SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

Security Analysis and Portfolio Management

Executive Summary

To understand how a business is performing, understand what might be expected in the future and determine whether the business is a risky investment. An investor, analyst, researcher or accountant needs to understand the strategy of a business and how they plan to achieve this. The capital structure of a business can determine whether the company has enough finance in order to achieve targets and investments, determining certain risks involved and level of return required. This report looks at the level of gearing Tesco has whether financed by debt or equity, going on to look at the weighted average cost of capital. Investment is also important as investors expect, and the company looks to achieve growth. With Tesco this report looks at both future and past investments, analysing the non financial and financial benefits from them. Dividend policy and yields are analysed looking into theory behind them. Tesco shares are analysed using valuation techniques, looking at what may be the reason for Tesco's success through the recession, helping them stabilise share price after the peak of recession despite some contractual and ethical issues. Finally looking into how the international market has benefited Tesco by non financial means.

An overview of a few strategic issues Tesco has faced over the years is provided, looking into some of the challenges and results of these issues. Problems such as competition, international expansion and contract disputes are shown in detail later in the report.

Security Analysis and Portfolio Management

Introduction

Tesco's overall strategy is growth, which has helped strengthen their core business within the UK, (Tesco, 2010). Tesco plan to achieve this strategy through diversifying their product range away from food and to include financial, non financial and telecommunication services/products also by penetrating new markets globally. This report evaluates Tesco, analysing their capital structure and the level of debt discussing how this can influences the company value and investing decisions, looking at how past investments and future investments are beneficial for Tesco. Dividend policies are related to theory and share prices are questioned using different valuation techniques available to any investor. Going on to look at survival through the recession looking at different strategic issues they have faced over the years.

Main Body

Capital Structure and Finance agreement

Figures above referenced from FAME database, show for expansion of its business Tesco Plc increased gearing from 51.58% to 91.38% within years 2000 and 2003. Increasing debt can be a cheaper less risky option as cost of debt is lower than equity and increasing levels of debt can reduce the weighted average cost of capital. By reducing weighted average cost of capital, company value can be increased and therefore shareholder wealth is increased. WACC can be used against cash flows in order to determine the net present value of a project. Tesco probably used this as a means to decide which investments are beneficial.

After this period global financial crisis began to hit the market, Tesco Plc reduced its gearing ratio and kept the ...