Rolls Royls Essay

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Describe the capital structure of the firms and try to explain why it is chosen. In this paper, we will consider two non-financial firms from different industries; they are Unilever Group and Rolls-Royce Holdings plc. In order to see the capital structure debt and equity ratios were calculated. According to calculations Unilever’s debt ratio is 32.49% and equity ratio is 67.51%. Rolls-Royce numbers are 16.81% and 83.19 % respectively. In both cases we see that firms prefer to use their own capital. We cannot tell with certainty why this structure was chosen, but we can look for example at the level of liquidity. Unilever has 93% (cash to current liabilities). We can conclude that the firm has enough cash to meet its obligations and able to generate cash flow to use it for project financing when needed. According to Pecking Order Hypothesis by Donaldson companies prefer internal financing than external when financing positive NPV projects (Frank and Goyal, 2002). Unilever has many ongoing projects, like new product launches in different countries (for example personal care products in Brazil and Philippines). So we can assume that for these projects Unilever might have used internal sources of financing. If the external financing is needed they can start with the most secure debts and finish with common stock. Although companies do not always follow the classical theories in deciding capital structure mix we can assume that Unilever’s management decision could be influenced by Pecking Order Theory. Low debt ratio of Rolls-Royce is due to the type of niche business - premium cars and engines for planes. Also Rolls-Royce is a very old company, stable, with many years of activity so it has a high equity because of past profits (retained earnings). "More stable and mature firms typically need less debt to finance growth as its revenues are stable and proven”

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