FINANCIAL ACCOUNTING

Financial Accounting

Financial Accounting

Task 1

Jute Plc

The course of the study will critically analyze the capital structure requirement of the Jute Plc. The company currently requires a long-term funding for the development of their revolutionary new product. The study will focus on how equity, debt and leasing financing relates to the Jute Plc. The study will discuss in detail about how Jute, Plc should finance its revolutionary product. The current capital structure of the company is funded by both equity and debt with equity at £ 500 million and debt at £ 200 million with an average coupon rate of 6%. In the previous financial year, the company has reported an EBITDA of £ 11 million pounds. The cash generated from the operation were at £ 100 million. Capital structure of a company defines the way a firm finances its investments through a combination of debt, venture capital (or equity) or financial stocks mixed in nature (Artikis 2007, pp. 11-29). The capital structure is, therefore, the composition or, indeed, "structure" of the financial capital of the balance sheet of a company.

Jute, Plc requires long-term finance for the funding of their new revolutionary product. The financial structure of the Jute, Plc is comprised of total £ 700 million out of which £500 is from equity and rest £200 is generated from debt financing. The company has obtained debt financing on a coupon rate of 6% annually which means that the company is incurring £120,000,000 annually (Artikis 2007, pp. 11-29). The implication of debt financing is that it accounts for a fixed interest expense irrespective of the performance of the company. In case if the company is not performing well or facing a financial crunch due to any reason still, it will have to pay the interest or otherwise the bank (lender) will exercise its right and sell the property (security) of the company to recover its payment.

Capital Structure Analysis of the Jute Plc

Capital structure of a company defines the way a firm finances its investments through a combination of debt, venture capital (or equity) or financial stocks mixed in nature. The capital structure is, therefore, the composition or, indeed, "structure" of the financial capital of the balance sheet of a company (Artikis 2007, pp. 11-29). For example, a company whose capital is composed of 20 millions of Euros of venture capital and 80 million Euros of debt will be for 20% equity financed (financed by venture capital) and 80% debt financed (financed by debt), the ratio of the debt of a company and its capital, in this case 80%, is called leverage. In this case, the Jute, Plc is financed with 71 % equity and 29 % from debt financing. The choice of a particular source of funding such as the company internally generated resources, debt or venture capital will determine the capital structure of a company.

The Sources of Finance Available To Jute, Plc

Most of the businesses begin life as proprietorships or partnerships, and if they become successful and grow, at some point ...