Integrated Project - Part 2 Capital Structure with comments Revised v2-2 (1)

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1 Integrated Project Part 2: Capital Structure Completed by Royal Bank of Canada, RBC Czegledi, Anna September 29, 2023 Part 2: Capital Structure Compare and Contrast Debt and Equity Financing Debt and equity financing represent two pivotal avenues businesses employ to secure capital, serving diverse objectives like expansion, investments, or operational requirements. Each method boasts unique attributes, benefits, and inherent limitations. To elucidate these financing paradigms, we turn to the comprehensive financial data divulged by the Royal Bank of Canada (RBC) in its 2022 Annual Report. Delving into these financials offers valuable insights into RBC's strategic capital allocation, highlighting its prudent financial management.

2 Debt Financing: Debt financing involves borrowing capital from external sources, which is evident in RBC's operations. RBC extends loans to key individuals, including directors and their families, ensuring a steady cash flow with predefined interest rates and security measures. Moreover, RBC has outstanding loans with joint ventures and associates totaling $251 million as of October 31, 2022 ( Royal Bank of Canada, 2022, p.221). RBC's commitment to diligently manage loans to entities it holds interests in reflects its continuous utilization of debt financing. Advantages of Debt Financing: One of the crucial advantages of debt financing is that it allows businesses to leverage their existing resources. RBC can expand its lending capacity and generate interest income by borrowing finances. Additionally, interest payments on debt are tax-deductible, which can lead to implicit tax benefits for the institution ( FIN74000 - Fall 2023 pg. 421) . Furthermore, debt financing doesn't dilute ownership or control. RBC maintains complete control over its operations and strategic decisions, as creditors don't have any voting rights or ownership claims. Disadvantages of Debt Financing: However, debt financing also comes with its set of challenges. One primary concern is the obligation to make regular interest payments and repay the top amount. In profitable downturns or financial stress, meeting these obligations can strain a company's cash flow. Moreover, excessive debt can negatively impact a company's creditworthiness, potentially leading to advanced borrowing costs or difficulty securing future loans. Equity Financing: Equity financing involves raising capital by issuing shares of stock to investors in exchange for ownership stakes in the company. This method allows companies to sell partial ownership to external investors, like individual or institutional investors. In the case of RBC, equity financing is apparent through its ownership structure ( FIN74000 - Fall 2023 pg. 423) . RВC is a publicly traded company, meaning it has issued shares of stock that are traded on stock exchanges. Individual and institutional investors hold ownership stakes in RВC based on the number of shares they own. Advantages of Equity Financing: One of the crucial advantages of equity financing is that it doesn't involve debt obligations. Unlike debt, equity doesn't require regular interest payments or top repayment. This can provide lesser financial flexibility, especially during uncertain profitable conditions. Additionally, equity investors share in the company's success. However, shareholders profit from capital

3 appreciation and may receive dividends, enhancing their overall return on investment If RBC performs well. Disadvantages of Equity Financing: However, equity financing also has its drawbacks. When a company issues shares, it dilutes existing shareholders' ownership stake. In the case of RBC, issuing new shares would dilute current shareholders' ownership, potentially impacting their control over the company. Also, sharing ownership with external investors means sharing profits and decision-making authority. While this can bring fresh perspectives and expertise, it also means relinquishing some control over strategic decisions. A table on Comparison of Debt Financing and Equity Financing Aspects Debt Financing Equity Financing Underwriting and Advisory Fees Decreased $634 million or 24%, indicating debt underwriting services. Likely involved in equity underwriting as part of investment banking. Interest Income Recognizes interest on loans, indicating lending activities. Invests in equity securities, earning income from dividends. Tax Treatment Interest payments may be tax-deductible. Tax treatment varies, potentially fewer tax benefits. Flexibility Fixed repayment schedules. More flexibility in dividend payments. Source: RBC, 2022 Annual Report, Page 26 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Debt and Equity Financing for RBC One of the biggest banks in Canada, Royal Bank of Canada (RBC), has operations all over the world. RBC, like many big organizations, finances its operations and expansion plans using a combination of debt and equity funding. A summary of RBC's use of debt and equity financing is shown below: Debt funding 1. Bonds: To raise money, RBC issues corporate bonds. These bonds are interest-bearing debt instruments that are sold to bondholders. The money raised from bond sales is used by

