Unit 2 Core Financial Management Assignment Sample

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Task 1 Business Report Introduction

Financial management implies to the process of planning, acquiring, managing and controlling funds for successfully attaining goals and objective of the business entity. It is the crucial activity which supports in managing financial stability by taking adequate and informed decision. Tesco is the multinational British groceries and merchandise organization which was established in year 1919 by Jack Cohen at Hackney, London. The firm offers large number of products and services which include clothing, books, furniture, electronic, toys, petrol and financial services (Description of Tesco, 2024). Tesco is having market share of 28.1% and earn annual revenue of 65.762 billion pound in year 2023. Students seeking help with writing assignments can analyze the impact of macroeconomic environment on Tesco's working and the process to formulate financial strategy in this comprehensive report.

Impact of macroeconomic environment on Tesco

Macroeconomic environment implies to various external forces that influence working and decision-making process within the organization (Tomar et al, 2021). Macro-economic factors are not part of organization’s surrounding because of which it cannot be controlled by any firm. There are various factors of macro-economic environment which includes inflation, unemployment, interest rate, exchange rate, national income and country’s GDP. Following are the various impact of macro-economic environment on the overall working of the Tesco:

Influence Tesco’s decision: Macroeconomic environment play a crucial role while taking decision within an organization. Business entity generally takes their production decision after carefully evaluating the exchange and inflation rate within country. Tesco generally opts for lower production as there is 2.3% increase in UK’s inflation rate which results into lowering the customer’s purchasing power (Inflation rate in UK, 2023). Further, high inflation rate leads to rising cost of production which ultimately makes the product expensive for the consumer. Along with this, there is an appreciation in UK’s currency which results in decreasing export that eventually leads to lower demand for Tesco’s product.

Reduce firm’s profits: Macroeconomic environment has huge impact on overall profitability position of Tesco. In the current times, UK’s bank rate has increased which result into making loan expensive for the businesses (Hanlon, Yeung and Zuo, 2022). Due to this change, Tesco needs to pay higher amount of interest which eventually leads reduction in the overall profitability. Moreover, there is a 0.3% rise in UK’s unemployment rate which denotes reduction in disposable income of people that eventually impacts the overall sales of Tesco.

Difficulty in gaining competitive advantage: Due to the continuously change in macro-environment factor, Tesco face issue in gaining competitive advantage. Tesco is aiming at offering goods at cost effective prices which helps in attracting the large number of customers (Rane, 2023). Due to continuous increase in inflation and interest rate, Tesco face issue in managing cost and offering product at reasonable cost which creates issue in sustaining competitive edge in the industry. 

Key role and responsibilities of senior financial adviser and executives

There are various role and responsibilities that a senior financial adviser and executive needs to followed which are mentioned below:

Senior financial advisor (SPA)	Executive
Financial planning: SPA is involved towards effectively evaluating financial position of the organization. This includes analysing firm’s income, expenses, assets, and liabilities for better understanding overall financial health of the company (Bhatia, Chandani and Chhateja, 2020). This also includes assisting organization in budgeting process so that firm’s overall cash flow could be managed.	Building budget: Financial executives include towards forming budget based on the information provided by the SPA. Executive are also aiming at maximising firm’s overall cash inflow which helps in managing profitability position of the organization.
Investment management: Financial advisor are also required to effectively allocate assets and diversifying portfolio which help in reducing risk and maximizing return. Along with this, they are involved towards identifying market trends and opportunities related to investment.	Monitoring transaction: Financial executive are also responsible for effectively monitoring all the monetary transaction as to depict overall financial position of the business entity.
Tax planning: Another crucial responsibility of SPA is to manage overall tax expenses of the organization. In this context, advisor provides information related to various taxes efficient investing option which helps in reducing overall tax liabilities.	Drafting financial statement: Another responsibility of financial executive is to formulate financial statement of the company which could be shared with all the stakeholders (Truby, 2020).

Formulating financial strategy within MNCs

Financial strategy refers to the comprehensive plan by which entity will manage its financial resources for attaining long term goal. These strategies support in reducing the overall risk of the firm and helps in maximising profits for fulfilling the long-term objective. There are three crucial decisions which taken while formulating financial strategy that include investment, dividend and financing decision. Below mentioned are the various steps that followed for formulating financial strategy of Tesco:

Identifying current financial position: The first step of formulating financial strategy includes utilizing financial analysing techniques to determining current position of the company (Litvinenko et al, 2022). Under this, firm is involved towards calculating profitability, liquidity and solvency ratio which provide insight regarding overall cash flow position of the organization.

