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1、Contents1 Discussion 2 - 131.1 History of British American Tobacco 1.2 How British American Tobacco financed1.3 The reason of Imperial Tobacco choosing the method of financing1.4 The reflect of the operation of efficient capital markets1.5 Discussions of Dividend Policy1.6 Analysis of the P/E ratio2
2、 References 143 Appendices 15 - 171.1 History of British American Tobacco British American Tobacco has been in business for more than 100 years, trading through the turbulence of wars, revolutions and nationalisations as well as all the controversy surrounding smoking. The business was formed in 190
3、2, as a joint venture between the UKs Imperial Tobacco Company and the American Tobacco Company founded by James Buck Duke.1902The UKs Imperial Tobacco Company and the American Tobacco Company of the United States form a joint venture, the British American Tobacco Company.19041908Expansion: to the W
4、est Indies, Ceylon and Egypt, Holland, Belgium, Sweden and Norway, Finland, Indonesia and East Africa1910British American Tobaccos sales are more than 10 billion cigarettes. Profits grow correspondingly very quickly.1911Expansion: to Malaya (now Malaysia)1911The American Tobacco Company divests its
5、shares in the joint venture. British American Tobacco is listed on the London Stock Exchange and British investors acquire most of its American parents shares. The company is now free to conduct its business independently throughout the world, except in the UK where territorial agreements remain wit
6、h Imperial.1913A local tobacco manufacturer in Argentina, Bozetti & Co. is acquired. 1914Brazilian company Souza Cruz is purchased today, one of the Groups leading subsidiaries.1915British American Tobacco cigarette sales total 25 billion.1921 Cigarrera Bigott Sucs is formed in Venezuela and, in the
7、 following few years, acquisitions are made in Chile, Mexico and Central America.1927British American Tobacco moves into the US market with the acquisition of a small North Carolina company, Brown & Williamson.1953With new Chairman Duncan Oppenheim, 1953 signals a fresh start for the company. 1956Br
8、itish American Tobacco obtains the overseas business of Benson & Hedges. With State Express, Benson & Hedges becomes one of the cornerstones of the Groups predominance in the international brand market.1960British American Tobacco begins to diversify into paper and pulp, cosmetics and the food indus
9、try. Stakes in Wiggins Teape and Mardon Packaging are among the companys initial moves. 1964Acquisitions the UKs Tonibell ice cream company and the Lenthric fragrance house. Brown & Williamson and British American Tobacco companies in South Africa and Australia also begin to invest in the food indus
10、try.1966British American Tobacco acquires cigar manufacturer Henri Wintermans and company profits exceed 100m for the first time. 1976the Group undergoes radical reorganisation. With a new Chairman, Peter Macadam, operations are coordinated under a new holding company, B.A.T Industries.1978Industrie
11、s is the UKs third largest company and the largest tobacco manufacturer in the free world with annual sales of 500 billion cigarettes.1992British American Tobacco acquires Hungarys Pecsi Dohanygyar.1994Acquisition of the American Tobacco Company 1998BAT Industries divests its financial services busi
12、nesses. That same year the company acquires Cigarrera La Moderna, the leading cigarette company in Mexico.British American Tobacco p.l.c. becomes a separately quoted company on the London Stock Exchange, with Martin Broughton as its chairman1999British American Tobacco, the second largest tobacco co
13、mpany, announces a global merger with Rothmans International, the fourth largest. With the merger, British American Tobacco adds to its portfolio several major brands, including Dunhill.2001the Group announces a series of new investments in countries such as Turkey, Egypt, Vietnam, South Korea and N
14、igeria.2004US business of Brown & Williamson and RJ Reynolds Tobacco Company are combined and Reynolds American is formed a stronger, more sustainable business in which British American Tobacco has a 42% share.2007sees snus test marketing extended to Canada and the sale of a number of our pipe tobac
15、co trademarks to Danish company Orlik Tobacco Company2009Richard Burrows takes over as Chairman of British American Tobacco p.l.c. in November 2009.1.2 How British American Tobacco Tobacco financedGenerally, company should be financed by a combination of long-term and short-terms.British American To
