Project Report: Financial and Economic Analysis of UK Business

This project report offers a comprehensive analysis of the UK market, focusing on financial and economic literacy. It begins with an introduction to business economics, then delves into the UK local high street store, examining its market structure, competition, and growth strategies like diversification, using River Island as a case study. The report then explores the UK housing market, analyzing demand and supply dynamics, monetary policy, and inflation. Key macro-economic indicators such as GDP, inflation rate, balance of trade, and employment rate are examined, with data from the past five years. The report uses various sources to support its findings and provides a thorough overview of the UK's economic landscape.

Running Head: Financial and Economic Literacy
1
Project Report: Financial and Economic Literacy

Financial and Economic Literacy 2
Contents
Introduction.......................................................................................................................3
Que 1: UK local high street store.....................................................................................3
Que 2: Demand and supply...............................................................................................4
Que 3: Key macro economical indicators.........................................................................5
Que 4: concepts leverage and current account management............................................8
Que 5: financial Analysis................................................................................................10
References.......................................................................................................................14
Appendix.........................................................................................................................16

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Introduction:
This report explains about various business economics concept and strategies which
assists a company to make various decisions about the marketing and financial position and
level of the company. Evaluating the business economics concept is a vital and significant
part of an organization. Following study explains about various business economics concept
such as demand and supply, market structure, macro economical factors etc.
Que 1: UK local high street store
UK local high street store is the primary street business of UK. Basically, various
stores such as small and medium shops etc are running their business in UK street market.
The market structure of these small stores is perfect competition as various stores offer the
same product to the customers. Products are homogenous to each other and there is no barrier
for the new firms to enter. Further, in these markets, a firm can never make supernormal long
run profit (Nobes and Parker, 2008). Though, short run profit could be made. The market
structure of these stores explains that the prices are set by the industry. There is no
competition for the process and economical power is always high. Due to the homogenous
products and similar prices, it is not easy for the small and medium stores to set the monopoly
in the market and that is why, the profit of all the firs are quite normal.
“River Island” a small high street store has been evaluated for the study. “River
Island” is a chain of fashion stores that offers apparels and accessories trending in the market.
The price range of the clothes of the company is average as it is focusing on the medium
income size people and offers designer clothes to them. The company faces huge competition
in the market as various other designer stores are available in UK market which is offering
the same apparels and accessories with the same price range. Further, it has been evaluated
through the study of Niu (2006) that the main advantage of perfect competition is related to
the “River Island” is less advertisement cost as the products are homogenous to each other
and if the firm sells the product into set price then the automatically sales of the company
would take place. And hence, it is not required for the firms to spent huge amount on
advertisement. In case of River Island, it has been evaluated that the extra cost of the firms
are quite less and all the firms are earning almost same profit from the market (Needles,
Powers and Crosson, 2013).

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The Guardian (2018) study explains that the perfect competition id there in the market
structure of UK local high street. Perfect competition is a phase where various companies are
running their business in the same industry and offering the same product or services to the
clients in same price. It has been argued by Visuals (2018) that growth strategy of UK local
high street market is diversification. Growth strategies are the policies and strategies which
are prepared by the organizations to evaluate that how the performance and the position of an
organization could be better in terms of market share, competition level, short term earnings
etc. Growth strategies make it easy for the market or the firm to implement the strategy and
enjoy the growth. The guardian (2018) explains that the diversification is a corporate strategy
in which the business enters into a new market or industry from the current operating market
to enhance the market share, performance and grab the opportunity. Diversification could be
of many types such as industry diversification, market diversification, segment diversification
etc.
In case of River Island, it has been evaluated that the diversification strategy would
help the market and the firm to grow rapidly. The firm must diversify into the new industry
such as currently they are dealing in clothing industry, but now these markets could also offer
grocery items to the customers (Faleti and Myrick, 2012). This strategy would help the
markets to enhance the customer base and it would also attract the local people to buy all the
essentials at one place.
This explains that the River Island and UK local street market could enhance its
market share, profitability and performance through making few changes into its operations.
Que 2: Demand and supply
UK housing market is the one of the significant business of UK economy. Basically, it
is the market where houses are purchased and sold either directly by owners or indirectly by
the brokers among the seller and buyers. In other words, houses could not be physically
transferred so it is just a way to evaluate the performance of the market index. The market
structure of UK explains that the property and houses are sold and bought by the people due
to various reasons such as investment etc and at the time of good economy position and
positive changes into the country, index of housing market enhances (Eriotis, Vasiliou and
Ventoura-Neokosmidi, 2007). The demand and supply of housing market of UK has been
evaluated and it has been found that the demand of the housing products is quite lower

