The Identification of Tescos Capital Structure - Coursework Example

? Tesco Plc Financial analysis Question one The first question requires an identification of Tesco’s capital structure. Other than that, it requires the type of finance raised by the company from one of Tesco's balance sheet and comment on the balance sheet using the financial ratio based on Tesco’s capital structure. Tesco is well known of being the most successful operator in retail groceries and merchandise in the UK. It is rated as the third largest retailer in the world. Tesco also owns fourteen stores with a wide variety. The main reason for the success of Tesco is the various products they deal in, popular products and the brand preferences. Furthermore, Tesco operate online sales of product which has seen them expand internationally and get customers all over the world. There are reasons as to why Tesco is customers’ favorite store in the UK. Tesco have got a well analyzed capital structure which supports the growth of business plan with consideration of their expertise in the financial system and cash management. Tesco also has a business that deals in banking. In its finance department, Tesco has schemed on operation of its business and financial strategies which is inclusive on debt, financing, equity, and capital investment. Tesco as a corporation is authorized to give only three categories of capital stock. These categories are unlimited in number and are inclusive of preferred shares, common shares, and the 2nd preferred shares. The common shareholders are permitted to attendance of any meeting and receiving of notice of the Tesco’s shareholders. The common shareholders also have the right to only one vote. Both the second and first shareholders are known as preferred shareholders. According to the rights of the preferred Shareholders, the common shareholders have gotten the right to receivership of any dividend that has been declared by Tesco Corporation and upon dissolution receive any remnants of Tesco Corporation. Tesco states that their main sources of finance are from medium and long term debts, retained profits, commercial paper, leases, issues and bank borrowings (Tesco 2007). There is a FY Tesco generated 2611 million pounds from their operating activities that financed 3 billion pounds expenditure on capital, inclusive of 1899 million profit that added to retained earnings. Another finance provider is from the shareholders. The company gets financed by debt more than equity. Leases also form a source of financing Tesco, which is a major contributor towards its balance sheet and in its capital structure. The financial strategy of Tesco seems to have moved to a change in its capital structure hence making equity returns get better by the increase of finance debt in utilizing tax shield. Nevertheless, it seems that it is because of the ratio of debt-equity that there have not been any changes. To support this, by the year 2010, this ratio had actually dropped to approximately 0.11 from 0.12. After debt issues in the balance sheet and sale of property, this level was reinstated to its initial level. By consideration of this ratio, there is a sign that Tesco is not concentrated on improvement of shareholders’ equity return. Taking this to be their major goal, Tesco would have achieved it by the increase of leverage and more debt issue. Instead, they take advantage of conversion of assets into capital with the aim of making the shareholders interested. Question two Question two requires an explanation on what ‘FACTORING FOR BUSINESS’ means and its usefulness in an organization. Factoring for business is a transaction in finance that involves selling of a firm’s account receivables. In a detailed level, factoring involves the provision of finance by the factor to the account’s seller in advance cash form (Seidman, 2005). The accounts are always approximately 80 percent of the total price of the accounts purchase, taking into account payment of the purchase price balance, commission and upon collection other charges. The factor may opt for maturity factoring where no advance is made on purchased accounts. Factoring is far different form bank loan emphasis being on receivables value. Bank, on the other hand, places emphasis on total assets of the borrower and always takes a consideration on loan underwriting, and attribution of value to collateral of the borrower. Factoring is a purchase of financial assets. Three factors are directly involved in factoring: the debtor, one who is responsible for making sales of the receivables, and factor. Receivable is a financial asset related to the liability of the debtor for payment of the amount owed to a seller. A seller then makes sales on its invoices with a discount to other persons; the third party. On selling the receivables, their ownership is transferred to providing the factor with all exclusive rights related to the receivables. In accordance, the factor earns the rights for receivership of payments that are transacted by the debtor and, in factoring of non recourse; it must contain the loss in case the debtor fails to settle the invoice. Usually, the debtor of the account is provided with the notification on the sales of the receivables. The factor afterwards, issues the debtor with the bill and then collects payments; nevertheless, factoring that involves non notification, where the seller brings together accounts sold. At times, the seller is charged by the factor discount fee and other services. The factor carries out estimation on the amount which has failed to be collected as a result of fail in making payments and compensates for this in the prices, during the determination of price of purchase to be settled to a seller. The overall profit made by the factor is the difference from price on invoice payment and debtor’s payment, less the lost amount which resulted from the non payments. Importance of factoring Factoring is a way used by many firms to acquire cash. A good number of firms factor accounts if the cash balance that is available that a firm holds is inadequate to satisfy the current obligations of the firm and meet its cash needs. Contrary to this reason, other companies such as the textile do factoring as a tradition of the company. The employment of factoring as a way of acquiring cash that is required to meet a company’s needs allows the company to maintain a cash balance that is continuous despite being small. By reduction of cash size balances, there is a high turnover is created for investment of a firm’s growth. Factoring of debt is also employed as an instrument of finance which provides a better control of cash flow specifically when a firm currently posses an edit to number of account receivables containing different terms of credit to manage. Invoices of a firm are sold at a discount at face value on calculation of being better off on the grounds of making proceeds boost its growth than effectively working as a customer’s bank. In accordance, factoring takes place when the return rate on invested proceeds on production is more than related cost with factoring of receivables. As a result, the trade off that occurs between