FINANCE ASSIGNEMNT

Index

Task 1

Growth profitability ratio................................................................................ 3

Structure of company....................................................................................... 4
Sources of business finance............................................................................. 4
Investment advice............................................................................................. 5
Appropriate finance sources............................................................................ 5
Working capital management......................................................................... 6
Task 2

Cash Flow Statement.........................................................................................................6

Task 3

Finance....................................................................................................................... 7
Recommendation of projects...................................................................................... 8
References..................................................................................................................9

Task 1

(A)

Carry out ratio analysis for 2 years

Growth Profitability and Financial Ratios for Tesco PLC ADR

Revenue GBP Mil

Gross Margin %
Operating Income GBP Mil
Operating Margin %
Earnings Per Share GBP
Payout Ratio %
Revenue
COGS
Gross Margin
Net Margin %
Asset Turnover (Average)
Return on Assets %
Financial Leverage (Average)
Return on Equity %
Return on Invested Capital %
Interest Coverage
Cash & Short-Term Investments
Inventory
Total Current Assets
Total Assets
Accounts Payable
Total Current Liabilities
Total Liabilities
Total Stockholders' Equity
Total Liabilities & Equity
Current ratio
Quick ratio
Debt/Equity
Payables Period
Receivables Turnover
Fixed Assets Turnover
Asset Turnover

(B)

2014
2013
64,82
63,55
6
7
6.3
6.3
2,188
2,631
3.4
4.1
0.05
0.36
78.4
58.7
100
100
93.69
93.69
6.31
6.31
0.19
1.53
1.28
1.27
0.25
1.94
3.01
3.41
0.72
6.21
1.61
5.33
5.4
6.05
6.17
7.18
7.47
7.13
26.12
31.04
100
100
12.04
11.62
37.87
42.66
66.76
70.65
33.24
29.35
100
100
0.69
0.73
0.41
0.37
0.6
0.63
36.08
36.37
36.36
17.48
2.47
2.58
1.28
1.27

Comment on the structure of the TESCO PLC

Tesco is a large firm and it has a huge hierarchical structure lots of people reporting more
than one person before the information passed to top management or leadership. One person
control the each level. Usually hierarchical companies are to be big companies like Tesco or

Asda. Information is passed down from one person to another person until its gets to the top
of the hierarchical structure. If there is any problem in the hierarchical structure it will move
up again from one person to another person until the problem is being sorted out. Close
control of worker is one of the important strength of a hierarchical structure. Workers do not
wait around until they are told because they know exactly what they have to do.

(C) Comment on business finances

According to annual report of the organization, company net income is increasing gradually
from 23M to 974M GBP which is very healthy for the Tesco but there is very minor increase
in organization revenue which is 63.6B. Percentage of sales decreased relating to income tax
expenses from 0.83% to 0.55%. It was the key factor in the bottom line growth in the face of
almost consistent or same revenues.
In the last fiscal year the percentage of total capital is increased at Tesco PLC. Which is
43.24%. Operating profits are more than adequate to service the debt. Organization accounts
receivable collection is worst with 2.14 days worth of outstanding sale. It indicates that
revenues are not collected in the efficient way. Inventory period is very typical but it is will
managed by the organization. Inventory processing period is 22.65 days.

(D) Advice investor to invest in a business

According to prediction interest rate will not be increased for at least 2 to 3 years, third
anniversary basic rate is coming up in this year as well which is 0.5%. How much risk should
be involved when savers closed the comfort of standard deposit account?
Although lot of deposit accounts pay relatively low returns, they still hold number of
attraction for the investors. The most important and first thing is high liquidity. Generally
small amount of money is charged as a fees if your account balance dip to minimum level, if
you are interested to can close your account at any time. There is no penalties for early
withdraw but for second account you have to offer a high level of security.
It is easier for everyone to open a deposit account with a small amount of money. Any mount
is saved in a passbook account if you want to do it. Suppose there is no limit of minimum
investment requirements that can be run into thousands of dollars with the kind of
investment.
For any investment there is trade off between safety and returns. For the deposit account you
have to pay lower risk rates as compare with risk free investment such as Treasury Bounds.
There is no unusual for the passbook accounts holders to pay lower interest or dividend rate

than the inflation rate. Your capital appreciate in a real value have a very little opportunity,
kind of returns possible with other kind of investment opportunities.