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whereas the supply of the products is quite higher in the market. Current report of the
company explains that it is quite tough for the sellers of housing products in UK to find out
the buyers for their homes (FT, 2018). The latest report explains that in 2018, it becomes
quite tough for the £1m sellers of housing products in UK to find out the buyers for their
homes.
Further, it has been found that the monetary policy of the country is decided by bank
of England. It has been expressed that the inflation target of the consumer price inflation is
2%. It has been evaluated that the monetary policy of the country is quite fluctuate in nature
in case of UK housing market (The guardian, 2018). The current inflation rate of UK explains
that the performance of the country is not well in concern with the UK housing market. The
country is suffering huge losses in case of housing market. Further, it explains that the GDP
growth of the UK is quite lesser. It explains that the housing market is required to be
enhanced through adopting various new strategies. The bank has reduced the level of the
interest rate so that the demand of the housing products could be enhanced and the demand
and supply could be managed.
Trading economies (2018) study explains that the demand and the supply of UK
housing market explain that the demand of the housing products is quite lower whereas the
supply of the products is quite higher in the market. Demand refers to the total quantity of
products and services which are willing to buy and sell by the customers in a certain price. It
has been evaluated that the relationship among the quantity and price demanded is known as
demand relationship. It explains that the supply and demand underlies the force behind the
resource allocation. Further, it has been argued by the guardian (2018) that the demand and
supply of the market must be better through making few changes into the housing market.
Further, Deegan (2013) has explained that the monetary policy plays an important in
the economy of a country. It explains that the current inflation rate of UK in concern with the
UK housing market explains that the performance of the country is not well. The country is
suffering huge losses in case of housing market. Further, it explains that the GDP growth of
the UK housing market of the country is quite lesser (De Haan and Amtenbrink, 2011). It
explains that the housing market is required to be enhanced through adopting various new
strategies.

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Que 3: Key macro economical indicators
Macro economical indicators are the economic statistics that are released by
government agencies and little private organization periodically. These indicators offer
insight into the economical performance of a nation or a region and thus, it could also make a
significant impact on the FOREX market. UK economical factors have been identified and it
has been evaluated that various changes have occurred into the economical position of the
country in last 5 years. UK economical position is the one of the top 10 economies
worldwide. Basically, macro economical indicators are the economic statistics that are
released by government agencies and little private organization periodically. In other words,
macro economical factors explain about the position of the country against any other country
(Jaumotte, Lall and Papageorgiou, 2013). The macro economical factors of UK market
explain that the GDP of the country is getting increased in last 5 years and net international
investment position of the country is also good (ONS, 2018). The GDP rank of UK is 6th in
case of nominal GDP and 9th in case of PPP GDP. Contribution of service sector is highest in
UK economy.
The main macro economical indicators of the country are office for national statistics,
World Bank, gross domestic product, labour market statistics, household expenditure,
inflation measures, consumer confidence, retail sales, balance on trade, balance on payments,
interest rate, public sector finances etc. (Visuals, 2018). Report of trading economies (2018)
explains that the GDP growth of the company has been changed a lot in last 5 years. The
GDP level of the country was quite higher in 2015 but right now, GDP is at its lowest.
Figure 1: GDP changes in last 5 years
(Trading economies, 2018)

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It has been explained by ONS (2018) that the GDP of the country has been lowered due
to various changes into the government, financial crisis etc. More to it, the economic reports
of the country explains that the government has taken few steps to manage the position and
the performance of the company. It has been evaluated that the inflation rate of the UK
market has also been changes rapidly in last 5 years. It has been identified that in the year of
2015 and 2016, the inflation rate was quite lower due to the Donald Trump’s US election
victory. Due to this victory, UK’s office for national statistics has declared an important
change into the inflation numbers. Rate inflation (2018) has explained into his reports that
inflation rates are used to calculate the pension payouts and wage deals to raise the rail fares.
Figure 2: Inflation rate
(Trading economies, 2018)
Further to it, balance on trade of UK market has been evaluated and it has been
recognized that the balance on trade of the country is changing rapidly. Balance of trade
explains about the trade surplus or trade deficit of the country. Figure 3 explains that the
country is facing trade deficit in last 5 years. Though, in recent years, kevel of trade deficit
has been lower. Trading economies (2018) has explained that it is required for very
organization to manage the balance of trade in surplus as in that case, the profitability level of
the country becomes higher.

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Figure 3: Balance of trade
(Trading economies, 2018)
In addition, employment rate of UK market has also been evaluated and it has been
found that the employment rate of the country has been enhanced. Employment rate explains
about the measurement of the extent against which the labour resources are used by a
country. The current employment rate of the country explains that the country is offering a
good amount to the labours.
Figure 4: employment rate
(Trading economies, 2018)
Thu, through the above analysis, it has been found that various changes have taken
place into the economical position of UK due to various factors such as changes in the
government, financial crisis, changes in the GDP, service sector impact, investment level of
the country etc.

