Capital Structure and Financial Strategy Analysis: Just Eat Plc Report

This report provides an in-depth analysis of the capital structure of Just Eat Plc, examining the interplay of debt and equity in its financing strategy. The analysis begins with an overview of capital structure, leveraging the Modigliani and Miller (M-M) theory, and discussing its assumptions and limitations. The report then delves into the application of various theories like the pecking order theory and the market timing hypothesis to Just Eat Plc's capital structure, assessing their relevance and implications. It also discusses the company's leverage ratio and its relation to financial distress and tax benefits. Furthermore, it explores the relationship between leverage and profitability, and the role of equity issuance in the firm's financial decisions. The report concludes by highlighting the importance of recognizing the implications of capital structure and the need for Just Eat Plc to strategically manage its financing choices. The report draws upon various academic sources and research papers to support its arguments.

Running head: FINANCE STRATEGY
Finance strategy
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The capital structure, Just Eat Plc is a combination of debt and equity. Before starting the
explanation of capital structure, it considers some assumption of perfect capital markets
postulation, according to Modigliani and Miller (1958), the company’s investment decision
based on the pre-determination, non- existence of corporate or individual taxes, no charges on
the finnacial distress, unbiased access to similar information by investors, managers and lenders
as well as no transactions or issuance cost.
Modigliani and Miller (M-M) model demonstrates that the issue odf capital structure
decisions is insignificant to the shareholders. To improve the capital structure versions with the
significant and probable predictions, various writers have continuously activated the perfect
markrts assumptions from the M&M theory (Ahmeti and Prenaj 2015).
For example, previous examine referes “no tax” and “no distress cost” predictions that
the M&M model to develop the static trade off models in which corporations trade off tax
benefits of debt finanancing that arise from the tax deductability of interest payments and other
non debt tax shields against the highlightened likeliness of distress which increased the debt
financing by company. These models draw some impactable conclusions, which are backed up in
resersch. Various studies confirm rather strong evidence that the leverage ratios (Cathcart, El-
Jahel and Jabbour 2015)atre undoubtedly related to ancipated tax benefits from the debt
financing, but unfavorably related with the measures of likelihood and the cost of the financial
distress.
Just Eat Plc’s capital structure closely relate with the Pecking order theory (Serrasqueiro
and Caetano 2015). During the 1980s, several studies placed some evidence of negative stock
price reaction to the announcement of the corporate financing events. These negative stock price

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reacts very harshly for the offering of equity than for debt offerings. Convertible debt offerings
than straight debt offerings (Consiglio, Tumminello and Zenios, 2018). Such negative market
reacts the financing events are insconsistent with the basic trade offs models of the capital
structure. A trade off model refers the capital structure adjustment should represent a movement
towards the firm’s optimal capital structure. As a result the the stock price reacts positively. By
defining the Just Eat Plc’s capital structure, the risk of pecking order is high due to 88% of the
equity exposure than debt in their capital structure. AGMs hold these mitigation with the
shareholders that explaining the rationale for the decision.
The Myers and Majluf model (Li et al 2015), established on 1984 stated the insight of the
puzzle of the negative stock price reactions to financing events by modifying the M&M
assumption of equal access to the information.
In this model, the managers possess information to the shareholders which is unavailable
but using this information to make financing choice. Because the mangers elevct to avoid the
issuing securities if they perceive them to be sufficiently undervalued, the announcement of an
offering signals to the managers that on average the company’s shares atre overvalued.
From the capital structure of Just Eat Plc, the model predictions are unlikely to manifest.
Because the financial statements stated clearly about its financial position and the valuation of
equity.
Another capital structure theory, Baker and Wurgler (2002) the market timing hypotheis
(Setyawan 2015) stems for a relaxation of the M&M assumption of equal access to the
information. In the Baker and Wurgler setup that ovserved that the capital structures reflects the
result of cumulative attempts of managers to time the market by issuing the overvalued equity.