Assessing risk: After this, Tesco is involved towards assessing all the foreign exchange, political and economic risk that will impact on firm’s overall performance (Process of formulating financial strategy, 2023). Along with this, various micro environment risks will also be analysed as to depict overall business environment of Tesco.

Forecasting financial possibilities: Third step of formulating financial strategy includes identifying all the potential opportunity that is prevailing in the market (Sunarti et al, 2021). Tesco is involved towards identifying all the investment potentials that are available in the market based on which strategies could be formulated.

Managing risk: After identifying all the available strategies, Tesco is involved toward using various risk management strategies such as Netting, pooling, hedging, decentralising treasury and in house banking which help in adequate managing overall financial resources.

Formulating strategy: After managing overall risk, Tesco concentrate on investing in project which help in maximizing return. Under this, firm also concentrates over identifying the amount of dividend which should be paid to the shareholders (Taeihagh, 2021). After evaluating all the potential opportunities, Tesco is able to identify whether huge amount of profit should be distributed in from of dividend or not. If there are effective growth prospect in upcoming time, then company will provide low dividend and vice-a-versa.

Risk of conflict in ethical and governance objective

Tesco operates at global level which in turns creates issue for the firm in attaining ethical and governance objectives. Financial governance objective includes enhancing control over audit, promoting transparency with shareholder, determining risk and ensures accurate reporting to each stakeholder (Knights and Vurdbakis, 2021). Further, financial ethical objective includes promoting accountability, transparency and integrity in all the transaction of the business entity. There is higher risk of conflict within financial ethical objective and financial governance objective in carrying out operations of MNCs. This conflict creates issue for manager in taking adequate decision which results in negatively impacting on overall performance of the business entity.

Analysing Use of dividend policies in Tesco

Tesco is emphasis over using stable dividend policy under which particular percentage of earning has been used for paying out dividend. This strategy has been used with the aim of managing overall satisfaction of shareholder. This strategy provides shareholder with the security that a certain amount will be received as dividend which aids in managing their overall trust and confidence (Yusuf and Ichsan, 2021). This methos helps Tesco in effectively creating positive image and reputation in the mind of investors which leads to sustaining competitive edge in industry. Tesco uses dividend policy with the aim of attracting new investors which support in successfully fulfilling funds requirement of company. However, in long term this strategy result in creating dissatisfaction among investors as there is no rise in dividend over years.

Conclusion

By summing up the report, it has identified that macroeconomic factors have huge impact on overall working of the Tesco. Due to increase in inflation, interest rate and reduction in employment rate there is decrease in demand for Tesco’s product leading to negatively impacting on firm’s overall profitability. Further, macroeconomic environment creates issue for Tesco in sustaining competitive edge in the industry leading to facing difficulty in managing long term stability in industry. Further, senior financial advisor’s roles includes investment management, financial planning and tax planning where as executives are responsible for creating budget, drafting financial statement and monitoring transaction. It has been identified that there is high conflict in managing link within ethical and governance objective of Tesco.

Task 2 Portfolio

Investment appraisal implies to the process of identifying profitability of particular investment after carefully evaluating the life of asset while considering affordability and strategic fit (David, 2021). It is the process in which user determines the monetary aspect of the investment and assets by carefully considering benefits and tangible cost. This technique support in identifying rationale and benefit of investing in particular project that aids in taking most effective decision. There are three crucial method of investment appraisal that includes Payback period, internal rate of return (IRR) and net present value (NPV) (Investment appraisal method, 2024).

Payback period:

This investment appraisal method which defines the total time required to cover the initial investment. This method supports in identifying the potential time which will be required to earn an adequate amount of profit after covering all the cost (Hossain, 2021). This method is used to determine the total liquidity risk associated with a particular investment which aids in taking effective decision.

Benefits

• Usually, business entities have limited access to resources so with the help of payback period, a company is able to identify the breakeven point of particular investment which support in preventing organization from major losses.
• This method is highly useful for organizations which are operating in highly uncertain environment. With the help of payback period, firm select projects which will provide return in shorter time leading to managing overall cash flow.

Limitation:

• It does not consider the concept of time value of money which creates issue in identifying the value of investment in the future time (Verma, 2022).
• This method does not consider the profitability of the particular investment which creates issue in estimating the cash flow.

Internal rate of return:

It is another investment appraisal technique which denotes the overall profitability of the particular investment. This method determines the compounded annual rate of return which will be earned by investing in particular project or investment.

Benefits:

• This method includes time value of money which helps in understanding the future value of particular investment (Dai et al, 2022). This aids in effectively estimating the value of investment in upcoming time leading to making more effective decision.
• Further, IRR is providing more accurate outcome as it ignores the hurdle rate which help in taking efficient decision.