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4 RBC for a variety of projects, including business growth, funding acquisitions, and debt refinancing. 2. Loans from banks: In addition, RBC has access to loans from other financial institutions and the money market. Depending on the requirements of the bank, these loans offer either short- or long-term funding. Commonly, the terms and interest rates are negotiated based on the state of the market and the bank's creditworthiness. 3. Commercial Paper: It is a sort of short-term financial instrument with maturities ranging from a few days to many months. RBC may issue commercial papers. RBC effectively meets its short-term liquidity needs with the use of commercial paper. 4. Subordinated Debt: RBC may issue subordinated debt, a sort of bond that, in the event of bankruptcy, has a lesser priority than senior debt but often has a higher interest rate for investors. Diversifying funding sources frequently involves using subordinated debt. Equity Financing: 1. Common Stock: By issuing common stock, RBC raises equity capital. Common shareholders are entitled to ownership and dividends. Either to increase the bank's capital base or to generate significant funds for long-term investments, common stock issuance can be a successful strategy. 2. Preferred Stock: RBC may also issue preferred stock in addition to ordinary stock. Common shareholders do not have preference over preferred shareholders in the case of a liquidation, and preferred shareholders normally get set dividend payments. Investors seeking a combination of income and equity ownership may find preferred shares appealing. 3. Retained Earnings: RBC is also able to get equity financing by using its retained earnings. The accumulated profits that the bank has not distributed as dividends are known as retained earnings. This money may be used to expand the company, make acquisitions, or improve the balance sheet, among other things. 4. Stock Options and Employee Stock Purchase Plans: To motivate staff and match their interests with those of shareholders, RBC may utilize stock options and employee stock purchase plans. These initiatives assist to retain workers and foster an ownership culture by enabling them to purchase RBC shares at a reduced cost.

5 RBC must consider its capital requirements, market conditions, cost of capital, and risk assessment while deciding between debt and equity financing. The financial management team of the bank assesses these variables to choose the best ratio of debt-to-equity financing to support its strategic goals while preserving a sound financial position. RBC's financing choices may also be impacted by market circumstances and regulatory obligations. For more information about RBC’s debt and equity financing, refer to pages 57 and 58. Source: RBC, 2022 Annual Report, Page 57-58 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Short-Term and Long-Term Financing Plan for RBC Royal Bank of Canada (RВС), one of the most prominent economic institutions globally, calls for comprehensive financing рlan to aid its short-term and long-term monetary desires. This рlan should align with RBС’s strategic goals, risk tolerance, and the dynamic nature of the financial industry. In outlining a financing plan for both short-term and long-term perspectives: Short-Term Financing Plan: Short-term financing is critical to the Royal Bank of Canada's (RBC) financial strategy, addressing immediate funding needs, maintaining liquidity, and seizing short-term opportunities. RBC employs several key approaches in its short-term financing plan: Firstly, interbank borrowing plays a pivotal role, leveraging RBC's strong reputation and creditworthiness to access short-term funds swiftly from other banks and financial institutions. This flexibility allows RBC to efficiently cover daily operational expenses, meet regulatory requirements, and capitalize on short-term investment prospects. Additionally, RBC issues commercial paper, a short-term debt instrument with maturities typically ranging from days to 270 days, tapping into capital markets for short-term funding at competitive rates. RBC's robust credit rating positions it as an attractive issuer, drawing investors seeking reliable short-term investments. Moreover, RBC utilizes repurchase agreements (repos) to secure short-term capital, selling securities with a commitment to repurchase them later (Royal Bank of Canada, 2022, p.55). Conversely, reverse repos can invest surplus cash for short durations, optimizing idle funds by earning interest. Effective cash and cash equivalents management is another essential facet of RBC's short-term financing strategy. Continuous assessment of liquidity positions ensures optimal utilization of available cash while ensuring compliance with regulatory requirements. Lastly, RBC maintains a robust contingency funding plan to address unforeseen liquidity needs, given the unpredictable nature of financial markets (Royal Bank of Canada, 2022, p.82). This

