Below you will find a financial report about Tesco.plc which is quoted on the London Stock Exchange (TSCO.L). Firstly, the company is valued on the basis of five differ-ent approaches (NAV, PER, DCF, DVM, EVA) and secondly, the different approaches are compared to detect distinctions. Maximising shareholder value is the superior aim in this context but what about claims of stakeholders like workforce for example?
Tesco is one of the world`s biggest retailers with over 2,700 stores worldwide. The core business is food retailing but Tesco has diversified its assortment in recent years into the non-food sector, banking, insurance and telecommunications.1
Tesco had a market capitalisation of 33,144.63 million pounds and 7,919.863 million issued shares on 14.01.2007.2
This coursework underlies the limitation of limited data input. Within the coursework it is not possible to forecast future based figures like growth rates for example as de-tailed as possible, therefore results can have big variations. Nobody is able to predict the future, but more detailed input figures will achieve better results.
Table of Contents
A) Introduction
B) Methods
B1) 1. Net Asset Value
B2) 2. Price-Earnings Ratio
B3) 3. Discounted Cash Flow
B4) 4. Dividend Valuation Model
B5) 5. Economic Value Added
C) Comparison
D) CAPM
Objectives and Topics
This coursework aims to perform a comprehensive financial valuation of the retailer Tesco plc using five distinct analytical approaches. The primary research objective is to compare these different methods to evaluate the company's worth and to identify the inherent strengths and limitations of each model in the context of maximizing shareholder value.
- Application of Net Asset Value (NAV) based on balance sheet data.
- Evaluation of market sentiment using the Price-Earnings Ratio (PER).
- Determination of firm value through Discounted Cash Flow (DCF) and Dividend Valuation Models (DVM).
- Calculation of true economic profit via Economic Value Added (EVA).
- Synthesis and comparison of results to assess the reliability of different valuation perspectives.
Excerpt from the Book
B1) Net Asset Value Method (NAV)
The NAV approach is based on the company`s balance sheet and deduces the company value from the accounting equation:
Equity = Assets – Liabilities (source: lecture notes)
Tesco`s NAV deducted from the 2006 balance sheet is 9,444 million pounds.
(Detailed calculations of the NAV can be seen in E3 of the appendix)
Advantages:
NAV has the advantage that the required data is easy available from the balance sheet and the calculation itself is easy, too. It makes sense to use NAV for the shareholders when the company has financial problems. In times of financial need it is important to know what the asset are worth to evaluate what will happen with regard to borrowing, asset sales or break-up value. In situations of takeover bids shareholders will not sell under NAV because otherwise they would sell the assets under book value.3
Disadvantages:
All data used for the NAV calculation comes from the company`s balance sheet what means that the NAV is historic driven and faces the problems coming along with accounting standards. For example, fixed asset figures from the balance sheet do not reflect the real market prices of fixed assets often because firms can depreciate high amounts of the assets that do not fit to real obsolescence of the assets. Hence, fixed assets are often out of date. “Stock values are often unreliable” and “the debtors figure may also be suspect.” (lecture notes) The NAV approach regards the value of a company as the value of the net assets alone and does not consider future performance or workforce what is important for investors.4
Summary of Chapters
A) Introduction: Provides an overview of the valuation of Tesco plc and defines the limitations of the analysis due to data constraints.
B) Methods: Details the five primary valuation techniques (NAV, PER, DCF, DVM, EVA) and examines their specific advantages and disadvantages.
C) Comparison: Synthesizes the results of all five methods and discusses why direct comparison is challenging due to the differing nature of the calculated metrics.
D) CAPM: Explains the Capital Asset Pricing Model as the basis for calculating the cost of equity and its significance for the discount rate used in other models.
Keywords
Tesco, Financial Management, Net Asset Value, Price-Earnings Ratio, Discounted Cash Flow, Dividend Valuation Model, Economic Value Added, CAPM, Shareholder Value, Cost of Equity, Market Capitalisation, Beta, Risk Premium, Valuation, Financial Analysis.
Frequently Asked Questions
What is the primary focus of this financial study?
The study focuses on the financial valuation of Tesco plc using five specific quantitative models to determine the company's value from different analytical perspectives.
Which five methods are utilized for the valuation?
The author employs the Net Asset Value (NAV), Price-Earnings Ratio (PER), Discounted Cash Flow (DCF), Dividend Valuation Model (DVM), and Economic Value Added (EVA) approaches.
What is the core research objective?
The goal is to determine the company's value while comparing the various methods to see how they differ in their assessment of performance and market expectations.
What scientific approach does the author use?
The report relies on quantitative financial analysis, utilizing balance sheet data, annual report figures, and market data (such as FTSE 100 indices) to calculate ratios and future value projections.
What is covered in the main section of the report?
The main section details the calculation mechanics, advantages, and disadvantages of each valuation model, followed by a comparative analysis of their outputs.
What are the characterizing keywords of this work?
Key terms include financial valuation, CAPM, shareholder value, market capitalisation, and economic profit, reflecting the focus on corporate finance metrics.
How does the author address the "garbage in, garbage out" principle?
The author acknowledges that the DCF model is highly sensitive to input factors and that any inaccuracy in growth rate assumptions significantly impacts the final valuation.
What role does CAPM play in this report?
CAPM is used to calculate the cost of equity (the required rate of return), which serves as a necessary discount rate for the present value models presented in the coursework.
Why are the final results of the different approaches not directly comparable?
The author notes that the models measure different things, such as historical net assets versus future earnings expectations, making an direct "apples-to-apples" comparison impossible.
What limitation is mentioned regarding the EVA calculation?
The author points out that EVA requires specific accounting adjustments to properly reflect economic profit, but these adjustments are limited in this report due to the scope of the coursework.
- Quote paper
- Mark Dinkhoff (Author), 2007, Business valuation of Tesco, Munich, GRIN Verlag, https://www.grin.com/document/136287
