5.4. Main Drivers of the Valuation Model Tesco’s historical financial data, market growth demonstrated through GDP growth, has been the main drivers for analysis in assignment 2 of this paper, applying to Tesco’s different markets and specific growth. Tesco has its way of calculating financial figures giving more details with the assumptions of continuing updates on projected market trends, geographical growth plans, etc. Depreciation and amortization figure has been considered as fixed % of 2015 revenue (62,284/38,135=1.63%) for easy of calculations as Tesco will have much better forecast. For interest expense, I used 35% which was the rate for 2015 on total borrowing and applied it on 2015 borrowings. There is a possible error here …show more content…
I therefore employed a 5-year average historical data as the basis. This is a driver that will cause an error in the estimation. Since Tesco is taxable in a number of jurisdictions around the world, its effective tax rate, which is income tax expense as a percentage of pre-tax earnings, fluctuates from year-to-year based on the level of profits earned in these jurisdictions and the tax rates applicable to such profits. Therefore I used the highest tax rate of 26.4% which is the rate charged Tesco in Canada. Tesco had a net Income loss in 2015 and therefore would definitely not pay out dividends. I therefore used an estimate for EPS for the purpose of the assignment. Which is a possible driver for error. It is very difficult to project the company’s financial statements showing how they would develop over a longer period of time. The confidence level of financial statement projection diminishes exponentially. Also, macro-economic conditions affecting the business and the country may change structurally and therefore, I simplified and use certain average assumptions to find the value of the firm beyond the forecast period (“Terminal Value”) Chartered Banker MBA