Finance Assignment of Tesco PLC

Questions: Part 1: You need to solve the following cases: Case 1: Bank A offers to pay you a lump sum of $20,000 after 5 years if you deposit $9,500 with them today. Bank B, on the other hand, says that they will pay you a lump sum of $22,000 after 5 years if you deposit $10,700 with them today. Which offer should you accept, and why? Case 2: You have decided that you will sell off your house, which is currently valued at $300,000, at point when it appreciates in value to $450,000. If houses are appreciating at an average annual rate of 4.5% in your neighbourhood, for approximately how long will you be staying in the house? Part 2: You should find a group to work with of between 2 - 3 people. You can make the judgment of optimal group size. Each group picks a company. The company should be publicly traded and have at least one year of trading history and one set of annual financial statements. The company can be listed in any market. Avoid the following: Financial service firms (banks, insurance companies investment banks) Money losing companies Companies with large capital arms (GE and the auto companies) Real estate investment trusts Each group should produce a report that answers the following questions: Corporate Analysis: Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders? What are the other potential conflicts of interest that you see in this firm? How does this firm interact with financial markets? How do markets get information on the firm? How does this firm view its social obligations and manage its image in society? Risk Analysis: What is the risk profile of your company? How much overall risk is there in this firm? Where is this risk coming from (market, firm, industry or currency)? How is the risk profile changing? Debt Ratios: What are the different kinds or types of financing that this company has used to raise funds? Where do they fall in the continuum between debt and equity? How large, in qualitative or quantitative terms, are the advantages to this company from using debt? How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt? From the qualitative trade off, does this firm look like it has too much or too little debt? Valuation: What growth pattern (Stable, 2-stage, 3-stage) would you pick for this firm? How long will high growth last? What is the key variable (risk, growth, leverage, profit margins...) driving this value? Answers: Part 1 Case 1 Situation 1 Bank A Lump sum amount $20,000 Principal amount deposited $9,500 Interest received $10,500 Time 5 years Rate of Interest 22.10526 Situation 2 Bank B Lump sum amount $22,000 Principal amount deposited $10,700 Interest received $11,300 Time 5 years Rate of Interest 21.1215 Thus it will be feasible to invest in Bank A as it offers higher rate of interest. The individual will get more return from less investment. Case 2 Case 2 Current value of House $300,000 Annual average rate of Appreciation 4.50% Appreciated value $450,000 Time period 11 years The individual will be staying in the house for 11 years. Part 2 Introduction The present report provides a brief outline of the Tesco in terms of its management and operations. The potential conflict in the organization has been identified. The report also studies the risk profile of Tesco. The debt ratios of the company have been studied and the influence of the debt ratios on the performance of the company has been discussed. The stage of growth of the company has been studied. Tesco is a British retail organization. It has spread its chain across various parts of the world (Tesco.com, 2015). Corporate Analysis The executive committee of Tesco is comprised of the Directors and the number of senior executives. The owner of Tesco is different from the management team. The major decisions of the company are taken by the management of the company with the approval from the Director. The management is responsive towards the shareholders. The value maximization of the share holders is a major strategy of the organization which is the reason behind its success. It has separate corporate governance guidelines to maintain healthy relations with the share holders. There was potential conflict in Tesco in the year 2011 with the announcement of the sudden resignation of the CEO of the company. The company was worried about the change that will be implemented as a result of the change of the members of the management (Tesco plc, 2015). Tesco is listed in London Stock Exchange and FTSE. The shares prices traded in the stock market are affected by the market factors and economic conditions. Tesco is aware of its social obligation. Tesco is committed towards performing its responsibilities for the welfare of the society. They sell healthy food products in all their retail stores (Tesco PLC Annual Report and Financial Statements 2014, 2014). Risk