Corporate Finance: Capital Structure, Financial Sources, and COVID-19 Impact

This report analyzes the capital structure and financial sources of James's place plc, a British multinational wealth management company. It also examines the impact of COVID-19 on the company's capital structure. The report discusses the importance of equity financing and the effects of the pandemic on the financial statements of companies worldwide.

Corporate
Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
Capital structure for the James place plc:....................................................................................1
PART 2............................................................................................................................................2
Financial sources for the company:.............................................................................................2
PART 3............................................................................................................................................3
Impact of COVID 19 for the capital structure of the company:..................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Finance is the term which describes activities related to the banking, debts, equity,
credits, money, investment etc. finance is the process which involves acquiring and managing
assets for the organisations activities. Finance is the term for matters related to management,
creation, study of money. It helps firms in order to fulfil their financial needs. Corporate finance
refers to finance which includes how corporations deals with funding sources, capital structure,
investment decisions etc. It is related to the maximize the shareholders value for short term and
long term financial planning. The company which is selected for this report is James's place plc.
It is the British multinational wealth management company. It was founded in 1991, headquarter
situated in England, UK. This report covers topics such as analyse the capital structure for the
company using data in the five years, comparison of its capital structure with its peers. Apart
from this it also covers topics such as current market situation, suggestion the firm using equity
financing or debt financing, recommendations, calculation for weighted average costs of capital
for the company (Baker, Kumar and Pattnaik, 2020).
PART 1
Capital structure for the James place plc:
Overview of the company Raymond James Financial:
It is the American multinational company deals in investment banks and financial
services which provides services to the municipalities, customers, corporations for financial
investment, financial planning. It was founded in 1962, headquarter situated in US. Raymond
James has 8200 financial advisors across the US, Canada etc. The total clients assets under
management are approx $930 billion.
Capital structure: Capital structure is the process of corporate finances for its assets
through combination of debts, equity and hybrid securities. It refers the firms capitalisation
which includes its debts, equity (Damodaran, 2016). The data is about capital structure of the
both companies includes James place plc and Raymond James finance. The data which is taken
for this report is 2015 to 2019.
As per the data Annual report for Stp. James place plc, 2019-20, it shows capital structure
for the James place plc for the year 2015 to 2019. In 2015 firms equity shows 237 which was
increases by 243.60 in year 2016 it shows increase in capital for the company. As per the data for
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the 2015 and 2016 reserves was decreases which shows 876.90 and 853.70. Firms equity
increases every years 2017, 2018, 2019. As it shows 251.10, 253.90, 262.60 which shows
increase in equity for the company. The company James place plc has no debts with it, it has
equity which was increases every year which shows profitability for the company. As per the
capital structure of the company it shows company maintains its equity, reserves, shareholders
funds etc.
As per the Raymond James financials it shows capital structure for the year 2018 to 2020.
In year 2018 firms equity shows 6.45 which was increases by 6.64, 7.18 in year 2019, 2020.
increase in equity shows firms profitability for the three years. Firms debts shows 2.45 in year
2018 which was decrease by 2.44, it further increase by 3.28 in year 2020. As per the data it
shows firm has increases its debts but it also increases its equity. From the comparison of James
place plc and Raymond James financials it shows James place plc has less debts and more
capital than Raymond James financials (Dang, Li and Yang, 2018).
Raymond James plc selected for the comparison to James place plc because both are
financial company. The company Raymond James is the pre established than its which provides
big data for the comparison. It helps company in order to know how it manages its debts and
equity. Both are similar in nature but the Raymond James has pre established than it and has
larger debts and equity.
The capital structure is reasonable for the company James place plc as its equity increases
. The company Raymond James financial has both debts and equity which shows company takes
loans for expanding its business (Ehrhardt, and Brigham, 2016). If the company James place plc
wants to expand its business and needs for funds it should takes loans so that it can manage its
activities and pay to debts by its equity which attracts investors for funding for the company.
PART 2
Financial sources for the been asked to calculate the cost of capital for a situation when the firm
decides to finance the project with 50% debt and 50% equity. Again no sign of that. There
is nothing about it company:
James place plc WACC % calculation:
The WACC % is all about the rate which company expected to pay to its shareholders in
order to finance its assets. The firms assets are finance by debts and equity. WACC is the
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average costs of sources of financing. It shows firms ability for paying interest to its
shareholders. It shows the relation for debts, equity, costs of equity etc. The formula for
calculating WACC % is mentioned below:
WACC = E/(E + D)* Cost of Equity + D/(E + D)* Cost of Debt* (1 - Tax Rate)
Weights:
weight of equity = E / (E + D) = 8235.980 / (8235.980 + 562.90027705427) = 0.936
weight of debts = D / (E + D) = 562.90027705427 / (8235.980 + 562.90027705427) =
0.064
Costs of debts:
Cost of Debt = 24.770642201835 / 562.90027705427 = 4.4005%.
Costs of equity:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the
Market - Risk-Free Rate of Return)
Cost of Equity = 0.30580000% + 1.24 * 6% = 7.7458%
WACC = E/(E + D)* Cost of Equity + D/(E + D)* Cost of Debt* (1 - Tax Rate)
= 0.936 * 7.7458% + 0.064 * 4.4005% * ( 1- 192.2% ) =6.99%
The WACC % for the James place plc is 6.99%.