6 plan outlines actions to be taken in various scenarios, ensuring the bank's resilience in the face of financial uncertainties. RBC Short Term Financing Source: RBC, 2022 Annual Report, Page 57 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Deposits RBC operates in the banking industry, which means that its short-term financing is primarily funded by deposits. RBC Deposits (Current Year: $1,208,814 million (about $3,700 per person in the US) (about $3,700 per person in the US), Previous Year: $1,100,831 million (about $3,400 per person in the US) (about $3,400 per person in the US): These figures represent the total amount of deposits held by RBC at two different points in time. Current Year (e.g., 20XX): $1,208,814 million (about $3,700 per person in the US) Previous Year (e.g., 20XX-1): $1,100,831 million (about $3,400 per person in the US). As one of Canada's leading banks, RBC offers a wide range of deposit products to its customers, including savings accounts, checking accounts, fixed- term deposits (such as certificates of deposit or CDs), and other specialized accounts. These deposits are provided by individual customers, businesses, institutions, and other entities. The increase in deposits from the previous year to the current year suggests that RBC has seen growth in its deposit base during that period. This can be influenced by factors such as marketing strategies, interest rates offered on deposits, economic conditions, and changes in customer preferences. RBC, like other banks, relies on deposits as a source of funding to support its lending activities, investment in securities, and other financial services. The bank uses these funds to make loans to individuals and businesses, invest in financial markets, and

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7 generate revenue through various banking services. The ability to attract and retain deposits is a crucial aspect of a bank's stability and profitability. RBC's strong deposit base indicates its ability to manage and grow its customer relationships. Source: RBC, 2022 Annual Report, Page 58 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Retained Earnings Retained earnings refers to a corporation's income after subtracting obligations and costs. This money may either be used to pay out dividends to investors or it can be held inside the company as retained earnings, establishing a pool of money that can be used to fund immediate projects. Retained earnings can be used as finance since they are cheap and won't diminish the corporation's ownership, among other advantages. The drawback is that stockholders will experience a loss of value because there is a chance that the money spent won't result in a profit. Retained earnings represent the cumulative profits or net income that a company has earned over its history, minus any dividends or other distributions made to shareholders. It's essentially a running total of the company's profits that have been reinvested in the business rather than distributed to shareholders. Here's what we can gather from the information you provided for RBC: In the first period, RBC had retained earnings of $78,037 million (about $240 per person in the US). In the second period, this amount decreased to $71,795 million (about $220 per person in the US). The change in retained earnings over time can be attributed to various factors: Net Income : Retained earnings increase when the company generates a profit. Net income is added to retained earnings. Dividends : Retained earnings decrease when the company distributes dividends to its shareholders. This distribution represents a return on investment to shareholders. Other Comprehensive Income : Changes in the value of certain assets, like investments and foreign currency translation adjustments, can impact retained earnings through "Other components of equity." Reinvestment : Retained earnings are often reinvested in the business for various purposes, such as funding expansion, research and development, debt reduction, or other strategic initiatives. The decrease in retained earnings from the first period to the second period could be due to a combination of factors. It's possible that RBC had lower profits in the second period, paid out higher dividends, or experienced changes in the value of certain assets affecting their comprehensive income.