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The main difference between the market timing and pecking order approaches is that the
mangers decisions issue equity conveys negative information to the investors. Based on the
market timimg hypothesis, stiock price do not fully adjust to any negative information conveyed
by the decision to issue equity. therefore the JEPLC’s capital structure will dependns on the
implementation of the market timimg strategy wheather JEPLc is tapping the equity market by
offering sahres to the public on stock exchange or selling shares through the private equity
market. Thus many theories are exist to defining the optimal capital structure (Tian 2016).
Modigliani & miller model is the first step in the capital streucture theory and it is often
called the irrelivence theorem. It describes that the equilibrium implication in the perfect capital
markets, the value of the firms is independent of its capital structure. The second step is also
defined by M&M theory 1963, at the time of corporate tax was introduced in the model, that 100
percent debt financing is optimal. The third stage of the capital structure theory was first
suggested by Baxter in 1976 and later formalized by others.
More recent evidence from JEPLC implies that these model all have a significant
shortcomings as the individual models of capital structure. The market timings hypothesis has
been faced challenged as a stand alone capital structure model has on two primary aspects. First
it shows the relatively poor job of predicting marginal equity issuance decisions, secondly the
facts that most firms do no stockpile the proceeds of equity issues in their cash account, when
there is an issue of equity financing (Drover et al 2017) that is impled by the market timing
hypothesis.
Cotrporate finance scholars have also addressed that several pieces of evidence that are
inconsistent with the standard tradeoffs models predict a positive association between leverage

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and profitability. One of the most vigorous findings in the cross sectional studies in the negative
association between leverage and profitability. Although trade offs model accentuate the primary
role of the interest tax shield, which is associated with the debt financing, evidence in support of
this role is tenuous. It is important to sate, the high proportion of firms that forego the tax
advantages of debt financing refers zero leverage which implies that the firms underutilize the
debt financing tax shield. Another findings are from equity tend to mpirical literature, that the
firms tend to issue equity which follow the large movement in the stock price. Beacause such
movement tends to lower the firms’ leverage ratio. Therefore the trade off models can predict
that the firms should issue the debt in order to rebalance their leverage ratios which will be
backed their estimated targets. The recent study analyze that the firms do adjust their leverage
ratios in address to tyheir estimated targets.
Unfortunately in our view, none of them individually able to provide an overall
description that is consistant with the observed capital structure.
From the above discussion it mus conclude that JEPLC must recognize the implication of
its capital structure and alleviate or take advantage of financing in terms of debt to take
advantages from other form of incentives, for example tax examptions on the net profit of the
business in some caeses may be beyond 100%.

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Reference
Ahmeti, F. and Prenaj, B., 2015. A critical review of Modigliani and Miller’s theorem of capital
structure. International Journal of Economics, Commerce and Management (IJECM), 3(6).
Cathcart, L., El-Jahel, L. and Jabbour, R., 2015. Can regulators allow banks to set their own
capital ratios?. Journal of Banking & Finance, 53, pp.112-123.

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Consiglio, A., Tumminello, M. and Zenios, S.A., 2018. Pricing sovereign contingent convertible
debt. arXiv preprint arXiv:1804.01475.
Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A. and Dushnitsky, G., 2017. A
review and road map of entrepreneurial equity financing research: venture capital, corporate
venture capital, angel investment, crowdfunding, and accelerators. Journal of
management, 43(6), pp.1820-1853.
Li, X.D., Feng, X.N., Lu, B. and Song, X.Y., 2015. The determinants of capital structure choice
for Chinese listed companies based on structural equation modeling approach. STRUCTURAL
EQUATION MODELING (SEM), p.1.
Serrasqueiro, Z. and Caetano, A., 2015. Trade-Off Theory versus Pecking Order Theory: capital
structure decisions in a peripheral region of Portugal. Journal of Business Economics and
Management, 16(2), pp.445-466.
Setyawan, I.R., 2015. An empirical study on market timing theory of capital
structure. International Research Journal of Business Studies, 4(2).
Tian, Y., 2016. Optimal capital structure and investment decisions under time-inconsistent
preferences. Journal of Economic Dynamics and Control, 65, pp.83-104