Limitation:

• IRR method ignores the project duration, size and future cost of the project which results in providing irrelevant and ineffective outcome.
• This method also ignores the reinvestment rates of the project which results in providing inadequate information regarding the project.

Net present value (NPV):

It is the most effective method used in investment planning and capital budgeting decision which is related to determining difference in the present value of cash inflow and outflow over a period of time.

Benefits:

• This method considers inflation and time value of money concept which help in predicting the actual worth of investment in upcoming
• NPV also support investors in determining long term return of the investment.

Limitation:

• This method is based on hurdle rate and any issue in identifying rate will result in getting unreliable outcome (Fetner and Miller, 2021).
• NPV ignores the opportunity cost of particular investment which provide unclear picture regarding the investment gain and loss.

Below mentioned table indicates the NPV, IRR and payback period of two investment options:

Computation of NPV
Project 1	Project 2
Year	Cash inflows	Cash flow	PV factor @ 10%
1	62000	65000	0.909
2	65000	71000	0.826
3	59000	72000	0.751
4	74000	75000	0.683
5	82000	81000	0.621
Total discounted cash inflow
Initial investment
NPV (Total discounted cash inflows - initial investment)

Computation of IRR
Project 1	project 2
Year	Cash inflow	Cash inflow
0	-150000	-150000
1	62000	65000
2	65000	71000
3	59000	72000
4	74000	75000
5	82000	81000
Internal rate of return (IRR)	34%	37%

Computation of Payback period
Project 1		Project 2
Year	Cash inflows	Cumulative cash inflows	Cash inflows	Cumulative cash inflows
1	62000	62000	65000	65000
2	67000	129000	71000	136000
3	59000	188000	72000	208000
4	72000	260000	75000	283000
5	84000	344000	81000	364000
Initial investment	150000	150000
Payback period
0.4	0.2
Payback period	2 year and 3 months	2 year and 1 month

After analysing both the project by using NPV, IRR and payback period it have been identified that project two is more profitability than project 1. It has been determined that project B will provide higher earning while covering all the cost which indicates efficiency of investing in project 2. Further, it has determined that project 2 is also providing high internal rate of return which indicate that better return will be received by investing in this project. Moreover, the investment of 150000 will be recovered in 2 years and 1 month which depict that project 2 is more attractive and desirables as it help in covering initial cost in less time.

CAPM: It is the pricing model which helps in describing relationship between the expected return and systematic risk and also support in identifying the cost of equity of the business entity (Dessaint et al, 2021). Below mentioned is the example for describing the cost of equity of Tesco (Market return of Tesco, 2023):

Capital assets pricing model
Particulars	Formula	Figures
Rf (Risk free rate)	0.04
Beta	0.34
Rm (market return)	8%
CAPM	Rf + Beta (Rm - Rf)	5.5%

From the above table, it has been identified that Tesco’s expected rate of return is higher than the risk free rate of return which indicates effective investment options (Risk free rate of return of Tesco, 2024). Further, Tesco’s beta is below 1 denoting less volatility of security which is positive indicator for investors. This also depicts that investors will not face huge losses in the case of change in market which is positive sign for them.

Unit 2 Core Financial Management Assignment Sample

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WACC refers to the average cost which an organization pays for financing its assets (Harvey, 2020). WACC is also refers to the total cost of capital for which cost of equity and cost of debt are required. CAPM support in providing cost of equity based on which WACC could be calculated. Further, investors should critically analysis the WACC to take investment decision. If the WACC range between 9 to 12% than it indicates stability of the organization which is positive sign for the investors. However, very high WACC denotes high financing cost and also indicates high risk of the business entity.

Evaluation of success factors of Tesco’s Investment:

Tesco is having effective financial policies and strategy which help in accurately investing and utilising its funds so that most optimum results could be gained. It has been identified that firm is having adequate debt-equity ratio which amount of 0.6 which assits in managing overall interest liabilities and support in successfully carrying out investment. At the time of fund requirement, Tesco focused on using pecking order theory under which first priority is given towards retained earnings, then debt and lastly issue of equity share. Tesco does not want to increase its liabilities due to which it always emphasis over using retained earnings (Nabella et al, 2023). Further organization does not want to dilute control in decision making because of which less preference is given towards issue of equity share. Moreover, another success factor of Tesco is to follow Static trade off theory due to which company does not include debt funds in its capital structure as it will lead to creating financial distress for company. Due to this theory and factors, Tesco is able to manage overall risk and cost based on which accurate investment decisions are taken by the business entity.