8 Retained earnings are an important indicator of a company's financial health and its ability to reinvest in the business for growth. It also reflects the company's dividend policy and how much profit is being returned to shareholders versus being reinvested. Source: RBC, 2022 Annual Report, Page 140 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf RBC Long-Term Financing Plan Equity capital is a great alternative option for long term financing. Equity capital can be raised by selling off ownership of the corporation in the form of common and prefer shares. Preferred shares and other equity instruments : RBC had preferred shares and other equity instruments valued at $7,318. These instruments often come with specific dividend rights and can be attractive to investors seeking stability in returns. Common shares : The value of RBC's common shares was $16,984. Common shares represent ownership and often carry voting rights, allowing shareholders to have a say in the company's decisions. Retained earnings : RBC's retained earnings stood at $78,037. Retained earnings are the accumulation of past profits that have not been distributed as dividends. It reflects the bank's ability to generate and retain profits. Other components of equity : This category, at $5,725, includes various items like changes in the fair value of assets or liabilities. These items can impact the bank's overall equity position. The total equity attributable to shareholders for the current period was $108,064, indicating the collective value of ownership interests in RBC held by its shareholders. In contrast, for the prior period: Preferred shares and other equity instruments : RBC had $6,684 in preferred shares and other equity instruments, showing some changes in the composition of these financial instruments.

9 Common shares : The value of common shares was $17,655, which might have changed due to factors like share buybacks or new issuances. Retained earnings : RBC's retained earnings were $71,795 for the prior period, reflecting the accumulation of profits over time. Other components of equity : This category had a value of $2,533, indicating potential fluctuations in the fair value of assets or liabilities. The total equity attributable to shareholders for the prior period was $98,667. Additionally, the balance sheet highlights non-controlling interests: For the current period, non- controlling interests amounted to $111, indicating the ownership interests in RBC's subsidiaries or joint ventures that are not owned by RBC itself. For the prior period, non-controlling interests were $95. In total, the balance sheet reflects RBC's total equity for the two periods, which was $108,175 for the current period and $98,762 for the prior period. These numbers provide a net saving expense quantitative snapshot of RBC's financial position and changes in its equity structure, which is vital for assessing the bank's financial stability and performance over time. It's worth noting that changes in these figures can be influenced by various factors, including financial performance, capital management, and changes in the ownership structure of subsidiaries or affiliates. Source: RBC, 2022 Annual Report, Page 140 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Long-term financing is pivotal in facilitating the Royal Bank of Canada's (RBC) ambitious strategic endeavors, ensuring the realization of expansion, technology investments, and capital-intensive projects over an extended horizon. RBC employs a multifaceted approach to secure the necessary funds for these long-term initiatives. One core strategy involves issuing long-term debt instruments, such as bonds, a practice highlighted in its 2022 Annual Report (Royal Bank of Canada, 2022 p.85). With varying maturities, these bonds empower RBC to accumulate substantial capital from capital markets while benefiting from its robust credit rating, allowing access to favorable interest rates. This method provides the financial stability required for projects with prolonged gestation periods. In addition to debt financing, RBC also considers equity financing as a supplementary strategy to fortify its long-term capital base. The issuance of new shares or convertible securities can inject fresh capital into the bank's coffers, albeit judiciously, to circumvent significant dilution of existing shareholders. Furthermore, RBC harnesses its accumulated retained earnings, a testament to years of profitable operations (Royal Bank of Canada, 2022, p.153). This prudent approach minimizes the reliance on external financing sources and underscores the bank's commitment to sound financial management. Moreover, RBC explores asset securitization to monetize illiquid assets, including mortgages, by consolidating them into tradable securities

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10 (Royal Bank of Canada, 2022, p.183). This innovative strategy optimizes the bank's capital structure and unlocks financial resources for alternative investments. Additionally, strategic partnerships and alliances are integral to RBC's long-term financing landscape, allowing access to fresh capital and expertise through cooperative ventures with fintech firms, investment funds, or fellow financial institutions. These alliances enable the bank to pool resources, share risks, and fuel strategic initiatives collectively. Lastly, robust capital planning and stress testing practices ensure that RBC maintains an adequate capital buffer to effectively weather adverse financial scenarios and support its long-term growth objectives (Royal Bank of Canada, 2022, p.99). A table on Royal Bank of Canada's Financing Plan Components illustrating Short-Term Financing and Long-Term Financing Financing Plan Component Description Short-Term Financing Deposits Increased by $108 billion (10%) Mainly due to issuances of long-term and short-term notes due to funding requirements and foreign exchange translation Higher retail deposits also contributed Derivative Liabilities Increased by $62 billion (68%) Primarily due to foreign exchange translation Higher fair values on interest rate contracts Partially offset by lower fair values on foreign exchange contracts Other Liabilities Increased by $31 billion (8%) Mainly due to higher short-term borrowings of subsidiaries due to funding requirements Higher cash collateral and foreign exchange translation Long-Term Financing Relationship-Based Deposits $819 billion (54% of total funding) Primary source of funding for retail and commercial lending Increased from $771 billion (55%) in the previous year Short-and Long- Term Wholesale Funding Used for less liquid wholesale assets and liquid asset buffers Specifics on outstanding long-term debt subject to the Bail-in regime Outstanding Long- Term Debt Subject to Conversion under the Bail-in Regime $85 billion in 2022 Increased from $53 billion in the previous year