(E)

Advice for additional finance

Angel Equity:
Find a well reputed industry executive or management who is interested to invest a good
amount of money in the organization. Angel equity is an internal source of finance so thats
why its very positive for the organization to get finance at interest free rate or at very low
interest rate. It could be your friends and family who are ready to help you in your difficult
time at free of cost and ready to wait for getting their finances back.
Smart Leases:
Generally very difficult for the small organizations to finance, leasing fixed assets conserves
cash for working capital to cover inventory, especially for the new business. If business is
newly set up or have not goodwill in the market then its very difficult for the organization to
hire assets on lease. Some equipments are very costly and you have to import from other
countries so if organization is financially not good then they are not able to hire assets on
lease. If they able to hire it they have to pay particular amount as an interest charges which
could be in millions. Some assets are very costly and it is difficult for the organization to
purchase it on cash so they prefer to buy it on lease which gives organization a sort of relief.
Bank Loans:
Banks are one of the major sources of finance for the organization. If organization have good
reputation in the market or their business is at boom banks should offer loans to
organizations. Banks are the external sources of finance so they will charge interest rate on
borrowing. Interest rate is depend on the amount of money which you borrowed from bank. If
you are setting up a new business or organization have not good reputation in the market then
bank can refuse to give loan or have Bank needs high security because they want protection
of money.

(F) Advice how to manage working capital

Working capital depend on how much of current debt the company is caring on its balance
sheet, it could be positive or negative. Company who have lots of working capital will
experience more growth in the near future and they can also expand their operations using
existing resources. Companies suffer if they do not have enough working capital, company
growth rate could be effected. To satisfy short term liabilities and operational expenses
working capital Shows Company have a sufficient liquid resources.
Tesco PLC has a working capital of -5.727. This is lower than the service sector, and
3107.81%higher than that of Grocery industry stores. Working capital ratio for entire stock is
255.09% which is slightly higher as compare with company.
There is a stability in net debt which is 6.8 billion. It is little lesser than our expectations at
the half year, trading result on cash flow and lower working capital due to impact of
Christmas, higher stock levels as compare with planned. Due to control in sending group
capital expenditure was slightly low from our expectations. Operating cash flow from retail
operations was slightly down by 3.8 billion, effected by the lower working capital inflow.

Task 2

Cash Flow Statement

000
Cash flow from investing
activities
Cash receipt from customers
Cash paid (expense less
electricity)
cost of goods sold
expense less electricity
Electricity
Operating cash
Dividend Received
Interest Received
Tax paid
Net operating cash flow
Investing activities cash
flow
Additions to equipment(payment
of van)
Equipment cash
Proceeds from sales of
equipment
Net cash flow from investing
activities

July
106

August
114

Sep
118

Oct
124

Nov
104

Dec
96

-106
-30

-64
-30

-66
-30
-20

-70
-30

-59
-30

-54
-30
-34

-30

20

24

15

-22

24

15

-22

-25

-30

20

-23

Cash Flow from Financing

Activities
Proceeds from capital
contributed
proceeds from loan
Loan payment
Net cash flow from financing
activities
Net increase/Decrease in
Cash
Cash at the begining of the
period
cash at the end of the priod

-135
-30

20

-23

24

15

-157

90
60

60
80

80
57

57
81

81
96

96
-61

TASK 3
(A)
Accounting rate of return= (initial investment scrap valve)/ useful in years

For project 1 ARR=

3.16%

For project 2 ARR=

3.335 %

Payback period for project 1 = 3 years plus remaining 80 in 4th year

= 3+ (80/140)*12
= 3years and 7 months

Payback period for project 2

= 3+ (30/70)*12
= 3 years and 5 months

NPV for Project 1= -145.92

NPV for Project 2= -64.86

IRR for project 1= 14.28%

IRR for project 2= 6.59%

(B)
Base of recommendation which project organization have to
choose
Its better for the organization to choose the project 1 there are several reasons
to choose project 2. If we look at the NPV of both project it is negative in both
projects. But project 2 NPV is acceptable in that worst case because we have to
choose at least 1 project out of these 2 projects. If we look at the ARR project 2
ARR is higher. It is the basic concept of ARR we must choose the higher ARR
project 2 ARR is 3.335% which is higher as compare to project 1.Payback
duration of project 1 is 3 years and 5 months which is slightly lower than as
compare with project 1. IRR of project 2 is very low as compare to project 1,
whereas project 1 IRR is higher which is 14.28%.

References:

Margarate, W. (2008) 'Linking risk management to strategic controls: a case study of

Tesco plc',
International risk assessment journal and Management, volume 7, no.
8, pp. 75-89.Miller, F., Agnes, V. and McBrewster, J. (2010)

Tesco, New Jersey: VDM Publishers. Neil, W. (1997) 'Exporting British food model
retailing to the US: implications for the EU-US food systems convergence debate',
Agribusiness , volume 13, pp. 135-151

Vignali, C. (2001) 'Tesco adaptation to Irish food', British Food Journal, volume
103, no. 2, pp.145-184.

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