Sources of Finance of Tesco - Essay Example

QUESTION Tesco Plc-- Sources of Finance As per the company's financial ments, Tesco Plc's capital structure comprises about 64% equity financeand 36% debt finance. Therefore, it can be said that the company uses a mix of debt capital and equity capital to finance its business operation. It does not over rely on the externally borrowed funds and has sufficient equity funds available to meet various financial needs of the business. The major source of equity finance used by the company is through the issuance of shares to general public and other shareholders as it is a publicly traded company and the various sources of debt finance include bank loans, borrowings, finance leases etc, which finances the rest of the company's financial needs. Stock Market Listing and Financial Resources Options The company has been listed on the major stock markets around the world for years. The major benefit of floating a company's shares in the stock market is that the company's shares become available to general public, which in turn helps a company to generate more equity finance for the company without any liability. This is the reason Tesco Plc does not need much of debt finance to fund its business operations. It has more of equity finance readily available inside the company without having to pay any interest and without any liability to pay off the amount in future. It has transformed its entire capital structure and as evident from its annual reports for the last three years, the company has been minimizing the extent of external debt used for financing. Thus, issuance of shares publicly and stock market listing is very useful for a company in increasing the financing options to obtain necessary funds for the business. Stock Market Listing and Shareholders Listing in stock market is very beneficial to a company's shareholders. It enhances the liquidity of shares owned by the shareholders, hence they become more marketable as the shares can easily be bought and sold in the stock market. It becomes more convenient for the shareholders to determine the market value of shares in their hands. Apart from these benefits, the shareholders get an opportunity to obtain financial gains out of the shares they own other than the dividends paid by the company and the opportunity is the Earning per Share of the company's shares. Tesco Plc's EPS has had an increasing trend over the years and it is one of the major benefits of stock market listing to the shareholders of the company. Deciding the Mix of Debt and Equity Finance When deciding upon the mix of suitable debt and equity finance, a company needs to consider a lot of issues. Some of them are listed below: The extent of ownership and control the company is ready to sacrifice. The different types of financing options available to the company and the cost of financing The amount of cash available to pay off the borrowed money and interest payment Word count: 495 words QUESTION 2 Importance of Cash According to Bernstein Leopold A. (1993, p129), "Cash is considered the most liquid of assets. In fact, it represents the starting point, as well as the finish line, of what is known as the accounting cycle" Cash is the life blood of any business activity. No business can run without the sufficient availability of cash to run its operations. Cash is needed in the company to meet its various short terms needs, payments of current liabilities and meeting day to day business expenses. Cash also forms a vital part of the working capital, which determines the health of a company in terms of short-term liquidity. Tesco Plc- Cash Management Policy A company can manage its cash and cash equivalent assets by controlling the payment collection methods, curbing unnecessary expenses and utilizing the uninvested cash lying in the company. Tesco Plc has described its supplier payment policy in its Directors' report section of the annual report. Also, the company's cash management can be assessed with the help of the cash flow statement. However, the company has not displayed any projection or forecasting of the company's cash flow with the help of any cash flow projection statement. Word count: 198 words QUESTION 3 Tesco Plc- Treasury Management Policy Tesco Plc has described its treasury management policy in the company's annual report. As mentioned in the company's Operating and Financial Review statement section, Tesco Plc's treasury management is carried out by the company's Board that manages the financial risks faced by the company. The Board maintains and reviews the company's treasury management policy, which is also audited by the company. The company restricts the board to act as a profit centre and undertake any speculative transactions. Tesco Plc- Working Capital Policy Working capital exhibits difference between the current assets and current liabilities of the company. The company is really short of sufficient working capital that is needed to meet the company's short-term liabilities, obligations and expenses of the company. The working capital available to Tesco Plc's is much less than the liquid assets required by the company to pay off all its current liabilities. Therefore, it is evident from the company's annual reports and financial statements that the company has not invested sufficiently into the current assets, which is the lifeblood for any company. Hence, the company should reconsider its working capital management