WACC for Raymond James plc:
Weight of equity = 0.8182
Weight of debts = 0.1818
Cost of equity = 8.19%
Costs of debts = 6.2216%
Average tax rate = 23.52%
WACC = E/(E + D)* Cost of Equity + D/(E + D)* Cost of Debt* (1 - Tax Rate)
= 0.8182 * 8.19% + 0.1818 * 6.2216% * ( 1 – 23.52% )
= 7.57%
There are various sources for financing firms activities includes debts and equity. Firms
should use equity financing because it gives higher return to the company. The main advantage
for equity financing is there is no obligation in order to repay money. In this types of finance
firms sells its equity ownership to shareholders. Firm pays dividend to shareholders as per the
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profitability it achieve. It pays dividend from its profitability, higher the dividend means higher
the profitability (Finance, 2017).
Debt financing: Debt financing is the process of borrowing the money.
Equity financing: Equity financing is the process for selling portion of equity in the
company.
PART 3
Impact of COVID 19 for the capital structure of the company:
There are various external factors which affects firms activities. These factors includes
political, economic, social, technological, environmental, legal. These factors affects any
business by its sales, capital, profitability (Fracassi, 2017). From 10 years firm has achieve
higher sales and increase in profitability but due to COVID 19 it faces crisis such as fund
management. Due to lockdown, businesses decreases their sales which affects its profitability
(Jiang, Jiang and Kim, 2017). Investors paying for those companies who are pays higher
dividend and has higher sells. It affects well established companies profitability reasons are
mentioned below:
Banks’ credit approval timescales may be too slow to deliver the necessary funding in time;
Banks may be at the limits of their risk tolerance for a single credit.
RCFs may be draw stopped due to facility/covenant limits/cross defaults.
Hastily-assembled security packages to support new funding may be ‘messy’ due to limited
collateral availability.
Companies may be looking for a highly bespoke, rolling short-term facility for the terms
which do not naturally fit into a bank’s standard product suite.
COVID-19 pandemic has impacted the businesses all over the world. Globally the sales
and revenues of many organizations has slowed down. The impact of this pandemic led to
lockdown in the different countries of the world. Thus in this way the overall profits of the
company have also been impacted. The pandemic has resulted in creation of a change of
financial structure of the companies all over the world. The way it has affected the financial
structure of the firms is explained as follows-
Dilution of equities- Many companies all around the world had to dilute their equities.
This happened because as a result of the lockdown the owners of certain companies had to
sell off their shares which diluted the level of equities. As a result of this the financial
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statements of many companies have been impacted. Thus it can be said that the influence of
COVID-19 pandemic has been seen on the value of equities in the firms (Korsmo and
Myers, 2018).
Decrease in the value of assets- The value of assets of many companies all around the
world has reduced. The reason for this is that the market value of these assets is not on a
higher side as a result of low demand of these assets. This has happened because the
COVID-19 pandemic and the resultant lockdown has reduced the value of the assets of these
organizations.
Increase in the value of liabilities- Due to the impact of COVID-19 pandemic many
companies ran into losses and had to take loans which increased their value of liabilities.
This has enhanced the level of debt in their Balance Sheet which has impacted their
financial position. As a result the financial statements of the different organizations have
been impacted.
Losses- As a result of the COVID-19 pandemic the business of many companies was
affected and thus due to this reason they ran into losses. Thus the profitability level of the
companies was affected which has created an impact on their financial statements.
Reduction in cash flows- Due to COVID-19 pandemic the regular income of the different
companies has been impacted. The cash flows which were generated earlier have decreased
which is impacting the liquidity position. This has resulted in a reduction in the cash flows
of these companies and they have been affected as a result.
Further, as a result of the pandemic the way the companies finance their operations has been
affected. Earlier in many of the organizations a higher proportion of equities was used and
debt was used in a lower proportion. However due to the decrease in the value of equities
and increase in losses they have to take more amount of debt for financing their needs and
requirements and maintaining smoothness in the level of functioning (Malmendier, 2018).
Thus after the pandemic, the amount of loans which the firms are taking has increased. Thus
overall, it can be concluded that in the financial structure of the organizations there is a
higher proportion of Debt as compared to Equities.
CONCLUSION
From the above report it has been concluded that finance is the activity which includes
acquiring funds and managing it for firms activities. Corporate finance refers to finance which
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includes how corporations deals with funding sources, capital structure, investment decisions etc.
corporate finance helps companies for fulfilling their fund related needs. There are various
financing sources which includes debts, equity etc. debts financing is the process for borrowing
money from lenders. Equity financing is the process for selling equity ownership to the
shareholders. Equity financing is better than debt financing because in this there are no
obligations for paying money to shareholders for their funds.
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REFERENCES
Books and journals:
Baker, H. K., Kumar, S. and Pattnaik, D., 2020. Twenty-five years of the journal of corporate
finance: a scientometric analysis. Journal of Corporate Finance, p.101572.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
Dang, C., Li, Z. F. and Yang, C., 2018. Measuring firm size in empirical corporate finance.
Journal of Banking & Finance. 86. pp.159-176.
Ehrhardt, M. C. and Brigham, E. F., 2016. Corporate finance: A focused approach. Cengage
learning.
Finance, C., 2017. Empirical Corporate Finance. Volume A.
Fracassi, C., 2017. Corporate finance policies and social networks. Management Science. 63(8).
pp.2420-2438.
Jiang, F., Jiang, Z. and Kim, K. A., 2017. Capital markets, financial institutions, and corporate
finance in China. Journal of Corporate Finance, p.101309.
Korsmo, C. and Myers, M., 2018. The Flawed Corporate Finance of Dell and DFC Global.
Emory LJ. 68. p.221.
Malmendier, U., 2018. Behavioral corporate finance. In Handbook of Behavioral Economics:
Applications and Foundations 1 (Vol. 1, pp. 277-379). North-Holland.
Online
Annual report for Stp. James place plc. 2019-20. Available through
<https://tools.morningstar.co.uk/uk/>
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