Task 3 Essay 

Introduction

Each organization aims at expanding its business operation which helps in increasing profitability and managing long term stability in the industry. Under this, most of the organizations are involved toward expanding its operation in vertical or horizontal manner that help in covering the wider target market. Expanding into other country requires firm to arrange all the required resources and needs to mitigate risk associated with expansion. The current essay is based on describing the concept of financial reconstruction and reorganization. Along with this, it will provide comparison of merger and acquisition strategy with other growth strategies. Further, the essay will include information regarding role of treasury function in MNCs. It will also depict on use of financial derivates for hedging against interest and forex risk.

MAIN BODY

Financial reconstruction or restructuring implies to the method of reorganising assets and liabilities of the business entity. It also refers to process of reorganizing finance of company by modifying capital structure. There are large numbers of components included in reconstruction that are repurchasing stock, raising and reducing debt. Business restructuring is divided into two broad categorizes that are financial and operational restructuring (Roberts et al, 2021). Operational restructuring is related to managing asset side of balance sheet through joint venture, divestment, workforce reduction and acquisition. Financial restructuring is related to liability side of balance sheet which includes repurchasing shares and raising debt.

Mainly organizations are aiming for merger and acquisition which help in enhancing overall sales and support in boosting financial position. These strategies have been selected with the aim of enhancing access to new customer segment, additional distribution capabilities and for eliminating competitions (Morley et al, 2021). For initiating merger and acquisition, multinational organization needs to incur high cost which creates issue in successfully undertaking reconstruction process. There are various methods of financing merger and acquisition of the organization that includes loan from bank and private lender, institution investors, lines of credit, Small business association loan and owner financing.

Business re-organization is the process of critically evaluating the current setup, strategy and operation of the organization. This process is generally incorporated at the time of financial trouble, structural change and introduction of new owner and staff. Business reorganization creates most critical impact on firm’s tax structure (Polak et al, 2020). Various type of business reorganization includes transfer spin, spilt off, acquisition, merger, consolidated and recapitalization. Reorganization also includes selling division, shutting down of firm’s division, cutting budget, lying off workers and replacing management. The major reason behind initiating reorganization is to enhance profitability, strategic and efficiency position of the organization. For example; Tesco is aiming at initiating reconstruction by cutting down 2000 job which includes 1750 job of manager, 70 for call centres and 120 jobs in the head office (Tesco’s reorganization strategy. 2023). This step has been undertaken with the aim of reducing overall expenses and enhancing financial position. There is reduction in demand for Tesco’s product due to macroeconomic environment which result in changing structure of the business entity.

Merger refers to the process of combing two different organizations with the aim of forming a new business entity whereas acquisition is related to forceful takeover of one firm by other (Vissing-Jorgensen, 2021). These are the most common growth strategy which used by the various business entities as it helps in expanding market reach and supports in enhancing overall financial position. Along with this, there are various growth strategies such as product expansion, joint venture, diversification and market penetration which could be used for improving firm’s financial position. Product expansion is related to introducing innovative feature in the existing product or adding new product in the existing business. It is different form merger and acquisition as this process involved selling same product after expansion whereas feature of product changes after the product expansion strategy.

 Joint venture is another growth strategy which is related to combination of two different business entities with the aim of completing a particular project. This strategy is mainly undertaken for shorter period of time and the venture dissolved after the completion of project. However, merger and acquisition are a long term strategy which does not end after the completion of one project (Yadav, 2021). Diversification includes introducing completely new product and services with the aim of entering into type of market. Mergers are generally initiated in the same sized origination whereas diversification is generally initiated between two different sized organizations. Moreover, market penetration is another growth strategy which includes increasing overall sales from the existing customers. This method does not include introduction of new product and services rather increasing sales of existing product and services. It is different from merger and acquisition as this strategy does not include entering into new market area rather based on current market.

There are large number of financing option available for effective undertaking the process of merger and acquisition which includes debt and equity. Under this exchange of share is the one of the most common method in which acquiring company exchanges its share with targeted firm result in successfully initiating merger. It is most of useful financing method which help in sharing risk and support in guaranteeing careful management (Li and Peng, 2021). In this method, if the value of buyer’s share is high than it will receive more number of share of other company which leads to effectively undertaking the transaction. Another significant method of funding merger is related to sourcing debt from market. Further, many acquiring company agree to pay out debt and losses of targeted company in exchanges of mergers.