policy to be able to meet its short-term needs. Word Count: 198 words QUESTION 4 a- Advantages and Disadvantages of Long-Term Finance The various long-term financing options available to Tesco Plc include long term loans and borrowings, leasing and equity financing etc. Following are their advantages and disadvantages: Advantages Long-term loans and borrowings provide the major source of obtaining substantial amount of finance and save the company from losing its control over its business and equity. Finance lease enables the company to purchase an asset and take the ownership over a period of time. It saves the company to pay a large sum of money at one time and use an asset that is more effective and beneficial to the company without having to bear the expense of purchasing it. Equity financing helps the company to generate funds without having to bear any liability for the repayment. Disadvantages The biggest drawback underlying long-term loans and borrowings is that it renders the company liable to repay the borrowed amount with heavy interest charges. The major disadvantage of finance lease is that it makes the company pay a larger sum greater than the asset's value. Equity finance makes the company sacrifice a part of the company's ownership and control. Word Count: 198 words b- Tesco Plc- Exposure to Risk According to the company's annual reports and financial statements, there are various risks company needs to confront with in the course of its major business operations. These risks are interest rate risks, foreign currency risks, credit risks, and insurance risks etc. The company struggles to reduce the risk of increase in interest rates and enhance the opportunity to take advantage of any deductions in these rates. The company achieves this objective by using the forward rate agreements, interest rate swaps, caps and collar methods. Credit risk is another major risk faced by the company in case of non-payment by the customers due to default or bankruptcy etc. The company reduces the extent of this risk by diversifying its portfolio of financial transactions that are all highly ranked for credit rating. The company minimizes the insurance risks by purchasing assets, earnings and combined liability protection from the open insurance market at a catastrophe level. Tesco Plc also faces considerable risks on its short-term profits due to the inconstancy of exchange rate. The company reduces the exposure to this risk by hedging the transactional currency exposures using forward purchases and currency options. Word Count: 196 words QUESTION 5 Tesco Plc- Share Price Information As per the FTSE listing, the company's stock price performance over the three months (since October, 2005) has been very fluctuating. However, it has reached a higher point as compared to where it was three months ago. The following chart (Share Price Tesco, accessed 09.01.06) depicts the performance of Tesco Plc's shares from the month of October till the recent days: Source: www.lse.co.uk In the above chart, only the share prices over three month period for Tesco Plc have been shown with their major rising and falling trends in order to highlight the company's share price performance. According to the chart displayed above, the company's share price before the month of October started off at a point nearly about 304p per share that had a major rise in the mid of October, which pushed up the price of Tesco Plc's shares to about 310p per share. After this hike, the company's share price continued to fall gradually until the last week of the same month, and therefore at the end of the month the company's stock price fell to a price of 295p per share. The company's share price further took an increasing trend in the beginning of November 2005 and only during the first week, Tesco Plc's share price increased to about 315p per share showing an increase of about 7% in a single week in the company's share price. Then again after the first week the company's shares took a declining trend, the share prices kept coming up and down with a lot of fluctuation throughout the month taking down the company's share price to about 305p per share by the end of the month. The fluctuating trend continued to last during the first week of December 2005 as well but after that week, the company's share prices took a tremendously high leap and continued to rise constantly until the mid of the same month taking the share price up to the level of about 330p per share thus showing an increase of about 9% in a matter of only10 days. Since the mid of December 2005, the company's share price has been facing fluctuations and currently, Tesco Plc's share price hangs around a price 320p per share. It is evident that the company's share prices have faced a lot of fluctuation since October 2005. Word Count: 392 words References: Annual Report 2004, accessed January 01, 2006 from the World Wide Web: http://www.tescocorporate.com/images/Report_04_0.pdf Interim Report 2005, accessed January 01, 2006 from the World Wide Web: http://www.tescocorporate.com/images/Tesco_Interim_2005_0.pdf Annual Report 2005, accessed January 01, 2006 from the World Wide Web: http://www.tescocorporate.com/images/Report_05_0.pdf Bernstein Leopold A. (1993), Financial Statement Analysis: Theory, Application and Interpretation, New York, p129 Share Price Tesco, accessed January 05, 2006 from the World Wide Web: http://www.lse.co.uk/SharePrice.aspSharePrice=TSCO Read More