16、bacco is financed by Borrowing which including the non-current and current liabilities. And another financed method is issue of shares.Borrowing: This is the mean method to financed for the company. The proportion accounted for 59.29%, total amount is 9712 millions. Its the foundation of the financi
17、al structure of a company and mean source of its capital. Borrowing capital including the below items.Eurobonds: Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. This items total amount of the company is 5500 millions.UK bonds: This is
18、 similar to the Eurobonds, they are issued in UK. This items total amount of the company is 2297 millions.US Securities: Commission underwriting refers to the method whereby a securities company undertakes to sell securities on behalf of the issuer and return all unsold securities to the issuer at t
19、he end of the underwriting period. This items total amount of the company is 620 millions.Floating rate notes: A bond on which the coupon is reset periodically in line with a money market reference rate such as LIBOR. This items total amount of the company is 467 millions.Other notes: Out of these b
20、onds, there are other fragmentary bonds. This items total amount of the company is 119 millions.Issue of shares: Share is the certificates which is issued to investor when the company to financed. Its represents the ownership of the company of shareholders. This the second most important method to f
21、inanced of the company. The company have collected 7613 millions. The proportion accounted for 40.72%. This is the high specific gravity as well.Following the success of the rights issue, British American tobacco are comfortable with their current financing position.Gearing: is a measure of the rati
22、o of debt to equity. Gearing= long-term debt/ Equity = non-current borrowings / EquityGearing adds the effect of financial risk. The higher gearing the more risky thecompany is considered.In 2008,Gearing= 9437m/7215m = 1.308In 2009,Gearing= 9712m/7912m = 1.228In accordance with the gearing data of B
23、ritish American Tobacco, it shows us a slightly high gearing level which represents high financial risk. But overall, this level is in reasonable range.By reference to the group cash flow statement, there was two mean changes to British American Tobacco as follows. 2008 m 2009 mNet cash from investi
24、ng activities: Purchase of Bentoel 0 (370) Purchase of Tekel cigarette assets (873) (12) Proceeds from ST trademark disposals and purchase of ST business (1243) 187 (2386) (589)Net cash from financing activities: Proceeds from increase in and new borrowings 3518 1447 Movements relating to derivative
25、 financial instruments (656) (267) Purchase of own shares (400) 0 Reductions in and repayment of borrowings (731) (1853) (374) (3405)1.3 The reasons of the company has chosen these method of financingThe group mainly adopts the equity and debt finance.From the preceding section, we have got that the
26、 gearing level of the Group is high which means the debt level is high.Equity finance represents the highest level of risk faced by investors. This is due both to the uncertainty surrounding dividend payments and capital gains. Therefore, the Group also chooses debt finance.Generally, cost of debt i
27、s lower than cost of equity, because the interest payment of debt is deducted before tax. That is to say, profit will increase and it will benefit to the equity shareholders wealth. Thus, Group raises debt finance more than equity finance. If the group only chooses equity finance, it will carry grea
28、ter financial risk. Moreover, debt finance is good way to solve capital shortage. Thus, the Group chooses the method of equity and debt finance. Thus, The Group manages the capital structure in an efficient way in order to minimise the cost of capital whilst ensuring that British American Tobacco Gr
29、oup have access to on-going sources of finance such as the debt finance in capital markets.According to the proposition of capital structure states that an optimal capital structure does exist and a company can therefore increase its total value by using the debt finance within its capital structure
30、. Thus, bringing into gearing will contribute to the shareholder wealth maximization to the company. As a company starts to replace more expensive equity with cheaper debt finance, shareholders are initially indifferent to the introduction of a small amount of financial risk. The WACC of the company
31、 will fall initially due to the benefit of the cheaper debt finance outweighing any increase in the cost of equity finance. Hence, WACC will fall until to an optimal capital structure. However, the British American Tobacco Group continues to gear up, increasing its gearing more, the benefits with us
