Report On Capital Structure And The Cost Of Capital Of Astrazeneca Plc And British American Tobacco Plc

2868 words - 12 pages

Report on Capital Structure and the Cost of Capital of AstraZeneca Plc and British American Tobacco Plc.

Table of Contents

1.0 Introduction………………………………………… 4

2.0 Background………………………………………… 5

3.0 Capital Structure…………………………………… 6
3.1 Debt to equity……………………………… 6
3.2 Long term debt to equity…………………... 7
3.3 Total debt to capital………………………… 7
3.4 Long term debt to capital…………………... 8
3.5 Balance sheet structure AZN………………. 9
3.6 Balance sheet structure BAT………………. 10
3.7 Discussion…………………………………. 10-11

4.0 Cost of capital……………………………………… 12
4.1 Introduction………………………………... 12
4.2 Weighted average cost of ...view middle of the document...

It is worthwhile noting that 25% of the R&D expenditure of UK corporates, in 2012, was contributed by the pharmaceutical sector. (ONS,2013).
The economic environment that AZN works in is driven by its need to have a constant pipeline of development products and this in turn requires high levels if investment, this investment can take some considerable time to bear fruit and return earnings to shareholders. There was a 28% increase in research and development spending in 2007 to $5B and another $5B in 2008. 1.http://www.astrazeneca.com/Investors/financial-information/Financial-results/2007-Financial-Results
Threats include patents expiring on key products and the emergence of generic products.

British American Tobacco (BAT)

BAT is a global tobacco group, with brands sold in more than 200 markets. It has a turnover of £46,185 million and employs 57,730 people across 41 countries. Profit from operations is £5,526 million.

2.http://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DO6LMNZV?opendocument&SKN=1

It is estimated that BAT will be able to grow its revenues over the next few years. This will be driven by demand from emerging markets such as Asia and Africa where disposable incomes are rising.
BAT's volumes will be put under pressure by a trend of declining smoking rates in some mature markets and weak demand from consumers in Southern European countries where unemployment remains high and disposable incomes are being squeezed.

3.http://uk.reuters.com/article/2012/12/11/idUSWLB214120121211

3.0 CAPITAL STRUCTURE

3.1 Total Debt to equity

The relationship of stockholder's equity to total liabilities is the most straight-forward measure of a company's solvency.

The capital structure of a company is composed of debt and equity. Equity capital has no guaranteed rate of return and is the basic risk capital of the company. A small amount of equity capital represents a greater risk to the holder's of debt in the company.

The current financial structure of AZN looks very reasonable comparing to its peers. It changed it’s capital structure strategy which was heavily relied on equity into the one with higher leverage. In year 2007, AZN used the committed banking facility to finance the deal valued $15 billion. 1.http://www.astrazeneca.com/Investors/financial-information/Financial-results/2007-Financial-Results

Fig 1

Raw data : 4.https://www.thomsonone.com/Workspace/Main.aspx?View=Action%3dOpen&BrandName=www.thomsonone.com&IsSsoLogin=True

Fig 1 shows that the capital structure strategy of BAT is to finance its business by debt.

3.2 Long term Debt to equity

Fig 2

Raw data : 4. https://www.thomsonone.com/Workspace/Main.aspx?View=Action%3dOpen&BrandName=www.thomsonone.com&IsSsoLogin=True

Long term debt is preferred to short term.

3.3 Total debt to capital

Companies can finance their operations through either debt or equity. The...

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