A Financial Case Study Analysis

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Efficient market hypothesis- An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.”(Investopedia web site).

Required:

  1. Using the regression analysis calculate the line of best fit through the data and interpret your values of a and b.

where,

a=120

b=3

Y=a+bx

=120+3(let x=0)

=120+0

=£120(£000)

=£120,000

  1. Forecasts sales when advertising expenditure is:
  1. £50,000

Let x=£50,000

Y=a+bx

=£120,000+3(£50,000)

=£120,000+£150,000

=£270,000

  1. Identify and appraise the sources of finance available to Jeronimo Inc. Give various sources so that the board of directors can discuss at the next board meeting.

Jeronimo Inc. amass its investment commencing the basis:

Lengthy period sources of finance

  • Ordinary shares - no fixed burden, permanent capital, credit worthiness, dividend.
  • Debt – commercial bank loan, asset based borrowing, bonds, small business investments companies, insurance company, stock broker house.
  • Mortgage, lottery funding, retained profiting asset also other sources of finance

As well as the Jeronimo Inc. rummage sale their merchandise in a altered business promotion, sale plus reduce the manufacture price via decreasing other redundant cost.

Answer,

Calculation of Payback Period for Business A and Business B

Business A

Payback period= 4 yrs.+100,000

300,000

= 4 yrs.+0.33

= 4.33 yrs.

Business B

Payback period= 2 yrs.+200,000

400,000

= 2 yrs.+0.5

= 2.5 yrs.

Calculation of Net Present Value for Business A and Business B

Business A

Year

Inflows(£)

Outflows(£)

Net Cash flows(£)

Cost of capital @ 12%

Present value(£)

0

-1000000

-1000000

1

-1000000

1

200000

200000

0.893

178600

2

200000

200000

0.797

159400

3

200000

200000

0.712

142400

4

300000

300000

0.636

190800

5

300000

300000

0.567

170100

6

400000

400000

0.507

202800

Net Present Value

44,100

Business B

Year

Inflows(£)

Outflows(£)

Net Cash flows(£)

Cost of capital @ 12%

Present value(£)

0

-800000

-800000

1

-800000

1

300000

300000

0.893

267900

2

300000

300000

0.797

239100

3

400000

400000

0.712

284800

4

0.636

5

0.567

6

0.507

Net Present Value

8,200

Justifiable Decisions as per Payback Period

Here business A, payback period is 4.33 years and business B, payback period is 2.5 years it shows whether Christine plc. devote in Business A, payback period is extended contrast among Business B. As a result I think if Christine plc. invest for the business B, company will be beneficiary rather than invest for business A.

Justifiable Decisions as per Net Present Value

Business A’s net present value is £44,100.00 and business B’s net present value is £8,200.00 it shows whether Christine plc. Invest for Business A , then net present value is too high rather than business B.As a result I think if Christine plc. invest for the business B, company will be beneficiary rather than invest for business A.

  1. Select appropriate and relevant financial information for use in the process of making strategic decisions on the investment by Christie plc.

Upper level executive makes a strategic decision for investment. Because of they can extent the long term cost of such decisions. Usually a major capital venture decision such as promoting a new item for consumption, spend for new-fangled division will vary to examine make ultimate decision.

In general the Christie plc. have diverse scheme for creating strategic decisions on the investment which is valuable for the organization. Also subsequent are the most important;

ï‚® Return on Capital Employed (ROE)

ï‚®Payback Period

ï‚®Discounted Cash flow (DCF)

  1. Net Present Values (NPV)
  2. Internal Rate of Return(IRR)

On the other hand I consider to decide on Payback Period method for

Making strategic decisions on the investment portfolio of Christie plc..

The payback period is the couple of years it capture to recover the unique investment. This is a cash measure and as such it procedures the couple of years taken to regain the speculation in cash terms.

  1. How would your decisions change on Business A and Business B if the net cash inflows for Business A were £200,000 throughout the six year period and also the net cash inflows for Business B were £300,000 throughout the three year period. The initial investment for business A is £1,000,000 and for business B is £800,000.

