Analysis of Funding Sources for British American Tobacco

PROJECT

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
Explanation of long term funding of chosen company............................................................................3
Calculation of weighted average cost of capital.......................................................................................4
Different funding sources with their pros and cons.................................................................................6
Role of risk, tax and gearing for funding choice....................................................................................10
CONCLUSION.........................................................................................................................................11
REFERENCES..........................................................................................................................................12

INTRODUCTION
The project report is based on analysis of financial information of a FTSE listed company
which is British American Tobacco. This company is involved in production of various kinds of
tobacco products and sales all around the United Kingdom. The project report covers detailed
information about calculation of weighted average cost of capital, different sources of funds and
role of tax, risk in choosing funding alternatives.
MAIN BODY
Explanation of long term funding of chosen company.
On the basis of given financial statement of above British American tobacco plc, this can
be assessed that they are based on various kinds of sources for funding that are mentioned below
in such manner:
 Retained earnings- The retained profits of the company are the total net profit of the
business that is held by the company at a given date, such as at the close of the tax period.
At the completion of the time, the net gain (or net loss) at that stage shall be shifted from
the benefit and expense account to the remaining earnings report. When the value of the
remaining earnings report is negative, cumulative gains, residual losses or accrued
deficits or related terms can be used. In the aspect of above company, it can be find out
that their retained earnings are increasing effectively. Such as in year 2018, it was of
GBP 38557 that raised and became of GBP 40234.
 Additional paid up capital- Additional paid-up capital (APUC) is the valuation of the
ordinary shares above its stated fair market value and is a financial reporting item on the
balance sheet under the stockholders ’ equity (Visser, 2019). APIC can be formed if a
firm reports new shares and can be decreased if the business organization focuses its
shareholdings. In the context of above company, it can be find out that their value of
additional paid up capital was of GBP 192 that raised and became of GBP 195 for year

2018 and 2019 respectively. It is indicating that their owners are investing funds in
company.
 Accumulated other comprehensive income- Other accumulated Detailed Revenue (OCI)
includes unfulfilled profits and losses listed in the balance sheet equity segment that are
offset elsewhere here-retained earnings. Other thorough revenue may consist of losses
and gains on certain forms of investors, public pensions, and deposit trying to hedge. In
the context of above company, this can be assessed that their accumulated other
comprehensive income was of GBP 26081 which reduced and became of GBP 22859 for
year 2018 and 2019 respectively.
 Common stock- Common stock is a kind of control of corporate equities, a kind of
security. Often commonly used in other regions of the world are the words participating
share and normal share; "common shares" is mainly used in the USA. In the UK as well
as other overlay network they are classified as share capital or common stock. In regards
with British American Tobacco plc, it can be find out the value of common stock for year
2018 and 2019 was similar that was of GBP 614.
Calculation of weighted average cost of capital.
Weighted average cost of capital- The weighted average cost of capital is the rate a
business is required to pay to all its current shareholders on ordinary in capital to afford its
resources (Booth, Cleary, and Rakita, 2020). The WACC is typically referred to as the value of
capital for the company. Crucially, the external demand decides this and not the administration.
The WACC formula is as follows:
WACC = [(E/V) * Re] + [(D/V) * Rd * (1-Tc)]
 Re = cost of equity (expected rate of return on equity)
 Rd = cost of debt (expected rate of return on debt)
 E = market value of company equity
 D = market value of company debt
 V = total capital invested, which equals E + D