UGB363 Strategic Corporate Finance Assessment Answer

Introduction

The given study will highlight financial statement analysis of two companies which are Tesco and its competitor Sainsbury. It is common knowledge that the global retail industry is an essential component of the world economy. It is a key supplier of a wide variety of consumer goods, which makes it an extremely important sector. Tesco is a multinational corporation that has operations inside the borders of the United Kingdom and is in charge of a wide variety of food and general retail products and services. The company's stock has been traded on the London Stock Exchange since 1919, when it was first established as a business.

Part A

Question 1: Compute the Following Ratios for the Selected Company and Its Competitor for the Most Recent Three Years

Tesco

Sainsbury

Question 2: Critically evaluate the selected company’s performance for the selected period in terms of:

Profitability

When a company's entire revenue is reduced from the variable costs associated with producing and selling products or providing services, the amount that is left over is the gross profit for that company. The corporation estimates that its total gross profit for the fiscal year that will finish in 2021 was approximately $5.854 billion, which is an increase over the sum that it made the year before.

When it comes to organizational management, profitability ratios are frequently employed to determine how much money a company is able to make based on the expenditures, operating costs, and assets that are shown on the firm's balance sheet. You can determine how efficiently a company makes use of its resources to generate revenue and boost the value of its shares by utilizing the aforementioned metrics.

A firm's "net profit" is the amount of money it still has after deducting all of its expenses from its total revenue. This statistic indicates how much money the company has remaining. These types of costs include things like taxes, the costs of doing business, interest, and a wide variety of other things. It is possible to illustrate Tesco's net income with a line graph. This particular form of graph illustrates the financial state of the shop by demonstrating whether it is profitable or unprofitable for the business.

Shareholder’s wealth Maximization

It would appear that Tesco did not have sufficient controls in place to adequately protect the company from situations in which it misrepresented its financial performance. In this particular situation, the specific obligations and functions of the board of directors are still unknown; the case is currently being investigated by the judicial system. Concerning the auditors, there are reasons to believe that the appraisal of the company's performance that they provided was carried out in a dishonest manner. Nevertheless, it is of the utmost importance to recognize that the company did in fact have policy-driven protective measures, such as the execution of a sustainability strategy. This is demonstrated by the fact that the company was able to maintain its operations notwithstanding the fraudulent activity that took place.

Question 3: (a) Critically Evaluate the Firm’s Financial Risk Based on Your Research on the Firm and Findings in Part Assess Whether the Selected Company Can Afford to Take on More Debt

Within the parameters of the example that was presented, Tesco has determined that the most significant pure risk is the risk of fraud. This danger may be effectively reduced through the use of various policy initiatives. To begin, it is essential to keep in mind that policies do not automatically preclude the existence of pure hazards. For instance, it is not possible to create a policy that will directly prevent catastrophes such as fires or unexpected deaths from happening. Nevertheless, policies have the potential to function as a form of protection for stakeholders against circumstances in which the only consequence is a loss. The imposition of limits on firms or individuals, such as the prohibition on taking part in particular activities unless the entity in question had enough insurance coverage, is one method for reducing the impact of pure risks.

When doing a risk assessment, businesses are needed to make well-informed decisions on the most effective course of action to take in order to prevent or reduce the likelihood of undesirable outcomes. In this regard, important considerations include separate projects or initiatives, as well as the implementation of corporate policy (in an autonomous manner), and risk-related circumstances. It is essential to the process of decision-making that the connection between risk management and the many different operational components, both internal (such as corporate governance and ethical culture) and external (such as legislation), be acknowledged. As a result, the most significant shortcoming of the approach was that it had an insufficient capacity for exposure, and it also lacked sufficient reaction mechanisms. The leadership of Tesco showed a lack of preparedness in uncovering and preventing the occurrence of illicit actions leading to the accounting discrepancy, despite the fact that there were indications of fraudulent activities, as evidenced by the resignations explicitly citing fraudulent practices as the cause. In addition, the resignations explicitly cited fraudulent practices as the cause. However, recommending that the approach be improved by making significant financial investments in risk mitigation and loss prevention is not a sound course of action and should be avoided. To improve Tesco's risk management approach, the company should place a higher priority on bolstering its internal response system and putting the risk of fraud at the top of its list.

