this reason, firms also set targets or objectives that translate corporate mission and visions into quantifiable terms and therefore measurable means.

This would allow the company to see whether it indeed aimed into doing its purpose. Strategic management theory and principles can only support this financial management theory since strategically companies must position itself in a world where there is competition while trying to play with the rules as laid down by corporate authorities. This explains also the requirement of purpose in every corporate registration as the accomplishment of the same is the best gauge if a company should be allowed to continue existing.

Attaining one’s purpose has both its legal and philosophical frameworks as well as financial framework for which the Hermes principles being evaluated must now be fitted against if the latter principles will have

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to survive usefulness as a test. A firm normally combines it plans and of strategies to attain its defined objectives. Marks & Spencer, is therefore expected to have firm plans on ways to have long-term shareholder value that would cause in increasing shareholders’ wealth.

It has in fact achieved a lot in the last five years particularly the most recent three years based on its financial statements and website. It continues by its declaration that it is still building on that success by giving solid attention more in its business as it builds also more ground works for more business in the years to come. Its declared target to be a more customer-focused, faster moving and flexible business, by offering a wide choice of quality goods and services could only be viewed at as a will to reach its defined mission and vision (Marks and Spencer, 2008).

The firm is claiming to do everything to build a sustainable business for the long term in its effort to generate shareholder value through reliable and continuous profitable growth while it makes certain that its customers to always maintain trust and loyalty to the firm (Marks and Spencer, 2008). Marks and Spencer is transparent on its long term plan via its profitable growth and this has the effect of making relevant and useful the application of the Hermes principle.

Its stock price was proven to have increased in relation to its profitability; hence, there should be no problem in its plan to become a world-class retailer truly in words and reality. See Figure 3. Hermes principles find usefulness and application to Marks and Spencer as shown in the relationship of higher shareholder value as against its profitable operation for years. This could be validated by referring to Yahoo Finance (2008) shown below: Figure 3. Stock Price Chart from Yahoo Finance (2008)

A 40% or more return on equity for years 2005, 2006 and 2007 seems to have driven the stocks more than expected as a clearly upward line is reflected stock price graph or chart from Yahoo Finance (2008) above. A fall in the line graph was however noted towards the end of 2007 although the fall did reach a level below the highest price before the sudden increase in 2006. Be that as it may it would be missing the point not to attribute stock price increase to profitability as borne by evidence. As found in the valuation, the intrinsic value of stock is 1,098 pence per share as against the quoted price of 385.

75 pence per share from Telegraph (2008) or an undervaluation of 712. 25 pence. The valuation of stocks as applied to Marks and Spencer assumed annual growth rate in the dividend per share at 5% and the same was below the actual computed dividend rate of 15% using average historical dividend per share for the last five years. The model was fitted under its allowed conditions to determine valuation hence interpretation must consider this limitation. 3. Conclusion Finding no inconsistency as to the application of the Hermes principles, this paper has no reason to recommend modification.

It must be concluded however the principles are broad guidelines and to find inconsistencies could be best validated in the light the examination of details. In this particular case of Marks and Spencer, a conclusion to say that Hermes principles have a useful application in targeting a maximum shareholder value of the firms and doing its strategies to attain the same may be deemed to be grounded on correct principles. What this researcher also considers very important in this paper is the reasonability of assumptions if the model used will have to applicable under given conditions.

Reference:

Google Finance (2000) Sainsbury plc – EPS information and Tesco – EPS information {www document} URL http://finance.google.com/finance?q=LON:SBRY, and http://finance.google.com/finance?q=LON:TSCO, Accessed April 3, 2008

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