returns earned from production investment and utilization cost of a factor is vital in the determination of both factoring extent used and cash quantity held by the company. Cash flow in many businesses varies. In one period, the cash flow may be large, while in other periods, it may be small. From this, a firm finds it important to sustain cash balance and to carry out factoring with an aim of enabling them sort out cash needs in the short run if these requirements surpass the cash flow. The variability determines the cash size in cash flow of cash balance will hold as much as the extent of dependency on financial mechanisms. This variability is associated directly to two factors: 1. The period of cash flow can stay under the average level 2. The extent to which cash flow can make change In any case, the cash flow may drastically decrease; the firm finds itself in need of large sums of cash either from cash balances that exist or from factor which will help in sorting out of obligation. In the same way, depending on how long a cash flow lasts, more cash will be needed from somewhere else to counter the obligation. As an indication, the firm has to balance the forgone alternative of losing cash return, which could have been invested against factoring cost. The cash balance held by a firm is important for transaction demand of money. The cash size held by a company is directly associated to not willing to settle costs that are needed for factor use in financing of cash needs. Main problems faced by companies in making decisions on the size of cash balance require maintenance of cash on hand same to the faced decision on deciding the number of inventory to maintain. This situation requires a business to balance factor costs against the forgone alternative of loss on the return rate earned on investment (Goodman 2003). Question three The third question requires the importance of working capital in the financial management of Tesco in the sense on how it obtained its finances giving figures. Working capital is the capital amount that is always available to a firm. In details, it is the difference between current assets and current assets. Current assets are the resources that are in cash, and if not will in the near future be converted to cash. Current liabilities are the commitments that will require settlement by cash in the near future. Hence, working capital=current capital-current liabilities. Current liabilities include payables, bank overdraft, creditors and other liabilities while current assets include receivables, inventory and debtors. From the point of view of Tesco plc, the surplus in working capital implicates operation inefficiencies. The money which is owed by customers to Tesco plc and that, which is held in inventories cannot be employed to settle any obligation of the firm. Therefore, if a firm operates in a slow collection, it will be indicated as increase in working capital. It is evident from the comparison of working capital. To do this one should manage the working capital. The management of WC occurs in two stages: ratio analysis and or by use of strategies and techniques. In the consideration of strategies and techniques Tesco plc needs to recognize every department has a unique WC mixed components. Emphasis that requires being on every component is varied. Moreover, the management of working capital is in itself, not the end. Therefore, the need for efficient management of WC should be considered relative to other aspects. Question four What is the implication of market efficiency on securities that are to be traded by investors in the market? Include the forms of efficiencies. An efficient market is where by the market price is not a biased estimate of the real investment value. This efficiency does not mean that the real value should necessarily be equal to the market price at each point. The deviations of market value imply that a probability of under stocking or overstocking at some moment. Lastly, deviation of market value from the real value means that investors’ group number should be in a position to maintain over or undervalued stocks by the use of an investment strategy. Investors’ market efficiency These market efficiencies are categorized into three classes. Types of efficiency Under weak efficiency, this where by the current price shows the information that is contained in past prices, which suggests technical analysis and charts which use prices of the past alone (Gowthorpe, 2005). Under semi strong efficiency, current price shows the information that is contained in prices of the past and in all information of the public. Under strong efficiency, this where by the current price shows all information if it is either private or public and not any of the investors is bound to get stocks that are undervalued. Implication on investors An implication that is more direct and immediate is no investors group should employ a common strategy of investment to bang the market. A market that is efficient should be in a position to carry negative implications on actions looked down upon and many strategies of investments. In a market of efficiency, valuation and equity research would be a task that is costly that has no benefit. Odds of finding a stock that is undervalued should not be defined. The benefit at best from the collection of information and equity research covers the research cost. The markets of efficiency, a randomly diversifying strategy across stocks and or market indexing that carry no or little cost of information, and execution cost as its minimum is above other strategies, which created execution cost and large information. There would now be an addition of value by the managers of portfolio and strategists of investments. Lastly, in the market of efficiency, minimizing trading strategy involves the creation of portfolio omitting trade unless cash is required. This would be above a strategy which needs constant trading. Reference Baumol, W.J., Litan, R.E. & Schramm, C.J., 2007. Good Capitalism Bad Capitalism and The Economics of Growth and Prosperity. Yale University Press. Friedlob, G.T. & Schleifer, L.L.F., 2003. Essentials of Financial Analysis. New York: John Wiley & Sons. Ghosh, A., Cai, F. & Fosberg, R.H., 2008. Capital Structure and Firm Performance. Transaction Publishers. Gowthorpe, C., 2005. Business Accounting And Finance for Non-Specialists. 2nd ed. New York: Cengage Learning EMEA. Great Britain. Dept. of Industry; Great Britain. Dept. of Trade, 1987. British business. London: H.M. Stationery Off. J.G.Siegel, N.Dauber & J.K.Shim, 2005. The Vest Pocket CPA. New York: Wiley & Sons. Kontoghiorghes, E.J. & Gatu, C., 2007. Optimisation, Econometric and Financial Analysis. Illustrated ed. New York: Springer. Riahi-Belkaoui, A., 1999. Capital Structure: Determination, Evaluation, and Accounting. Quorum. Tesco, 2012. Tesco PLC. [Online] Available at: HYPERLINK "http://www.tescoplc.com/media/417/tesco_annual_report_2011_final.pdf " http://www.tescoplc.com/media/417/tesco_annual_report_2011_final.pdf [Accessed 18 April 2012]. Viscione, J.A., 1977. Financial analysis: principles and procedures. Michigan: Houghton Mifflin. Read More