11 Unsecured Long- Term Funding $119.2 billion Secured Long-Term Funding $68.95 billion Subordinated Debentures $10.64 billion Diversified Wholesale Funding Well-diversified by geography, investor segment, instrument, currency, structure, and maturity Long-Term Debt Issuance Programs Various programs with authorized limits by geography Includes Canada Shelf Program ($25 billion), U.S. Shelf Program (US$50 billion), European Debt Issuance Program (US$40 billion), Global Covered Bond Program (€75 billion), and Japanese Issuance Programs (¥1 trillion) Evaluation and Expansion Continuously evaluate opportunities to expand into new markets and untapped investor segments Diversification strategy to expand flexibility, minimize funding concentration, and reduce financing costs Diversified Long- Term Debt Profile Well-diversified by both currency and product Maintaining Credit Ratings Focus on strong risk management to ensure cost-effective funding Source: RBC, 2022 Annual Report, Page 56 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Identification of Major Influences on Capital Structure, Industry Averages, Debt Ratings, and Other Factors The capital structure of the Royal Bank of Canada (RBC) is shaped by a multitude of factors that interact with and guide the bank's financing opinions. One of the foremost determinants is the regulatory environment. Banking controllers, like the Office of the Superintendent of Financial Institutions Canada (OSFI) in Canada, put strict capital adequacy requirements on financial institutions (Royal Bank of Canada, 2022, p.105). RBC must maintain a minimal position of capital to absorb implicit losses and ensure stability during profitable downturns. Accordingly, the regulatory framework dictates the composition of RBC's capital structure, necessitating a balance between common equity, favored shares, and other forms of capital. Risk assessment is another fundamental influence on RBC's capital structure. The bank evaluates various types of risks, including credit, market, and operational risks. A higher risk profile may require RBC to maintain a more substantial capital buffer to safeguard against potential losses. The right equilibrium between risk management and capital efficiency shapes the capital structure.

12 Industry averages and benchmarks also significantly pressure RBC's capital structure decisions. The bank closely monitors the capital structures of its peer institutions to ensure competitiveness and alignment with industry norms. Straying significantly from industry averages could affect RBC's perceived risk profile and borrowing costs. Therefore, RBC endeavors to uphold a capital structure that mirrors or slightly surpasses industry peers. The credit rating assigned to RBC plays a pivotal role in defining its capital structure. A higher credit rating enables RBC to issue debt at more favorable interest rates, reducing borrowing costs. Maintaining a robust capital position is paramount in preserving the bank's creditworthiness and securing good debt ratings ( Royal Bank of Canada, 2022, p.57) . Consequently, when faced with the choice between equity financing and additional debt issuance, RBC may opt for the former if it believes that excessive leverage could jeopardize its credit rating. Market conditions, such as prevailing interest rates and investor sentiment, can sway RBC's capital structure preferences. Favorable market conditions may prompt the issuance of long- term debt or preferred shares at lower yields, enhancing cost efficiency. Conversely, adverse conditions might incline the bank towards equity financing. RBC remains vigilant about market dynamics to optimize its cost of capital. Economic outlook is a crucial factor in RBC's capital structure deliberations. The bank closely monitors economic conditions, including GDP growth, unemployment, and inflation. Such conditions significantly influence credit demand and loan quality ( FIN74000 - Fall 2023 pg. 439) . RBC might prioritize strengthening its capital during economic downturns to brace for potential loan losses. The preferences and demands of investors also hold sway over RBC's capital structure. The bank must strike a balance among various stakeholders, including common shareholders, preferred shareholders, and debt investors. RBC's ability to attract investors and align with their expectations significantly impacts its financing choices. Therefore, RBC's capital structure is a dynamic outcome shaped by many influences, including regulatory mandates, risk evaluations, industry standards, credit ratings, market conditions, economic factors, investor preferences, and strategic imperatives. Adaptability to changing circumstances is essential for RBC to maintain financial stability and work towards its long-term objectives. Continuous monitoring and assessment of these factors are integral to RBC's capital management strategy. A table on Influences on Royal Bank of Canada's Capital Structure Decisions Credit Rating Higher credit ratings enable RBC to issue debt at favorable rates, impacting its financing choices. Regulatory Environment OSFI and other banking regulators impose capital adequacy requirements, shaping RBC's capital structure. Industry Averages and RBC monitors industry peers' capital structures to remain

