The working paper aims to critically discuss Tesco's primary and secondary objectives. Moreover, the development of Tesco's gearing policy and the impact on financial figures is analysed. In a next step, literature on dividend policies is reviewed and applied to Tesco. In a last step, the capital structure policy of Tesco in respect to the pecking order and trade of theory is assessed.
Table of Contents
1. Critical Discussion of Tesco’s Objectives
1.1 Primary Objective
1.2 Secondary Objectives
2. Gearing Policy
2.1 Development of Gearing
2.2 Impact on Financial Figures
3. Dividend Policy
3.1 Literature review
3.2 Analysis of Tesco
4. Capital Structure Policy
4.1 Pecking Order Theory
4.2 Trade-Off Theory
Objectives and Research Focus
The primary aim of this paper is to conduct a critical analysis of the financing policies of Tesco plc, evaluating whether the company has successfully achieved its corporate objectives regarding shareholder, customer, and supplier satisfaction over a five-year period. The research explores the relationship between dividend policy, capital structure, and financial performance, specifically testing established financial theories against empirical data from the retailer.
- Analysis of Tesco's corporate objectives and performance metrics (2010–2015).
- Evaluation of dividend policy theories (M&M, Bird-in-the-Hand, Tax-Preference).
- Examination of capital structure through Pecking Order and Trade-Off theories.
- Investigation into the impact of gearing on key financial figures like interest coverage and EPS.
- Assessment of the influence of external factors, such as accounting irregularities, on shareholder confidence.
Excerpt from the Book
4.1 Pecking Order Theory
The choice of the most adequate capital structure to maximise the firms value is an issue for more than 50 years (Mogdiliani and Miller, 1958). Nevertheless, the two capital theories which are presented in this chapter have always been predominant in the capital structure decisions of companies (Jahanzeb et al., 2014).
The base of the pecking order theory was set by Donaldson (Baker and Martin, 2011) who dealt with corporate debt capacity in 1961 (Donaldson and Fox, 2000). According to the pecking order theory no target debt-to-equity ratio is defined, but internal financing is strongly preferred and a company’s priories their sources of financing as demonstrated in the diagram below (Lumby and Jones, 2003, p 442-502).
Later on further studies have been conducted in order to explain companies behaviour in corporate finance and their tendency to rely on internal sources of funds and could prove that debt to equity is preferred if external financing is required (Myers, 1986; Myers and Majluf, 1984).
There are some empirical studies, e.g. in the UK and Australia, which underline the negative relation between profitability and corporate debt option (Allen, 1993; Collins et al., 2013; Strong, 1998) and therefore the pecking order theory. Moreover, Graham and Harvey (2001) make use of a survey of CFOs to outline that flexibility and the minimisation of interest obligation is one of the most important factors. However, other authors clearly criticise the model of Myers and Shyam-Sunder for not considering equity issuance (Chirinko and Singha, 2000). At this point clear limitations of the theory can be seen, because in certain situations, e.g. financial distress (Guzhva and Pagiavlas, 2003), a company would prefer equity to debt financing. Therefore, the models cannot be used to truly understand every capital structure (Rahman and Arifuzzaman, 2014), but nevertheless it is a good base for companies financing behaviour (Shyam-Sunder and Myers, 1999).
Summary of Chapters
1. Critical Discussion of Tesco’s Objectives: This chapter reviews Tesco's corporate goals, highlighting the discrepancy between its primary objective of maximizing shareholder satisfaction and the actual decline in share price and dividends.
2. Gearing Policy: This section analyzes the rising debt levels of Tesco over five years, explaining how this shift toward higher gearing has adversely affected key financial figures like interest coverage and EPS.
3. Dividend Policy: This chapter contrasts theoretical dividend models with Tesco's historical payout data to determine if shareholder wealth was influenced positively or negatively.
4. Capital Structure Policy: This final analytical chapter applies the Pecking Order and Trade-Off theories to Tesco’s financing strategy to understand the company's reliance on debt and its pursuit of an optimal capital structure.
Keywords
Tesco plc, Financial Management, Gearing Policy, Capital Structure, Dividend Policy, Shareholder Satisfaction, Pecking Order Theory, Trade-Off Theory, Financial Performance, Interest Coverage, Earnings per Share, Accounting Fraud, Corporate Finance, Debt Financing, Equity Structure.
Frequently Asked Questions
What is the primary objective of this work?
The work aims to critically analyze the financing policies of Tesco plc to determine whether the company has met its core corporate objectives between 2010 and 2015.
What are the main thematic areas covered?
The paper focuses on three central themes: the analysis of corporate objectives, the evolution of gearing policy, and the application of capital structure and dividend theories.
What research question does the paper address?
The core question is whether Tesco's financing decisions effectively supported its stated objectives regarding stakeholders and if current financial theories explain the company's actual market performance.
Which scientific methods are employed?
The author uses empirical data analysis from financial reports, comparing annual figures (dividends, ROSF, gearing) against established financial theories such as the M&M, Pecking Order, and Trade-Off models.
What does the main body of the work cover?
The main body examines the trends in Tesco's gearing and dividend payments, relates these to financial health metrics, and evaluates the validity of classic corporate finance theories in the context of a real-world retailer.
What are the key terms that characterize this study?
Central terms include capital structure, gearing, shareholder satisfaction, dividend policy, and financial distress, which are used to frame the critical assessment of Tesco.
How did Tesco's dividend payments affect shareholder wealth?
The analysis indicates that dividends had mixed results, supporting both the Bird-in-the-Hand and Tax-Preference theories at different intervals between 2010 and 2014, leading to the rejection of the M&M irrelevance theory for Tesco.
What impact did the 2014 accounting fraud have on the analysis?
The fraud, involving the overstatement of profits by GBPm 250, is highlighted as a critical factor that contributed to the lack of shareholder satisfaction and should be a primary consideration for potential investors.
Why has Tesco's interest coverage ratio declined?
The decline is attributed to a significantly increasing interest burden resulting from the company's rising gearing ratio over the analyzed period.
- Quote paper
- Marvin Müller (Author), 2015, Critical Analysis Of The Financing Policies of Tesco plc, Munich, GRIN Verlag, https://www.grin.com/document/315138
