Financial Analysis of Tesco

ASSESSMENT - (Length: 5000 words) Part 1 Select a company whose shares are traded on the London Stock Exchange and is part of the FTSE 100 Index. Company chosen: Tescos. Download its most recent annual report(s) covering the financial statements for the last 2 years. As an alternative, you may select the company by whom you are employed. Required: You are required to present a business report to the directors of the company. Within your report you should: • Calculate profitability, liquidity, gearing, efficiency and investor ratios for a minimum of the past 2 years. • Critically evaluate the ratios calculated. In your analysis. You should consider possible reasons for changes in ratios over the period and discuss the limitations of ratio analysis. • Based on your analysis, make recommendations on how to improve the financial management of the company. • Ensure you include a copy of the financial statements of the company chosen in an appendix to your report. Also, include an appendix showing your calculations for the ratios selected. (40%) (Report length 2,500 words) You are also required to create a podcast (audio or video) of a maximum of 10 minutes summarising the contents of your report. This should be uploaded to Moodle. All students are required to comment on a minimum of 2 other students’ podcasts via the online discussion forums. (20%) Part 2 Scottie Ltd is appraising an investment project which has an expected life of four years and which will not be repeated. The initial investment in the required machinery, payable at the start of the first year of operation, is $820,000. Scrap value of this machinery of $120,000 is expected to arise at the end of four years. The project also utilises a special calibrator which cost $18,000 three years ago and has a current disposal value of $9,000. If used in the project, it is estimated that the disposal value in four years’ time will be $6,000. There is some uncertainty about what price can be charged for the units produced by the investment project. The following forecast of selling prices and their probabilities has been prepared: Future Economic State Weak Medium Strong Probability of future economic state 25% 40% 35% Selling price in current price terms $22 per unit $28 per unit $32 per unit These selling prices are expected to be subject to annual inflation of 2% per year, regardless of which economic state prevails in the future. Forecast sales and production volumes have already been forecast, as follows: Year 1 2 3 4 Sales and production (units) 15000 22000 33000 41000 The variable cost of the product, in current price terms, will be $14 per unit. Variable cost inflation is expected to be 5% per year. Incremental overheads of $46,000 per year in current price terms will arise as a result of undertaking the investment project. A large proportion of these overheads relate to energy costs which are expected to increase sharply in the future because of energy supply shortages, so overhead inflation of 6% per year is expected. Producing and selling the product will call for increased investment in working capital. Analysis indicates that, at the start of each year, investment in working capital will need to be 6% of revenue for that year. It has already been decided that when work on this project ceases, this production department will be closed. Redundancy and severance pay has been estimated at $15,000 now, or $35,000 in four years’ time. The initial investment in the machine will attract capital allowances on a straight-line basis over the four-year project life. The rate of corporation tax is 22% and tax liabilities are paid in the year in which they arise. Scottie Ltd has traditionally used a nominal after-tax discount rate of 8% per year for investment appraisal. Work to the nearest $’000. Required: Write a business report to the directors of Scottie Ltd explaining whether the company should undertake the project or look for other opportunities. The report should incorporate the following: a. An evaluation of the investment option using the net present value (NPV) technique b. Find the approximate internal rate of return (IRR) c. Interpret your results for management, to include: - i. A presentation of the theoretical arguments for the choice of net present value as the best method of investment appraisal. ii. Explain the continued popularity among decision makers of non-discounting methods of investment appraisal. iii. Identify what other factors should be considered before an investment decision is made. d. advise the Board of Scottie Ltd how the proposed investment programme might be financed, identifying the main sources of finance available, critically assessing the main advantages and disadvantages of each.

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