Question 3: Using Capital Structure Theories, Critically Discuss Whether an Increase in the Company’s Debt Level Would Create More Value to the Shareholders

In order to acquire insight into the financial decisions that the organization is currently making and the repercussions those decisions will have for the organization's long-term financial well-being, it is essential to look at a number of different theories that pertain to capital structure. This is because it is vital to look at a number of various theories that pertain to capital structure. According to the conventional theory of capital structure, it is advised that an organization strive toward lowering its weighted average cost of capital while concurrently working toward growing the value of its marketable assets. This is because doing both can have a positive impact on the organization's overall value. This is due to the fact that doing so will make it possible for the organization to achieve its highest possible level of profitability. When seen from this perspective, it is obvious that Tesco made the astute choice to lower its net debt, so improving the stability of the company's financial status. Two of the most influential credit rating agencies in the world concurred that the decision made by the company was a positive development and characterized it as a move in the right direction. Both of these agencies believed that the option was a step in the right direction.

The pecking order hypothesis provides a unique perspective on the choices that are made about the capital structure of an organization. It is strongly recommended, in accordance with the conceptual framework, that a firm make use of its retained earnings in order to support both the ongoing operations of the company as well as any expansion plans that the company may have. If a company is unable to fund its operations by utilizing the money it has already earned and set aside for that purpose, the only alternative choice is for the company to expand the amount of debt it bears. It is possible that it would be sensible to issue stock if the conditions were such that further sources of external financing could not be obtained through alternate means. Tesco's long-term financial decisions are not influenced in any way by the concept of a pecking order at any point in time.

Question 4: (a) Based on the Relevant Data Over the Last Three Years, Describe the Company’s Dividend Payout Policy. Based on Empirical Evidence, Evaluate Whether Dividends Increase the Value of the Selected Company

Tesco shareholders are entitled to receive a dividend payment once every two months. When payments are accepted, it is throughout the months of June and November. The dividend calendar provides information regarding the months in which more than 2,000 different types of investments in the financial market pay dividends. In addition to this, it details the particular stocks from which every company derives its dividends. Make a comprehensive strategy for producing a passive income throughout the year in order to realise your desired level of financial success.

Tesco is likewise interested in cultivating long-lasting partnerships with its suppliers so that they may continue to deliver products that are of a high quality at rates that are affordable. Consideration of a wide range of elements is required in order to answer the question of whether or not a provider is content. On the one hand, it is projected that there would be a rise in the costs of sales. On the other hand, it is absolutely necessary to keep the payment dates for creditors consistent and to keep an eye on how trade creditors are developing. When Tesco pays its suppliers in a timely manner, the payment to those suppliers often occurs instantly. The amount of time it takes for Tesco's clients to get payment has been cut down, which is helpful for vendors who are paid on time. Despite this, the number of trade debtors continues to rise up until the year 2018. After that, they started going down, and by the year 2022, they had gotten down to the same level as in 2019. It's possible that the sellers' decreased willingness to extend a credit line is a sign that they are becoming less pleased with their lives as they are currently living them. Over the course of the previous five years, there has been a steady ascent in the cost of goods sold (COGS). This results in more chances for revenue generation for the many vendors. On the basis of this information, one can conclude that Tesco has been successful in achieving its goal of preserving positive relationships with its suppliers. Additionally, it is vital to note that the second technique runs counter to the idea that dividends should be produced from earnings rather than capital or reserves. This is an essential point to highlight because it contradicts the notion. This is a passage that has some important points to examine. In addition, companies have the ability to select their own unique dividend plan. Establishing a relationship between dividend payments and investment opportunities that a company may successfully manage on its own is required for this step. This approach is an option that can be considered while looking for different ways to get dividends.

A company decides to repurchase its own shares, the quantity of those shares that are made available for purchase on the market drops. As a consequence, there is a reduction in supply that is in direct proportion to the severity of the drop. It's possible that investors would get the wrong idea about anything as a result of the sharp rise in share prices. A "share buyback" takes place when an organisation repurchase its own shares from current shareholders. The meaning of this term is the same as that of "share repurchase." Both the buyer and the firm are involved in the process of redeeming or repurchasing previously owned shares. Both of these groups have an interest in purchasing shares of the corporation. When the corporation has finished repurchasing the shares held by its shareholders, it will once again be the sole owner of the whole enterprise. Because of this, taking this move will protect the company from unfriendly takeovers as well as sales that are substantially below the company's current market value. A share buyback or repurchase programme is when a firm gives its employees the opportunity to purchase company stock options at a reduced or set price, which is good for the employees' personal finances. A share redemption plan or a share repurchase plan are both names that can be used to refer to this kind of scheme.