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13 Benchmarks competitive and align with industry norms. Investor Preferences RBC balances the demands of common shareholders, preferred shareholders, and debt investors. Economic Outlook Economic conditions influence credit demand and loan quality, impacting RBC's capital priorities. Source: RBC, 2022 Annual Report, Page 84 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Complete Calculation Problem Appendix 6: Bond Refinancing

14 Please refer to the Excel sheet for all calculations for Appendix Six regarding bond refinancing Should RBC Refinance the Bond Issue? Yes, the company should refinance the bond issue. Several compelling factors support the company's decision to proceed with refinancing the bond issue. Firstly, the planned bond issue offers a significantly lower coupon rate of 5.5% compared to the old issue's 7.0%. In illustrating this:  Old Issue Annual Interest Expense: $25,000,000 (Face Value) * 7.0% (Coupon Rate) = $1,750,000  Planned Issue Annual Interest Expense: $25,000,000 (Face Value) * 5.5% (Coupon Rate) = $1,375,000 The company can save $375,000 annually in interest expenses by switching to the planned bond issue. This substantial reduction is a significant pro in favor of refinancing. However, it's important to note a potential con in this decision. While the lower coupon rate is advantageous regarding reduced interest payments, the company will incur floatation costs for issuing the new bonds (Ross et al., 2022 pg. 305). The floatation cost for the planned issue is 3% of the face value. Let's calculate this cost: Floatation Cost for Planned Issue: $25,000,000 (Face Value) * 3% = $750,000 So, the company will incur a floatation cost of $750,000 as an upfront expense. This represents a short-term drawback the company must weigh against the long-term benefits of lower interest expenses and tax savings. In conclusion, it is strongly recommended that the company proceeds with the bond refinancing. The comprehensive analysis, as presented in the Excel sheet and table, demonstrates that the company stands to save a substantial amount of approximately $1.5 million. This significant NPV represents the net financial benefit of the refinancing decision, considering both the cost savings and potential tax advantages. This compelling NPV figure underscores the financial prudence of the refinancing strategy and aligns with the company's goal of optimizing its financial performance and reducing interest expenses. Qualitative Factors (Pro and Con)