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Que 4: concepts leverage and current account management
Managers of an organization take the concern of all the related factors of the
organization while making a decision. It becomes significant for them to evaluate all the
concerned aspect so that a better decision could be made and company could achieve the
goals and the objectives. A manager takes all the relevant decision in a business such as
financial decisions, marketing decisions, human resource decisions, research decision etc.
(Bandy, 2013)
For taking the financial decision, it is important for a manager to manage the financial
position. Financial decision could be made by the financial managers through the help of
leverage and current account management. Leverage explains about borrowing of the funds
to purchase the inventory, equipment and various other assets of the company. Business
owners could use the equity or the debt to finance the company’s asset. Using debt or
leverage enhances the company’s risk in context with the bankruptcy. It also enhances the
return of the company specially the return on equity (Borio, 2014). Leverage makes it easy
for the managers to evaluate the financial risk of the company so that a better investment
decision could be made. This technique is helpful while raising the funds through new
sources.
Leverages are of 3 types which are operating leverage, financial leverage and
combined leverage. All the leverages assist the managers in different decision making
process. Operating leverage explains that an organization with high operating leverage is
sensitive and it affects the bottom line of the company quickly (Grinblatt and Titman, 2016).
On the other hand, financial leverage offers about the financial risk of the company and
combined risk explains about the financial risk as well as operating risk of the company.
For instance, a firm has a fixed cost of $ 100000. The variable cost of the company is
300000 and the sales of the firm are $ 500000 in current year and long term loans of the
company is 400000 at 10% interest rate. So, the composite leverage of the firm would be:
i) Operating leverage = Contribution / Sales – variable cost – fixed cost
= (500000-300000)/ 100000
=2
ii) Financial leverage = Sales – variable cost – fixed cost / Sales – variable cost –
fixed cost- interest

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= (500000-300000-100000)/ (500000-300000-100000-40000)
= 1.67
iii) Composite leverage = operating leverage * financial leverage
= 2*1.67 = 3.34
It explains that the operating and financial risk of the company is under control.
Further, it has been evaluated that as a financial and account manager, it s imperative
for the managers to have solid knowledge about the account management skills. Current
account management is a part of accounting factors in which various decision are mad
regarding the position of the company, assets of the company, customer lifestyle, customer
decision process, liquid position of the company, solvency level of the company etc. Current
account management makes it easy for the company to evaluate all the related factors and
make a better decision about the position of the company (Gambacorta and Signoretti, 2014).
Following are few of the examples of current account management:
Description Formula
Profitability
Net margin Net profit/revenues
Liquidity
Current ratio
Current assets/current
liabilities
Market value ratio
earnings per share
Net income - preference
dividend / weighted
average outstanding shares
Asset management
ratio
Fixed Asset turnover Sales/ Net fixed ratio
Debt management
ratio
Debt to assets Debt/ Total assets

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(Brigham and Ehrhardt, 2013)
Que 5: financial Analysis
a. Ratio Analysis:
Description Formula Tesco plc
2016 2015
Profitability
Net margin
Net
profit/revenues 0.25% -9.22%
Liquidity
Current ratio
Current
assets/current
liabilities 0.75 0.60
Market
value ratio
earnings per
share
Net income -
preference
dividend /
weighted
average
outstanding
shares 0.05 (2.12)
Asset
management
ratio
Fixed Asset
turnover
Sales/ Net
fixed ratio 1.87 1.93
Debt
management
ratio
Debt to
assets
Debt/ Total
assets 0.80 0.84
(Morningstar, 2018)
Profitability ratio of the company explains that the current position of Tesco Limited is
way better as the current profitability level of the company is 0.25% which is quite higher
than -9.22% in 2015. It explains that the profitability level of the company has been better.
Further, Liquidity ratio of the company has been evaluated and it has been found that the
company is utilizing the resources at their maximum and short term debt obligation of the
company is competitive to the industry.

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Further, asset management ratio of the company explains that the current asset
position of Tesco Limited has been lower from last year as the current asset level of the
company is 1.87 which is quite lower than1.93 in 2015. In addition, market value ratio has
been calculated and it has been found that the market position of the company became better.
Lastly, debt management ratio has been calculated. It explains that the debt and total
asset level of the company is competitive. Through the analysis, it has been found that the
performance and the position of the company have been better in current year.
b. Calculation of present value:
Annual interest rate 4.50%
Years 3
Yearly investment -650
Present value of
amount
£
1,328.16
EMI
No.
Opening balance
loan EMI Interest
Closing
balance
loan
1 1,328.16
59.7
7
1,387.9
3
2 1,387.93
650.0
0
62.4
6
800.3
8
3 800.38
650.0
0
36.0
2
186.4
0
4 186.40
650.0
0
8.3
9
Above calculations express that Alice must pay £ 1,328.16 in lump sum to pay her £
650 each year.
c. Calculation of net present value:
Calculation of Net present value (Project A)
Year Project A PV Factor Present value
0 $ -50,000.00 1 -£ 50,000.00
1 $ 26,000.00 0.899 £ 23,370.79
2 $ 17,625.00 0.808 £ 14,240.63
3 $ 15,000.00 0.726 £ 10,894.10