Answer,

Calculation of Payback Period for Business A and Business B

Business A

Payback period= 4 yrs.+200,000

200,000

= 4 yrs.+0

= 4 yrs.

Business B

Payback period= 2 yrs.+200,000

300,000

= 2 yrs.+0.67

= 2.67 yrs.

Calculation of Net Present Value for Business A and Business B

Business A

Year

Inflows(£)

Outflows(£)

Net Cash flows(£)

Cost of capital @ 12%

Present value(£)

0

-1000000

-1000000

1

-1000000

1

200000

200000

0.893

178600

2

200000

200000

0.797

159400

3

200000

200000

0.712

142400

4

200000

200000

0.636

127200

5

200000

200000

0.567

113400

6

200000

200000

0.507

101400

Net Present Value

177,600

Business B

Year

Inflows(£)

Outflows(£)

Net Cash flows(£)

Cost of capital @ 12%

Present value(£)

0

-800000

-800000

1

-800000

1

300000

300000

0.893

267900

2

300000

300000

0.797

239100

3

300000

300000

0.712

213600

4

0.636

5

0.567

6

0.507

Net Present Value

79,400

Justifiable Decisions as per Payback Period

Here business A, payback period is 4 years and business B, payback period is 2.67 years it shows whether Christine plc. devote in Business A, payback period is extended contrast among Business B. As a result I think if Christine plc. invest for the business B, company will be beneficiary rather than invest for business A.

Justifiable Decisions as per Net Present Value

For business A it’s net present value is £1, 77,600.00 and for business B its net present value is £79,400.00 it shows whether Christine plc. Invest for Business A , then net present value is too high rather than business B.As a result I think if Christine plc. invest for the business A, company will be beneficiary rather than invest for business B.

Task-3

Tesco plc

The following information has been extracted from the recently published accounts of Tesco Plc:

Balance sheet as at 31st May

2008 2007

£000 £000

Fixed assets1,800 1,400

Current assets

Stock1,200 200

Debtors 400 800

Cash100 100

1,700 1,100

Creditors: amounts falling due within one year

Loans and other borrowing(200) (500)

Other creditors(300) (800)

(500) (1,300)

Net current assets1,200 (200)

Creditors: amounts falling due after one year

10% Debentures(1,000) (600)

2,000 600

Capital and reserves

Ordinary share capital (50p shares)1,200 500

Share premium 600 0

Reserves200 100

2,000 600

Profit and loss accounts

2008 2007

£000 £000

Turnover2,000 1,000

Cost of sales(1,300) (700)

Gross profit700 300

Distribution costs(260) ( 90)

Administration expenses(100) ( 60)

Operating profit340 150

Interest(100) (60)

Profit before taxation240 90

Task-4

Taxation(50) (20)

Profit after taxation190 70

Ordinary dividends(90) (50)

Retained profit for the year 100 20

Balance brought forward100 80

Balance carried forward 200 100

Share price 1.301.26

Industry P/E ratio 22 20

Other industry ratios:

