Managing Financial Resources and Decisions Table of Contents Table of Contents 2 Introduction 3 Section 1 3 Section 2 4 Section 3 5 Section 4 5 Conclusion 6 References 7 Introduction This paper is expected to deliver an understanding regarding the share capital allocation and its effects on investor’s decisions of a UK listed company, i.e…
The paper will be divided into 4 sections. Section 1 will be focused on assessing the tangible cost and the opportunity costs incurred by Tesco when raising share capital through shares, bonds and proposed dividends, with hypothetical illustrations. Section 2 will aim at explaining the role and significance of financial planning in Tesco, while section 3 will remain focused on identifying the needs that investors of Tesco might essentially seek in respect to the fund raising activities of the company. Taking note on the changes expected in the PE (Profit-Earning) ratio, EPS (Earning per Share) ratio and ROCE (Return on Capital Employed) owing to its fund raising activities, section 4 will be constructed. Section 1 In correspondence to the three optional measures that Tesco can consider to raise its capitals, it was observed that the tangible cost will be as follows. Correspondingly, the opportunity costs associated with these options will be, As can be observed from the above analysis, it is likely and suggestible that Tesco decides for option 1a, having least opportunity cost of ?5,500,000, considering its next best alternative to be option 1b. Section 2 Financial planning assists large companies in finding out the best possible ways to generate the cash flow and to make the capital investments effective by incurring limited degree of risks. Large companies often face issues in dealing with complexity issues when deciding for capital gains owing to the varied range of sources available, ranging from shares, bonds and other financial instruments. Financial planning thus helps a large sized company like Tesco in identifying the best investment opportunities, keeping in account the investors’ interests. Financial planning also assists with the effective forecasting of the implications that the funding strategies may impose on the investors’ decision, considering the results from ratio analysis and other similar mechanisms (Greenwood, 2002). Section 3 The range of information to be required by the financial decision makers in Tesco may include details of the market investment trends, competitor’s influence on the demand of its products, market structure, regulatory norms applied to funding sources and changes in the market pricing trends concerning the fact that Tesco deals with consumer goods, which are highly influenced by market volatilities (Chartered Institute of Management Accountants, n.d). Section 4 Considering options 1a and 1b, as the most suitable options for Tesco, it can be observed that option 1a will be more beneficial as it is capable of yielding a higher P/E ratio, indicating that investors shall pay more for every dollar in comparison to option 1b. While the EPS ratio remains the same in both the instances, the ROCE reveals a contrasting situation where capital employed in option 1b is likely to have a higher return as compared to option 1a. This reveals that Tesco shall be able to obtain better efficiency in its capital allocation following option 1b. Source: (Tesco PLC, 2013) Conclusion From the above analyses that fund raising strategies used by Tesco is quite likely to impose strong effects on its financial statements and thereafter determine the decisions of its investors either favorably or unfavorably. A proper financial planning and effective decision making thus play a major role in the effectiveness of the business. References Chartered Institut ...
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