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Question:

Choose a company in a part of the world and domain where you feel at ease, and which has both shares on the stock market and corporate bonds outstanding.Describe the company, consider the recent performance (e.g. five years) of the shares and the bond you have selected.You should probably use Morningstar as your source but you are not obliged to.Had you invested 50/50 in the bond and the share, what would your average annual return over the last five years have been.

Answer:

TESCO is a retailer with its headquarters situated at Cheshunt, Hertfordshire, United Kingdom. It was founded in the year 1919 in Hackney in London. It is public limited company and its equity shares are traded on the London stock exchange with the ticker TSCO. Its founder is John Cohen. It is the third largest retailer in the world and when considering its revenues, it would be the second largest in the world. It has a total of 7,817 stores worldwide. The company is headed by John Allan who is acting as Non executive Chairman and Dave Louis as the Group CEO. It acts as both a supermarket and a hypermarket – which is combination of a supermarket and a departmental store. The company has total revenue of 62.28 billion GBP as of 2015. It has a net income of 5.76 billion GBP along with a total equity of about 7.07 billion GBP as of the 2015. The company employs a total of about 500,000 employees worldwide. The company has various subsidiaries and some of the main ones include Tesco Stores Ltd, Tesco Bank, Tesco Mobile and Tesco Ireland (limited, 2015). When we look at the external sources of finance for the company, we see that the company is majorly financed by debt and has a lesser portion of equity. The total debt of the company stands at 12,518 Million GBP and the equity portion of the company stands at 6,163 Million GBP. We can see that the proportion of equity to debt for TESCO PLC is in the ratio of 1:2. The diagrammatic representation of it debt and equity is as shown below (Finance, 2015):

Performance of Stock of TESCO PLC

If one had invested in the share of TESCO PLC in the year 2011 at GBP 430, then the present price of the stock is GBP 188 which shows that there is a loss of 56% over the last five years. Hence The average loss is about 11% per year. Investors would have lost half the wealth has they invested in the stock of TESCO PLC. The main reason for the fall in the share price is the large amount of debt that has been accumulated in the year 2014. Hence, the investors consider the company risky which reduces the return on equity and in turn the return to the investor. Hence the annualized return on the stock is -11.15% annually

Performance of Bonds of TESCO PLC

TESCO has bonds issued with a five year horizon, a coupon rate of 5.5% with a price of 106 GBP on a face value of GBP 100. The current yield to maturity of these bonds stands at 3.65%. Hence the investor would have got better returns by investing in the bond rather than the stock of TESCO PLC.

The annual return assuming you invested 50% in stock would be -11.15% and in bond would be 5.5%. Taking the average it would be -2.8%.The most difficult part of this assignment was to collate the data an identify reasons for the performance of the stock.

Question 2 – Building a personal portfolio

Based on the age of the person, the time horizon and also on the specific goals in mind, one has to design a portfolio.

Taking an investor (as myself) in realistic terms, there are three specific and important goals which have different time horizons. The first goal is purchase my own home in about seven to ten years which would approximately cost 200,000 CHF. Secondly I would like to invest for my child’s professional education which is fifteen to twenty years away. The requirement for child’s education is about 300,000 CHF. Lastly, I need to save enough for my retirement in about 35 years time and the money required for that would be 1 Million CHF. Now, for the three mentioned goals which are of different time horizons, I would have to carefully think of the different assets classes that I need to invest in. For short term goals which are due in about five years ( that is you require money in five years from today), we have to select asset classes which are less volatile and give assured returns.

This is because the time horizon is near. However, the returns may be lower and may require a larger corpus to begin with. Secondly, for goals that are further away, say 10 years and later, we can select assets classes which have some volatility and give better returns, but should not be very risky. Lastly, for very long term goals, we can choose risky assets with higher volatility since there a large amount of time available and highly volatile assets always give better returns and beat inflation by a big margin. These assets are chosen when the goals are very long, say more than 30 years and specifically for retirement (Costa, 2011).

Portfolio for Goal 1: Purchasing a home in about five years time

For my first goal, that is to purchase my own home in about five years time, I would have to choose debt assets specifically AAA rated corporate debt funds and long term government funds which give stable returns. The five funds for this specific short term goal are as follow. The table below gives the name of the funds as well as the five year return % as in the morning star funds database:

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