Analysis Tesco has established itself as one of the largest retail chains in UK. They use the method of competitive pricing. The major competitors of Tesco are Sainsbury, Aldi. The industry in which Tesco is running the business is highly competitive. The company has been implementing policies that will mitigate the risk of the company and ensure a secure position in the market. Since it has business in other parts of the world like Australia, United States it is exposed to exchange rate risks. The goods sold at the stores across Tesco are not indigenously purchased. Thus it is highly exposed to exchange rate risks. The risk profile of Tesco is affected by a number of factors. The main factors affecting Tesco are the existence of the competitors and the exchange rate risks. These factors play a major affect on the risk profile of the company (Tesco.ie, 2015). Debt Ratios Tesco raises funds from the public by issuing shares. At the initial stage, the owner of the company had invested considerable portion in the business. It has also financial borrowings from banks. The capital of the company can be divided into the equity capital and the debt capital. The equity capital comprises of the owners capital and the money that has been raised by issuing shares. The total equity capital raised by the company for the year 2014 is 14722 million pounds. The company pays regular dividend to the equity share holders. The company has paid 1189 million pound as dividend in the year 2014. The debt capital has been raised for meeting the short term requirements of the company such as the working capital requirements. The loan is taken from the bank in UK. The company pays regular interest to the banks. The company use debt for lowering the financial cost of the company. The debt holders bear less risk. Thus the company raises money via debt capital instead apart from the equity capital. Companies also enjoy tax benefits on raising capital via loans. The debt capital also can be disadvantageous in the sense that the company has the obligation to pay regular interest to the bank. Thus in situations where the company is not able to meet the cost of expenses or in times of bankruptcy, the interest payment turns to be a burden for the company (Way, 2015). Valuation The growth pattern of Tesco can be analyzed in terms of the growth in sales and profitability of the firm. It is seen that the sales of the grocery stores in UK has undergone a massive decline for the first time in the last 20 years due to increase in the price wars and the fall in the cost of the commodities. The sales growth of Tesco has been declining due to fierce competition among the grocery stores in Tesco. But among the other retail chains, the profit margin has declined the most. It is the worst performer as the sales of the company has dropped by 3.7%. Thus it is seen that the sales of the company is not in a stable position. The sales are fluctuating due to competitive pricing among the share holders. There is competition among the various retail chains in UK regarding the number of the convenience stores. This has also affected the sales of Tesco. The brand value achieved by Tesco from the year 1919 is the major force that has secured the position of the company. It values its customers which is evident from the various measures adopted by the firm (Barford, 2014). Conclusion The present report has analyzed the corporate structure, risk profile of Tesco. It is seen that the company has separate team of management who governs the organization. The conflicts faced by the organization include the existence of large number of competitors. It has resulted in the decline of the sales of the company. But the company has developed a strong brand image which has helped it to secure a safe position in the competitive market. References Barford, V. (2014).The rise, fall and rise of the mini-supermarket. [online] BBC News. Available at: https://www.bbc.com/news/magazine-25762466 [Accessed 16 Mar. 2015]. Tesco PLC Annual Report and Financial Statements 2014. (2014). 1st ed. [ebook] pp.8-136. Available at: https://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf [Accessed 16 Mar. 2015]. Tesco plc, (2015).Tesco plc. [online] Available at: https://www.tescoplc.com/index.asp?pageid=79 [Accessed 16 Mar. 2015]. Tesco.com, (2015).Tesco.com - online shopping; bringing the supermarket to you - Every little helps. [online] Available at: https://www.tesco.com/ [Accessed 16 Mar. 2015]. Tesco.ie, (2015).Corporate Responsibility | Tesco. [online] Available at: https://www.tesco.ie/corporate-responsibility/ [Accessed 16 Mar. 2015]. Way, J. (2015).The Advantages of Using Debt as Capital Structure. [online] Small Business - Chron.com. Available at: https://smallbusiness.chron.com/advantages-using-debt-capital-structure-22011.html [Accessed 16 Mar. 2015].