In contrast to the dividend programme, the share repurchase plan is distinguished by the ease with which it is integrated and carried out inside the market. In addition to this, the practise of repurchasing shares might function as a mechanism for returning cash to the shareholders. After the corporation and the shareholder have successfully completed the share repurchase transaction, the repurchased shares are subsequently removed from the market.

Part B

Question 1: Compute and Determine the Feasibility of Each of the Projects Using the Following Investment Appraisal Methods:

The calculation is as follows:-

Question 2: Compare the Decision Made in Part 1 Based on the Different Investment Appraisal Methods and Critically Evaluate the Accuracy and Appropriateness of Each Tool

The approaches of payback period (PB), internal rate of return (IRR), and net present value (NPV) are applied rather frequently in the process of selecting projects. In the process of capital budgeting, it is preferable for all three criteria to coincide and result in the same conclusion; nonetheless, it is typical for these techniques to produce results that are in contradiction with one another. The internal rate of return, the payback method, and the net present value are three key options that are typically available to managers when they are tasked with the responsibility of analysing and selecting projects. The net present value (NPV), more generally referred to simply as NPV, is the favoured method of analysis for the vast majority of financial specialists. This occurrence can be explained by a combination of two different variables. To begin, it is essential to keep in mind that the metric known as Net Present Worth (NPV) takes into consideration the idea that money is worth more when it has been invested over a longer period of time. This requires determining the present value equivalent of expected cash flows in the future by converting those cash flows into the future. To begin, this method provides managers with a clear numerical figure that they can use to easily compare the initial cash investment with the current value of the anticipated return. This is one of the primary benefits of this strategy. The term "discounted payback period" refers to the amount of time, expressed in years, that must elapse for the total discounted cash flows produced by a project to catch up to the level of the initial investment in order for the payback period to be considered successful. The utilisation of a discount rate improves the discounted payback time, so elevating it to a level that is marginally superior to that of the standard payback period. On the other hand, it does not take into consideration cash flows that take place after the moment at which the discounted payback time has been reached.

The rate of return on an investment is referred to as the internal rate of return (IRR), and it is defined as the discount rate at which the net present value (NPV) of cash flows connected with a particular project becomes zero.  Internal Rate of Return (IRR) can be defined as the discount rate at which the present value of future cash flows, adjusted for taxes, becomes comparable to the initial investment outlay in the context of a project with a single initial expenditure. This definition applies only when the project has a single starting expenditure.

References

Appelbaum, D., Kogan, A., Vasarhelyi, M., & Yan, Z. (2017). Impact of business analytics and enterprise systems on managerial accounting. International Journal of Accounting Information Systems, 25, 29–44. Web.

Brigham, E. F., & Houston, J. F. (2021). Fundamentals of financial management. Cengage Learning. Cokins, G. (2017). Strategic business management: From planning to performance. John Wiley & Sons. Davis, C. E., & Davis, E. (2019). Managerial accounting. John Wiley & Sons.

Catalão, I. D. P. (2022). Equity research-Tesco PLC (Doctoral dissertation, Instituto Superior de Economia e Gestão).

Guo, L., & Wang, Z. (2019). Ratio analysis of J Sainsbury plc financial performance between 2015 and 2018 in comparison with Tesco and Morrisons. American Journal of Industrial and Business Management, 9(2), 325–341. Web.

Jiambalvo, J. (2019). Managerial accounting. John Wiley & Sons.

Lokanan, M. (2021). Applying four quantitative prediction techniques to detect fraud in financial statements. Journal of Forensic and Investigative Accounting, 13(2), 362-383.

Rosnizam, M. R. A. B., Kee, D. M. H., Akhir, M. E. H. B. M., Shahqira, M., Yusoff, M. A. H. B. M., Budiman, R. S., & Alajmi, A. M. (2020). Market Opportunities and Challenges: A Case Study of Tesco. Journal of the Community Development in Asia, 3(2), 18–27.

Shapiro, A. C., & Hanouna, P. (2019). Multinational financial management. John Wiley & Sons.

ZXhang, Y. X., Haxo, Y. M., & Mat, Y. X. (2023). Analyzing Tesco PLC Stock: A Comprehensive Evaluation of Growth Potential and Investment Opportunities. AC Investment Research Journal, 220(44).
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