However this type of financing is not adequate as it result in increasing risk of bankruptcy for the company. Further, these types of financing lead to reducing overall value of the assets which creates dissatisfaction among investors. Further, Leverage Buyout is another method of financing merger in which 90% of debt to undertake merger and acquisition (Bose, Minnick and Shams, 2021). This method is generally used to acquiring competitors and improving overall performed of Underperforming Company. Lastly, third- party financing is another method of raising funds in which private equity investors acquires some of the equity in new company. Further, there are various external and internal sources of finance such as loan, debentures, retained earnings and shares for successfully undertaking process of merger and acquisition.

Treasury function involves management of funds and financial risk in the business entity. The main aim of treasury function includes ensuring the availability of adequate funds for successfully paying out all the liabilities of the firm (Von Solms, 2021). Treasury function also emphasis over developing strategies so that long term solvency position of firm could be managed. Treasury management concentrated over optimally using monetary assets and cash reserve for enhancing liquidity and reducing overall risk of the organization. Under this, treasurer is involved towards ensuring that timely collection from the debtors which help in managing overall cash flow. Along with this, for reducing financial risks treasury manager emphasis over managing revenue stream so that firm’s operation did not get impacted. They are also liable for managing relationship with banking partner and other investors so that funds could be easily sourced at the time of emergency.

Other crucial function of treasury manager includes ensuring that firm’ liquidity is managed at each time so that payment could be made on time and overall reputation did not get impacted. In this context, treasury manager are involved toward carefully improving account receivable and payable cycle which help in managing overall cash flow of the business entity (Barth and Kahn, 2021). Along with this, they also focused over effectively and optimally using all the monetary resources which aids in reducing expenses and support in effectively improving overall liquidity position of the business entity. Moreover, treasury function also plays a crucial role in making effective business decision and support in overall growth and development of the business entity. Treasury manager is involved towards effectively evaluating the return of particular investment based on which funds could be adequately invested which support in optimum utilization of financial resources. Further, by smartly managing funds, treasures provide a growth opportunity for organization which ensures firm’s long term stability.

Financial derivative refers to various financial instruments whose price is determined on the basis of the cost and value of other underlying assets. Foreign currency, interest rate, commodity and index are crucial type of underlying assets. The major type of financial derivatives includes swap contract, future contract, forwards contract and option contract which act a tool for managing overall risk and return of the investors (Du, Hébert and Li, 2023). The most common use of financial derivative is to hedge the risk associated with the foreign exchange. Forex risk refer to financial loses which is faced due to currency fluctuation. For example: During the transaction between the US based company and German based company, it was decided that 100 widget will be sold out at the rate of 10 Euros.

However at the time of transaction, both currencies could be appreciated or depreciated which will results in causing additional loss or profit for both the company. To avoid such situation, financial derivates are used which help in safeguarding firm from additional loss or profit (Ambwani et al, 2020). The most crucial method for hedging Currency risk includes spot contract, currency futures and foreign current options. In spot contract, both the parties are ready to undertake deal within the period of two days at the price prevailing in the market. This help in reducing risk of facing high fluctuation in the exchange rate and support in decreasing forex risk. Further, currency futures are used in which both the parties are ready to exchange currency at the decided rate which helps in securing individual from the risk of fluctuations.

Moreover, financial derivates also play a crucial role in hedging interest rate risk of the business entity. Interest rate risk is related to change in values of fixed assets due to unexpected changes in the interest rate. This risk is not related to equity investment rather it is based on the fixed income asset such as bonds. There are four crucial types of interest rate risk which includes basic, yield curve risk, option risk and reprising risk (Cartwright and Cooper, 2024). The most prominent methods of hedging interest rate risk are options futures, interest rate swap and forward rate agreements. In interest rate swap both the counterparties reduces interest fluctuation risk by obtaining better borrowing rates then bank. Further, in future agreement rate both the parties lock their interest which protect buyer form risk of increase in interest rate and seller form risk of decrease in interest rate. Along with this, options futures could be used in which investors take option to buy futures option at the predetermined interest rate.

Conclusion

By summing up the essay, it has identified that financial reconstruction is initiated with the aim of expanding market reach, reducing operational cost, decreasing competitiveness and improving overall growth. It has been identified that firm involved in reorganization with the aim of managing expenses and overall working of the business entity. It has been determined that merger and acquisition could be effectively under sourced through bank loan, institutions investors and owners. It has been determined that merger and acquisition are different form market penetration, product expansion and diversification on the basis of product and market. It has further identified that with the help of forwards and future contract companies are able to hybrid forex and interest rate risk.

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Online

• Description of Tesco. 2024. Online. Available through: < https://www.tescoplc.com/about >
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