32、ing debt finance are outweighed by the increase in the companys equity finance. Then, WACC will start to rise till the high level gearing. At very high levels of gearing, bankruptcy risk causes the cost of equity curve to rise and also cause the cost of debt to start to rise. Hence, it will decrease
33、 the shareholder wealth. As far as I am concerned, it is not appropriate for British American Tobacco group to finance of this type. For the long-term, the higher gearing ratio will not benefit to British American Tobacco. Once the debt finance level is too high, the Group will not get loan from or
34、creditors and bankruptcy risk will rise. Interest cover is a measure of the adequacy of a companys profits relative to interest payments on its debt. The lower the interest cover, the greater the risk that profit will become insufficient to cover interest payments. The interest cover went down from
35、2008 to 2009. However, the interest cover is more than one. For the short-term, the Group also has ability of the debt solvency. In this point, The Group can use debt finance.When earnings are historically stable or low risk, a higher level gearing than normal may be suitable. Conversely, when profi
36、ts are volatile, a prudent gearing policy should be adopted. In line with the profit for the year 2005-2009 in the Group, the overall profit gradually has ascended and stable. For the short-term, it will not have a significant impact on a higher level gearing. Then, the company will concern the chan
37、ge of interest cover in the following years. If the profit starts to volatile, the prudent policy will be considered.Whereas, the company has faced many risks, such as financial risk, interest rate risk, liquidity risk, Capital risk and Credit risk on the borrowings. The group has taken measure of t
38、hese risks which control the risk efficiently. For the long-term, the Group still should pay more attention to these risks in order to decrease the gearing level and to achieve desirable debt solvency. 1.4 The reflect of the operation of efficient capital marketsThe record the companys share price a
39、nd the values of the appropriate sector index and the FTSE 100 Index as belows:Ref :In prosperous economic market, all kinds of markets play a fundamental role in resource allocation, these markets combine into an unified and interrelated system. Financial market is an important part of this unified
40、 market system.The fluctuations in financial market reflect the operating performance of the listed companies in the entity economy market. In general, the more developed the financial market are, the quicker and the more accurate the market reactions are.According to records, we found that the stoc
41、k price of BAT fluctuated largely for several times. We now focus our analysis on the big jump and drop on Dec. 16th 2010 and Jan. 13rd 2011.As shown in the table above, the stock price went up 0.68% and 1.28% on Dec. 16th 2010 and Dec. 17th 2010, respectively. Why? This is largely due to the great
42、success of BATs new product, Kent Convertibles cigarettes in Korean market. Kent Convertibles cigarette consists of two parts: the charcoal and a small cellulose cigarette filter tip containing a fluid-filled spices capsule. When the consumers tap the filter tip while smoking, the smell of spices re
43、lease from the spices capsule, which brings the consumers a totally different smell and experience. This new product gained large popularity among the Korean consumers and gained 2.3% market share in big Seoul (including urban and suburban) in the first month after introducing. The big success of BA
44、Ts new product in Korean market definitely increased investors confidence on the future prospect of the company. This kind of good news helped the company attract favorable attention and more investors chose to invest in the company. In the meanwhile, the existing shareholders continued to hold thei
45、r shares or bought more shares also contributed to the big jump of the stock price.The huge drop on Jan. 13rd 2011（3.47%）was because BAT was rating from buy down to neutral by Merrill Lynch. The downward rating affected the investors investment psychological largely, to be more exact, it was a blow
46、to investor confidence on the company. To react to this negative news, the prospective buyers changed their minds and gave up buying BATs share or postponed the investment, which had a pressure on the stock price. In addition, the existing shareholders began to worried about the companys prospect, and this led to some shareholders withdraw their money, thus the sto
