Capital Structure and Cost of Capital for Tesco and Sainsbury

Capital Structure and Cost of Capital for Tesco plc and Sainsbury’s plc

Overview

Food retail is today a competitive and often more defensive industry that has had some scope for growth in recent years, and this work will focus on a comparison between Tesco and Sainsbury, analysing and contextualising their capital structures. First, Tesco is currently one of the most successful retail operators of groceries and general merchandise in the UK, holding a 30.5% market share. Tesco is also considered the third largest retailer in the world, with market exposure to Asia, the United States of America and continental Europe. Sainsbury, on the other hand, is the third largest retailer in the UK holding a 16.6% market share. Sainsbury has been able to keep momentum of competition in the UK but Tesco has been expanding in other regions across the world.

Businesses require capital to survive in their respective market or industry. New funds must be raised to venture current investments as well potential investments. Raising funds may be done in a variety of manners and decisions must be made as to which method is best suited. Finance may be raised through debt, equity or other securities, and the proportional allocation of these is termed the capital structure. In this work analysis had been restricted to the annual reports and financial statements of both Tesco and Sainsbury between 2006 and 2011. This period was chosen because due to the financial crisis that came into light in 2007, and by focussing on the period directly before and after we may focus in depth on salient financial issues.

Share Price

The first area of comparison in this work is the share price of the two companies. Whilst this is not demonstrative of capital structure as such, it is an important indicator of market confidence in the two companies over time, and can be used to place significant shifts in capital structure in the context of the market’s reaction. The graph below demonstrates the...