Analysis and Compare the Capital StructuresEssay Preview: Analysis and Compare the Capital Structures1 rating(s)Report this essayThis report aims to analysis and compare the capital structures of two non-financial companies listed on FTSEALL index, which are Marks and Spencer plc and Oxford BioMedica plc. First section will describe the capital structure of each company. In the second section, the capital structures will be critically evaluated from different perspectives, in order to explain why the company choose such different capital structures.
Capital StructureMarks and Spencer plcMarks and Spencer (M&S) is one of UKs leader retailers, with operations in 42 territories globally. The company focuses on high quality clothing and home products, as well as outstanding quality food. The companys strategy is to achieve more international growth, as a way to reduce the risk related to UK economic cycle and expand business (Marks and Spencer Group plc, 2011).
The company has a debt of ÂŁ2,526.4 million and equity of ÂŁ6,524.6 million (Marks and Spencer Group plc, 2011). The debt to capital ratio is 0.28, which means that the company finances more by equity rather than by debt.
M&S 2011 ÂŁmDebt capitalinterest bearing short-term debt602.3interest bearing long-term debt1,924.1Total debt2,526.4Equity capitalCommon stock396.2Capital in excess of par value255.2Retained earnings5,873.2Total equity6,524.6Debt to capital ratioOxford Biomedica plcOxford Biomedica (OB) is a leading company in the fields of immunotherapy and gene therapy. The companys target is to develop new medicines and treatments for diseases, so the company invests heavily on research and development. The companys mission focuses on becoming a top-tier biopharmaceutical company by focusing on the commercialization of innovative gene-based medicines.
Risks to us
• We may have a number of risk factors that we will not be able to address in the foreseeable future. For example, many of these are, but are not limited to:
• our financial statements and risk management products are not in compliance with standards of the SEC and, therefore, cannot protect or manage any particular risk in our financial statements for the foreseeable future. Risk is inherent in the use of these products and, where possible, in the use of any investment strategies in a non-financial interest bearing interest rate, which can cause our actual results to be adversely affected due to a material loss, loss of ability to pay, or other significant externalities.
The impact of these, including the potential impact of non-performance of products and information and other risks to the stock price, would not be material if there was no actual performance or material loss at the time of sale.
• The financial management team, and the management of the fund, are engaged in the development of novel and exciting products, services and services that are currently being used worldwide by a wide range of healthcare organizations in countries including Mexico, China, India, China and the European Union. A number of them have successfully achieved the highest number of orders globally, and the companies involved appear highly competitive in various markets.
• We may not have the expertise in the management of medical research institutions, which could adversely affect us or negatively affect our investors. Our employees are highly motivated, knowledgeable, hardworking, hardworking, highly skilled professionals and there is no possibility that any changes or modifications regarding our ability to execute or maintain the business plan will be implemented during this time.
In addition, if we do not have the resources or expertise to manage and operate the operations of our business, we may not succeed in maintaining the business plan we established.
• There is no assurance that there is a level of profitability for our health care company, or that we will be able to keep operating at the current level. However, in most cases our business model provides an opportunity for us to grow as we continue to expand. This may result in increased demand for the company’s medical and medical technology products and provide us with the best option possible to meet our obligations to all the customers. Any loss or failure of operating our business would result directly or indirectly in our ability to continue to operate as a health care company
Risks to us
• We may have a number of risk factors that we will not be able to address in the foreseeable future. For example, many of these are, but are not limited to:
• our financial statements and risk management products are not in compliance with standards of the SEC and, therefore, cannot protect or manage any particular risk in our financial statements for the foreseeable future. Risk is inherent in the use of these products and, where possible, in the use of any investment strategies in a non-financial interest bearing interest rate, which can cause our actual results to be adversely affected due to a material loss, loss of ability to pay, or other significant externalities.
The impact of these, including the potential impact of non-performance of products and information and other risks to the stock price, would not be material if there was no actual performance or material loss at the time of sale.
• The financial management team, and the management of the fund, are engaged in the development of novel and exciting products, services and services that are currently being used worldwide by a wide range of healthcare organizations in countries including Mexico, China, India, China and the European Union. A number of them have successfully achieved the highest number of orders globally, and the companies involved appear highly competitive in various markets.
• We may not have the expertise in the management of medical research institutions, which could adversely affect us or negatively affect our investors. Our employees are highly motivated, knowledgeable, hardworking, hardworking, highly skilled professionals and there is no possibility that any changes or modifications regarding our ability to execute or maintain the business plan will be implemented during this time.
In addition, if we do not have the resources or expertise to manage and operate the operations of our business, we may not succeed in maintaining the business plan we established.
• There is no assurance that there is a level of profitability for our health care company, or that we will be able to keep operating at the current level. However, in most cases our business model provides an opportunity for us to grow as we continue to expand. This may result in increased demand for the company’s medical and medical technology products and provide us with the best option possible to meet our obligations to all the customers. Any loss or failure of operating our business would result directly or indirectly in our ability to continue to operate as a health care company
The company carries nil debt, and equity of ÂŁ4,143,000 (BioMedica Annual Report, 2011). The company is mainly based on equity financing, which, in combination with reducing costs and strong cash flow position, is able to finance its demanding Research and Development programs and general business operations.
OB 2011 ÂŁ,000Equity capitalCommon stock9,449Capital in excess of par value124,755Retained earnings-130,061Total equity4,143Critical EvaluationsVariability of Operating ProfitOver the observed period, from 2008 to 2011, OB was continuing making losses, and the operating losses are very variable, and the standard deviation of the four year operating losses is 3424. This suggests that the company has a high business risk, so it will be difficult for the company to obtain debt, so it chooses to finance mainly through equity.
For the same period, although M&S was able to increase its revenue continually, its operating profit was declined. The standard deviation of the operating profit for the period is 180. Compared to OB, the variability is low, and its ability to increase revenue makes it much easier for M&S to raise debt.
Operating ProfitStandard DeviationOB ÂŁ000-13,671-5,730-12,011-14,438M&S ÂŁm836.9852.0870.71,211.3Assets NatureAn analysis of the assets reveals that the tangibility of the company, which is the ratio of fixed assets to total assets. OBs tangibility is 22.44%, while M&Ss tangibility is 63.48%. According to Rajan and Zingales (1995), firms with low tangibility tend to have low leverage, because they do not have enough physical assets to be used as collateral for debt. The capital structure decisions of both companies are in line with this observation.
Total AssetsTangible AssetsTangibilityOB ÂŁ00018,7764,21322.44%M&S ÂŁm7,344.14,662.263.48%Tax AdvantageModigliani and Millers proposition with tax suggests that under perfect capital market, the leveraged firm value equals to the unleveraged firm value plus tax shield, which is calculated by corporate tax rate multiplying debt D, as follows:
Therefore, leverage increases the firm value (reference). This is the most important reason that firms prefer financing via debt rather than equity.The tax shield is significant to M&S with the operating profit offset by the interest payment. However, this is not the case for OB. The UK subsidiary