Corporate Finance Management

This project analyzes Tesco's financial performance using net present value, ratio analysis, and investment decision-making to assess its financial health and investment potential. It examines Tesco's current ratio, return on equity, and price-earning ratio to evaluate its short-term and long-term financial capabilities.

Corporate finance
management and
governance

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................2
TASK 3............................................................................................................................................3
3.1.................................................................................................................................................3
3.2.................................................................................................................................................4
3.3.................................................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
APPENDIX......................................................................................................................................8

INTRODUCTION
Corporate finance deals with the capital structure of a corporation that includes funding
and action of management taken to increase the value of the company. It primarily concerned
with maximising shareholder value through long-term and short-term financial planning and
implementation of various strategies. Corporate governance provides some basis which provides
direction to manage financial position of business and helps in financial dealing. In this project
present value of future expenditure is calculated and net present value of an investment is
calculated (Corporate finance management, 2019). Together with this ratios of Tesco is
calculated and investment decision is evaluated.
TASK 1
Net Present Value: It simply refers to difference or variation between present value of cash out
flow and present value of cash inflow over a particular period of time. It is mainly applied in
capital budgeting and planning of investment to evaluate the profitability of a particular potential
project or investment. It simply defines viability of any investment or project. It provide
assistance in taking vital investment decisions. It provide a systematic framework for decision
making activities (Aebi, Sabato and Schmid, 2012). It is act as significant analysis tool to which
also assist in choosing a best alternative out of several alternatives.
Here annual fee = 12000
Interest rate = 8 %
Calculation of PV factor @ 8%:
Year
1 1/(1.08) 0.9259
2 1/(1.08)2 0.8573
3 1/(1.08)3 0.7938
4 1/(1.08)4 0.7350
5 1/(1.08)5 0.6806
6 1/(1.08)6 0.6302
Calculation of NPV:
Year PV@6% Annual Fee Present Value of Annual
1

Fees
1 0.9259 12000 11111.11
2 0.8573 12000 10288.07
3 0.7938 12000 9525.99
4 0.7350 12000 8820.36
5 0.6806 12000 8167.00
6 0.6302 12000 7562.04
55474.55
Amount of $55474.55 is required to set aside today to cover these bills.
TASK 2
(a) Net present value of factory:
Calculation of PV factors @ 10%:
Year
1 1/(1.10) 0.9091
2 1/(1.10)2 0.8264
3 1/(1.10)3 0.7513
4 1/(1.10)4 0.6830
5 1/(1.10)5 0.6209
6 1/(1.10)6 0.5645
7 1/(1.10)7 0.5132
8 1/(1.10)8 0.4665
9 1/(1.10)9 0.4241
10 1/(1.10)10 0.3855
11 1/(1.10)11 0.3505
12 1/(1.10)12 0.3186
13 1/(1.10)13 0.2897
14 1/(1.10)14 0.2633
Year Cash Inflow PV @ 10% Present Value of Cash Flow
0 -840000 1 -840000.00
2

1 174000 0.9091 158181.82
2 174000 0.8264 143801.65
3 174000 0.7513 130728.78
4 174000 0.6830 118844.34
5 174000 0.6209 108040.31
6 174000 0.5645 98218.46
7 174000 0.5132 89289.51
8 174000 0.4665 81172.28
9 174000 0.4241 73792.99
10 174000 0.3855 67084.53
11 174000 0.3505 60985.94
12 174000 0.3186 55441.76
13 174000 0.2897 50401.60
14 174000 0.2633 45819.64
Net Present Value = 441803.62
(b) Factory's worth at the end of seven years:
Year Cash Inflow PV @ 10% Present Value of Cash Flow
1 174000 0.9091 158181.82
2 174000 0.8264 143801.65
3 174000 0.7513 130728.78
4 174000 0.6830 118844.34
5 174000 0.6209 108040.31
6 174000 0.5645 98218.46
7 174000 0.5132 89289.51
So $ 89289.51 will be the worth of factory at the end of seven year.
3

TASK 3
3.1
Ratio analysis is a quantitative method of gaining insight into financial position of a
business. This helps in identifying efficiency and profitability by comparing information
contained in the financial statements of business (Khan, Muttakin and Siddiqui, 2013). To
identify financial position and profitability of Tesco current ratio, return on equity and price
earning ratio is calculated. For calculating current ratio current assets and current liabilities of
Tesco are as follows-
Year Current assets Current liabilities
2014 15572 21399
2015 11958 19810
2016 14828 19714
2017 15417 19405
2018 13726 19238
Return on equity helps in measuring financial performance by calculating return that is
earned by investing funds in business as capital by all the shareholders (Man and Wong, 2013).
To calculate return on equity amount of net income and shareholders equity is required which is
as follows-
Year Net income Shareholders equity
2014 974 147415
2015 -5741 7071
2016 138 8626
2017 -40 6438
2018 1206 10480
4