15 This table summarizes the key factors supporting the decision to refinance the bond issue. It highlights the substantial annual interest expense reduction as a significant advantage while acknowledging the upfront floatation cost associated with the planned issue. Factors Supporting Refinancing of Bond Issue Pro The old bond issue limits dividend payouts to just $1 million and prohibits additional debt financing. In contrast, the absence of such restrictive covenants with the planned bond issue grants the company greater financial flexibility. This newfound flexibility is invaluable as it allows the company to allocate resources more efficiently. The absence of restrictive covenants in the planned bond issue is a crucial qualitative factor supporting the decision to refinance. Unlike the old bond issue, which limits dividends to just $1 million and restricts additional debt financing, the new bonds offer the company greater financial flexibility. This newfound flexibility is vital as it allows the company to allocate resources more efficiently. Without these constraints, the company can make strategic financial decisions, adjust dividend payments, and access additional debt financing to support its growth and operational requirements. This factor is relevant because it aligns with the company's ability to make agile financial decisions, enhancing its financial stability and strategic positioning. Con Market Volatility Considerations: While the planned bond issue offers substantial interest savings, it's essential to recognize that financial markets can be unpredictable. Market conditions, such as sudden changes in interest rates or investor sentiment shifts, can affect the company's ability to realize the anticipated floatation cost recovery through interest savings fully. This is particularly relevant because increased market volatility could lead to a further decline in interest rates, limiting the company's potential additional savings and impacting the overall cost-effectiveness of the refinancing strategy. Therefore, it is essential to monitor market conditions closely and be prepared for fluctuations that may influence the expected financial benefits of the refinancing decision. Moreover, the planned bond issue provides substantial tax savings of $45,000, primarily driven by the new bonds' lower coupon rate and associated interest expenses. This tax efficiency enhances the overall cost-effectiveness of the refinancing strategy, further strengthening the case for adopting the new bonds. Another critical advantage of the planned bond issue is the reduced floatation cost, which is just 3% of the face value. In contrast, the old issue incurred a significantly higher floatation cost of 30%. This floatation cost reduction minimizes the bond issuance's initial financial impact, making it a more financially prudent option. Overall Conclusion Based on Qualtiative Factors and Calculations

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16 Based on the calculations and analysis, it can be recommended that the company proceed with refinancing the bond issue. There are several compelling reasons to support this recommendation: Significant Reduction in Annual Interest Expense: The planned bond issue offers a substantially lower coupon rate of 5.5% compared to the old issue's 7.0%. This results in a considerable reduction in annual interest expenses, with the company saving $375,000 annually by switching to the planned bond issue. This interest cost reduction is a compelling financial advantage that will positively impact the company's profitability and cash flow. Tax Savings: The lower coupon rate on the planned bond issue also leads to substantial tax savings of $45,000. This tax efficiency further enhances the cost-effectiveness of the refinancing strategy, providing additional financial benefits to the company. Reduced Floatation Cost: While there is an upfront floatation cost of $750,000 associated with the planned bond issue (3% of face value), it is essential to consider that this cost is significantly lower than the floatation cost associated with the old issue, which was 30%. The reduced floatation cost minimizes the initial financial impact of the bond issuance and makes the refinancing option financially prudent in the long run. In summary, the company should proceed with refinancing the bond issue. This decision is supported by a significantly lower coupon rate on the planned bond, resulting in a substantial annual interest expense reduction of $375,000. The refinancing also brings about significant tax savings of $45,000. Significantly, removing restrictive covenants in the new bond issue enhances financial flexibility. While an upfront floatation cost of $750,000 is incurred, it's considerably lower than the old issue's 30% floatation cost, making refinancing a financially prudent choice. An Overview of the Capital Structure of RBC and Information from Financial Results Royal Bank of Canada (RBС) is renowned for maintaining a robust and prudent саpitаl structure, a critical aspect of its financial strategy. Examining key financial ratios such as debt, debt-to- equity, and dеbt-tо-cаpitаl ratios provides insights into RBС's commitment to financial stability. These ratios, calculated based on financial data from 2020 to 2022, reflect RBС's steadfast approach to саpitаl allocation. Debt Ratio (Total Debt/Total Equity): The debt ratio, a pivotal indicator of financial leverage, signifies the extent to which a company's assets are funded through debt concerning equity. In 2022, RBС's debt ratio was 63.1%, which indicates that approximately 63.1% of its total assets were financed through debt. Calculated as total debt divided by equity, this ratio decreased slightly from 64.5% in 2021 yet remained consistent with the 2020 ratio of 62.3% (Royal Bank of Cаnаdа, 2022, р.110).

