Risk Management and Liquidity Management Strategies for a British Public Limited Company

Topic 1: Risk Management Strategies of Tesco

Task:

The TMA asks questions relating to the subject matter covered in Sessions 1–12 of the study planner. This includes Books 1 and 2, as well as the coverage of interest rate risk in  The guideline for the maximum word count for this TMA as a whole is 3000 words. There is no word limit specified for the three separate questions that make up the TMA.

Please note that if the TMA guideline word limit is exceeded by more than 10%, any content over 3300 words is awarded no marks and any feedback is provided at the discretion of the tutor. Failure to indicate, or to indicate correctly, the overall word count (and the point at which 3300 words is reached if the guideline word limit is exceeded) will be penalised by the deduction of up to 5% (5 marks) from the total score awarded. Refer to Word count in the MBA Qualification Guide.

Review the 2019 annual report from Tesco and, if applicable, related reports that focus on risk management and describe which categories of risk Tesco sees as its main operational risks.

Kefipe Ltd is a British public limited company manufacturer of electronics. You have been recently appointed Chief Financial officer and is in charge of managing your organizations liquidity. The next year might prove to be very challenging due to the uncertain conditions related to fears of a second wave of COVID-19 and Brexit.
The company forecasts an EBIT of £50 million and net profit of £5 million under normal conditions for the next year and an EBIT of negative £100 million a net loss of £125 million in case the UK leaves the EU without a deal and Europe is hit by a second wave of COVID-19.
 
The company holds £26 million in cash and equivalents and has investments in equity participation in other businesses worth £43 million.
Of the outstanding debt of £600 million the company must pay 6% on interest yearly. The company also has a credit line with its bank of £25 million of which £5 million has been drawn. However, it is expected that the bank will restrict the company’s additional borrowing to £5 million in the adverse scenario. The board’s minimum term to exhaustion of cash is set at 6 months.

The company’s Capex amount to £12 million of which £5 million can be avoided in case of a stressed scenario.
 
1. Discuss the rules you should apply to the management of the company’s sources of funds.
 
2.Draft a liquidity management matrix under both normal and stressed trading conditions. Assume a haircut of 5% for liquid assets and 20% for the equity investments. Also assume that only the liquid assets could be sold under normal trading conditions, but both the liquid assets and equity investments are sold under the stressed condition. Further, assume that the avoidable capital expenditures will not be made under the challenging scenario but will be made if trading is normal.
 
3. Discuss the appropriateness of the company’s liquidity position and explain whether you think it has sufficient resources to continue operating as a going concern.