Return on capital employed 15%

Asset turnover 6 times

Current ratio 2.3:1

Quick ratio 1.5:1

Interests cover 8times

Required

  1. Calculate the ratios for both years
  1. Return on capital employed

=PBIT ×100

Capital employed

For Year 2008= 340,000 ×100

2,200,000

= 34,000,000

2,200,000

= 15.45%

For Year 2007 = 150,000 ×100

1,100,000

= 15,000,000

1,100,000

= 13.64%

Where, Capital employed= owner’s equity+ long term liabilities

For year 2008 = 1200, 000+1000, 000

= £ 2,200,000

For year 2007 = 500,000+600,000

= £ 1,100,000

  1. Asset turnover

= Sales

Capital employed

For year 2008= 2000,000

2,200,000

= 0.91times

For year 2007=1000, 000

1,100,000

=0.91times

  1. Current ratio

=Current assets

Current liabilities

For year 2008=1700, 000

500,000

= 3.4:1

For year 2007= 1100,000

1300,000

= 0.85:1

  1. Quick ratio

= Current assets-Stock

Current liabilities

For year 2008=1700, 000-1200, 000

500,000

= 500,000

500,000

= 1:1

For year 2007=1100, 000-200,000

1300,000

= 900,000

1300,000

= 0.69:1

  1. Interest cover

=PBIT

Interest

For year 2008=340,000

100,000

=3.4 times

For year 2007=150,000

60,000

=2.5 times

  1. Total gearing

=Long term loans+ Preference share

Capital employed

For year 2008=1000, 000 + 0

22, 00,000

=0.45

For year 2007=600,000+0

11, 00,000

=0.54

  1. Earnings per share (EPS)

=Profit available to ordinary shareholders

Number of shares in issue

For year 2008=190,000

2400,000

=0.08

For year 2007=70,000

250,000

=0.28

  1. Earnings yield

=EPS×100

MPS

For year 2008=0.08×100

1.30

=6.15%

For year 2007=0.28×100

1.26

=22.22%

  1. Dividend yield

=Dividend per share ×100

Market price per share

For year 2008=0.0375×100

1.30

=2.88%

For year 2007=0.2×100

1.26

=15.87%

Where, Dividend per share=Total ordinary dividend

Number of shares in issue

For year 2008=90,000

24, 00,000

=0.0375

For year 2007=50,000

2, 50,000

= 0.2

  1. Dividend cover

=Profit available to ordinary shareholders

Dividends

For year 2008=190,000

90,000

= 2.11 times

For year 2007=70,000

50,000

=1.4 times

  1. P/E ratio

= MPPS

EPS

For year 2008=1.30

0.08

=16.25:1

For year 2007=1.26

0.28

=4.5:1

b) Use the ratios below to assess the financial viability of Tesco Plc.

2007 2008 industry average

Gross profit percentage 23% 19.4%21%

Quick ratio 1.41:1 1.83:12.1:

Return on equity 19.24% 16.39%20%

Return on capital employed 15%13%16%

Earnings per share 20p17p 19p

Debtor’s collection period 40 days 54 days 35 days

Answer,

Tesco Plc. gross revenue decrease in the year 2008 contrast to the year 2007 where return on equity decrease in year 2008 compare to the year 2007, come back on capital employed decrease in year 2008 comparing the year 2007, bring in per share also decrease in year 2008comparing the year 2007.Even though debtors collection period has increased in year 2008 to 6 days comparing the last year 2007.In general it shows the year 2008 is not make profit comparing the last year 2007.

c) Use these ratios, how can Tesco’s performance improve?

2007 2008 industry average

Gross profit percentage 23% 19.4% 21%

Quick ratio 1.41:1 1.83:1 2.1:

Return on equity 19.24%16.39% 20%

Return on capital employed15% 13% 16%

Earnings per share 20p 17p 19p

Debtors’ collection period 40 days 54 days 35 days

Answer,

Develop the commerce performance of Tesco have to exploit diverse policy for make organization revenue. They must reduce the debtors’ compilation time, aim to discover reduce the costs, and hit upon the technique to develop the excellence with production.

d) How would you use the balanced scorecard by Kaplan and Norton to assess the performance of Tesco Plc?

Executing the Balanced Scorecards habitually contains the four procedures:

  1. Interpreting the vision into set the operational objectives;
  2. Corresponding the vision along with connect on the way to individual portion;
  3. Production development; directory ambiance
  4. Feedback, also regulating the policy consequently.

The Balanced Scorecard is a structure of strategic planning and commences methods that are utilized in a business, government and non profit association whole over the world support the trade conduct into the vision, mission and strategy of the company; develop inner and outer communiqué and supervising the execution aligned with organizational achievement. According to Drs. Robert Kaplan and David Norton, The Balanced Scorecard is a performance related measurement framework to manager that gives them a scale to review the organisational performance.

Description: balancedscorecard

Fig. - Adapted from The Balanced Scorecard by Kaplan & Norton.

In my opinion Tesco Plc must have to follow the Norton and Kaplan’s Balanced scorecard to procedure their business by gathering organisational goal.

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