Price-earning ratio is the relationship between a company's stock price and earning per
share. It gives investors a better sense of value of the share to make investment decision. To
calculate this ratio market price per share is divided by earning per share. For this information is
provided as follows-
Year Market price per share Earning per share
2014 2.15 0.12
2015 1.02 -0.71
2016 1.6 0.02
2017 1.49 0.04
2018 2.52 0.15
3.2
Current Ratio:
Year Current assets Current liabilities
Current Ratio = Current
Assets/ Current Liabilities
2014 15572 21399 0.73
2015 11958 19810 0.60
2016 14828 19714 0.75
2017 15417 19405 0.79
2018 13726 19238 0.71
Return on Equity:
Year Net income Shareholders equity
Return on Equity = Net
Income/ Shareholder's Equity
2014 974 147415 0.66%
2015 -5741 7071 -81.19%
2016 138 8626 1.60%
2017 -40 6438 -0.62%
2018 1206 10480 11.51%
5

Price-earning Ratio:
Year
Market price per
share Earning per share PE Ratio = MPS/EPS
2014 2.148 0.12 17.9
2015 1.02 -0.71 -
2016 1.6 0.02 80
2017 1.492 0.04 37.3
2018 2.52 0.15 16.8
3.3
Ratio analysis represents financial position of a business and helps in comparing
performance of one year with the previous year and formulating targets for the succeeding year.
As Tesco is one of the largest supermarket organisation that is performing really well. Today's
business environment is very competitive and provides large amount of investment opportunities
to general public. Making an investment decision is very critical and proper evaluation of
financial performance of business needs needs to be done before making any investment decision
(Michelon and Parbonetti, 2012). For this short term and long term financial capability of
business organisation is evaluated. For analysing short term financial position of Tesco current
ratio is calculated. As per this ration it is calculated that business is sufficient to meet its short
term debts by realising all its current assets. In all the five years pitch of the ratio is going up and
down as there is no consistency by increasing or decreasing in one direction. Current ratio is less
then 1 that represent that Tesco is not efficient to meet all its current debts by selling all the
current assets.
Return on equity represents earning capacity of the company by making investment of
capital that is introduced by investors as equity capital. This is calculated by dividing net income
to shareholder's equity. In Tesco there is frequent change is noted year by year in return on
equity this is result of some large investments and some unpredictable changes. In the past five
years this ratio is at it highs and also at its lows but the last year a sudden hike is noticed in this
ratio. This is termed as an opportunities to earn high amount through investing in Tesco. As
effect of Brexit is low on the company then other business enterprises and introduction of
6

expansion plans for future development make it an good opportunity to invest in the company for
long run (Obradovich and Gill, 2013).
Price earning ratio is widely used for making a decision for investment in a particular
business organisation. It shows the sum of money investor is ready to pay for each unit of
earnings of the company. This is calculated by dividing current market price of the company
with earning per share. Past five years information of the company shows that there is high
amount of fluctuation in PE ratio this puts business is some unpredictable conditions and reflects
unstable performance of business activities. Together with this funds in the business that are
distributed as dividend is not equal and no minimum amount is available to be distributed as
dividend. This leads to high amount of instability in the market price of shares and investors are
not shuttle regarding making an investment in a business organisation.
Decision of investment in Tesco is risky as company has poor current ratio that reflects
poor short term position of business. Together with this it is seen that profitability of company is
not stable and there is high amount of fluctuation is noticed in the financial position of company.
Together with this it is seen that company is not distribution any fixed amount of dividend that
reflects inefficiency and poor financial performance of the company and make it irrelevant to do
any investment in Tesco (Wang and Sarkis, 2013).
CONCLUSION
From the above report it has been calculated that managing finance is one of the
important task in performing various business activities. Finance is termed as blood for the
business and it is important for survival for each business. To investment some specific amount
in future its present value is calculated through net present value method. Ratio analysis is one of
the primary factor to analyse financial performance of business organisation. Each investor
makes investing decision by critically analysing ratios of the company and expected performance
in future.
7

REFERENCES
Books and Journals
Aebi, V., Sabato, G. and Schmid, M., 2012. Risk management, corporate governance, and bank
performance in the financial crisis. Journal of Banking & Finance. 36(12). pp.3213-
3226.
Khan, A., Muttakin, M. B. and Siddiqui, J., 2013. Corporate governance and corporate social
responsibility disclosures: Evidence from an emerging economy. Journal of business
ethics. 114(2). pp.207-223.
Man, C. K. and Wong, B., 2013. Corporate governance and earnings management: A survey of
literature.
Michelon, G. and Parbonetti, A., 2012. The effect of corporate governance on sustainability
disclosure. Journal of Management & Governance. 16(3). pp.477-509.
Obradovich, J. and Gill, A., 2013. The impact of corporate governance and financial leverage on
the value of American firms.
Wang, Z. and Sarkis, J., 2013. Investigating the relationship of sustainable supply chain
management with corporate financial performance. International Journal of
Productivity and Performance Management. 62(8). pp.871-888.
Online
Corporate finance management. 2019. [Online]. Available through:
<https://yourbusiness.azcentral.com/difference-between-corporate-finance-financial-
management-17199.html>
8

APPENDIX
Balance sheet
9

Cash Flow Statement
Income Statement
10