You are a junior accountant for the Tesco Plc, a company listed on the London Stock Exchange

Introduction
You are a junior accountant for the Tesco Plc, a company listed on the London Stock Exchange. The following items are to be discussed at the next board meeting and the directors have asked you to write a report giving advice on the following areas. Nb: all areas should be answered.
2.1 Financial Analysis
a) A shareholder has raised concerns regarding the financial performance of Tesco Plc compared to its competitors.
Using the 2019 Annual Report and any other relevant research, and with the use of Financial Ratios, critically assess the financial and operating performance of Tesco Plc. Your assessment should draw comparison to competitor(s) and sector averages whilst also specifically addressing the shareholders’ pension concern. (You need to choose two competitors).
All sources of information used in your analysis should be Harvard Referenced as per the General Assessment Advice above. 25 marks
b) Discuss and explain FOUR possible limitations on the usefulness of ratio analysis as a tool for making the above comparisons. 8 marks
2.2 Company Valuation
a) Using the Annual Report used in part one as a basis, calculate the value of Tesco Plc using the following methods:
• Asset-based valuation;
• Dividend Valuation Model (using CAPM to estimate the required return to the shareholders); and
• Comparable P/E ratio.
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State any assumptions you make and include in your appendices any excel calculations. Your appendices should also include a spreadsheet of the formula’s used. 24 marks
b) Critically discuss the valuation methodologies used above and provide an argument for the amount you expect the Tesco Plc to be worth. 8 marks
2.3 Capital Structure
The following information has been taken from the accounts of Absolute plc:
Statement of Financial Position as at 31/12/2019 (extracts)
£’000 £’000
Non-current Assets 1060 Current Assets 745
Total Assets 1,805 Equity Finance
 Ordinary Shares (£1) (Note 1) 300
 Reserves 150 450
Non-current Liabilities
 8% convertible bonds (Note 2) 800
Current Liabilities 555
Total Liabilities 1,805
Notes:
1) The current ex-div market price of the ordinary shares of Absolute is £3.20. Both dividends and share price are expected to increase by 5% p.a. for the foreseeable future.
2) The 8% bonds contain options to convert in 3 years’ time into 50 ordinary shares of Absolute plc per bond or in 4 years’ time into 40 ordinary shares per bond. The current exinterest market price of the convertible bonds is £125 per £100 bond. If not converted, the bonds will be redeemed at par in 5 years’ time. Whilst option to convert must be taken at the timescales above, they will not be exercised until the end of the bond.
3) Corporation tax is at a rate of 19%.
Requirements:
a) Calculate the cost of debt of the convertible bonds for Absolute plc. (10 marks)
b) If a dividend of £0.30 per ordinary share has just been paid by Absolute plc, calculate it’s the cost of equity. (5 marks)
c) Calculate the Weighted Average Cost of Capital (WACC) of Absolute plc. (5 marks)
d) ‘The calculation of WACC is straightforward in theory, but difficult in practice’. Critically evaluate possible difficulties that may be experienced when trying to calculate WACC. (10 marks)
Professional marks 5 marks
Total 100 marks
3. Marking Guide (for students)
To help structure your Report in a professional manner, please refer to the template available on the VLE. You should use this as a guide on how to structure your work in an organised way. The assignment is marked out of 100.
The following table shows the mark allocation and the approach required.
Assignment Part Mark Approach
Professional Presentation
5 Marks are awarded for good use of language, layout, clear structure of the report, appropriate use of appendices and formatting.
2.1 Financial Analysis (a) 25 Marks are awarded for the relevance of points
made in respect of the comparison of Tesco’s ratios compared to competitor and industry averages. Marks will be awarded for critical thinking in the interpretation/conclusions drawn from these comparisons.
2.1 Financial Analysis (b) 8 Marks are awarded for points made in respect of the critical evaluation of the limitations of financial analysis using ratios.
2.2 Company Valuation (a)24 Marks are awarded for accuracy of the calculation of the value of the company using the suggested methodologies.
Marks are awarded for relevance of points made and for demonstrating critical thinking in the context of company valuations. The amount you expect Tesco should be worth should make commercial sense.
2.2 Company Valuation (b) 8 Marks are awarded for relevance of points made and for demonstrating critical thinking in the context of CAPM and DVM. Use of prospective PEs vs trailing PEs will gain further marks. Full marks will be awarded for providing relevant insights related to the scenario.
2.3 Capital Structure (a) 10 Marks are awarded for evaluation of each option, choosing the best option and calculating it’s IRR.
2.3 Capital Structure (b)
5 Marks are awarded for calculation of the cost of equity using CAPM.
2.3 Capital Structure (c) 5 Marks are awarded for the calculation of WACC.
2.3 Capital Structure (d)10 Marks are awarded for identifying the difficulties in calculating the cost of debt and equity used in WACC calculations together with inherent practical limitations in using WACC.
Total 100

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