Analysis of Financila Position of Tesco Plc.
Investment decisions companies make today will have a direct impact on their ability to reach financial objectives. Most companies are faced with questions such as: which projects should your company invest in, which returns are needed and what risks are the company willing to take to achieve company goals? This paper will explain what is, and how to calculate a weighted average cost of capital of Tesco Plc based on company’s balance sheet1 and cash flow statement.2 The second part will focus on a report on the Tesco’s cash flow over the two year period starting in 2005. In the last part essay will explain what discount rate Tesco Plc. should use when deciding on major investment projects.
a) Calculate the company’s weighted average cost of capital and explain/justify your calculation.
Weighted average cost of capital (WACC) is used to determine whether company should invest in a project. By comparing cost of capital on investment and expected return on capital, a company can decide whether investment is worthwhile. Companies use this method as a discount rate for financed projects, because cost of capital is reasonable method to use to evaluate profitability of an investment.
Broadly speaking, a company’s assets are financed by either debt (less risky to creditors, so it has lover cost of capital) or equity (more risky to investors, so it has higher capital cost). Thus the capital structure of a company consists of three elements: preferred equity, common equity and debt. WACC is the average cost of these three components that takes their weight in to consideration and delivers the expected cost of new capital for the company. The measure is the overall required return on the finances employed as a whole; it is often used internally by company managers to judge expansion opportunities.
As mentioned before calculating WACC requires knowing the required rates of return for all of the sources of financial resources. Cost of capital is the true cost of
a) Calculate the company’s weighted average cost of capital and explain/justify your calculation.
Weighted average cost of capital (WACC) is used to determine whether company should invest in a project. By comparing cost of capital on investment and expected return on capital, a company can decide whether investment is worthwhile. Companies use this method as a discount rate for financed projects, because cost of capital is reasonable method to use to evaluate profitability of an investment.
Broadly speaking, a company’s assets are financed by either debt (less risky to creditors, so it has lover cost of capital) or equity (more risky to investors, so it has higher capital cost). Thus the capital structure of a company consists of three elements: preferred equity, common equity and debt. WACC is the average cost of these three components that takes their weight in to consideration and delivers the expected cost of new capital for the company. The measure is the overall required return on the finances employed as a whole; it is often used internally by company managers to judge expansion opportunities.
As mentioned before calculating WACC requires knowing the required rates of return for all of the sources of financial resources. Cost of capital is the true cost of
Bibliography: Reference: G Arnold, “Corporate Financial Management”, 3d edition, Pearson Education Limited. Charles P. Jones, Investment Analysis and Management http://www.tescocorporate.com http://www.bizhelp24.com/accounting/cash-flow-statement-3.html http://www.tescocorporate.com/annualreview06/pdf/report/Tesco_Report_2006_Full.pdf http://en.wikipedia.org/wiki/Cash_flow_statement http://www.learningmatters.com/idx/7871/