17 Comparing RBC's debt ratio to the industry average, which stands significantly higher at 211%, underscores RBC's conservative financing approach. By relying more on equity financing, RВC demonstrates its commitment to maintaining financial stability and reducing financial risk. Debt-to-Equity Ratio (Total Debt/Total Equity): The debt-to-equity ratio evaluates debt utilization relative to fairness in financing an enterprise's operations. In 2022, RВC's debt-to-equity ratio turned to 40.7%, indicating that for each dollar of equity, there was approximately $0.41 in debt (Royal Bank of Canada, 2023, p.3). This ratio decreased from 42.5% in 2021 and an extensive decline from 51.3% in 2020. Once more, RBC's debt-to-equity ratio consistently resides well below the industry average. This underscores RBC's dedication to a conservative capital structure that prioritizes equity financing to mitigate financial risk and maintain a robust equity base. Debt-to-Capital Ratio (Total Debt / (Total Debt + Total Equity)): The debt-to-capital ratio offers insights into the proportion of а company's total capital represented by debt. In 2022, RВC's debt-to-capital ratio stood at 28.9%, indicating that debt constituted approximately 28.9% of its total capital (Royal Bank of Canada, 2023, p.3). This ratio decreased from 29.8% in 2021 and was notably lower than the 2020 ratio of 33.9%. Consistently, RВC's debt-to-capital ratio remains below the industry average. This further highlights RВC's commitment to sustaining а balanced capital structure with а significant equity component. Now, focusing on the the implications of these ratios and what they reveal about RBC's capital structure. RBC's capital structure reflects a prudent financial management approach. Compared with industry averages, the consistently low debt ratios highlight RBC's inclination toward equity financing, a robust mechanism to mitigate financial risk and uphold a formidable equity base. This cautious strategy aligns seamlessly with RBC's unwavering dedication to financial stability, positioning the bank to absorb potential losses even in a dynamically changing financial landscape. Several factors play pivotal roles in shaping RBC's capital structure decisions. Industry benchmarks serve as a guiding force, with RBC striving to align itself with or surpass industry peers. This commitment to competitive positioning while mitigating risk is evident in RBC's financial ratios. RBC's robust credit rating is another critical aspect of its capital structure. This rating grants the bank favorable access to debt financing when needed, thereby maintaining financial stability while capitalizing on favorable terms in debt markets. Economic conditions further influence RBC's capital structure. RBC might lean more toward equity financing during economic uncertainty or recession periods to seek stability and create a buffer against potential financial shocks. Conversely, RBC might consider utilizing more debt financing in economic growth and stability periods to leverage favorable market conditions. Recommendations

18 These calculations provide a clear overview of Royal Bank of Canada's capital structure over the specified years. 1. Debt Ratio (Total Debt/Total Equity): 2022: Debt Ratio = 63.1% 2021: Debt Ratio = 64.5% 2020: Debt Ratio = 62.3% 2. Debt-to-Equity Ratio (Total Debt/Total Equity): 2022: Debt-to-Equity Ratio = 40.7% 2021: Debt-to-Equity Ratio = 42.5% 2020: Debt-to-Equity Ratio = 51.3% 3. Debt-to-Capital Ratio (Total Debt / (Total Debt + Total Equity)): 2022: Debt-to-Capital Ratio = 28.9% 2021: Debt-to-Capital Ratio = 29.8% 2020: Debt-to-Capital Ratio = 33.9% These provide a clear overview of the Royal Bank of Canada's capital structure over the specified years. The consistent trend of decreasing debt ratios and debt-to-equity ratios indicates RBC's commitment to a conservative capital structure with a strong emphasis on equity financing. Additionally, the debt-to-capital ratio reduces debt in RBC's total capital, highlighting the bank's strategy to maintain financial stability through a balanced capital structure. These ratios reveal RBC's prudent approach to financing its operations, aligning with its dedication to financial stability and risk mitigation. They also reflect RBC's ability to adapt its capital structure in response to economic conditions, making it well-prepared to navigate financial uncertainties effectively. In conclusion, RBC's capital structure underscores a prudent approach to financing operations, as validated by consistently lower debt levels relative to industry averages. This approach aligns seamlessly with RBC's commitment to financial stability, empowering the bank to navigate uncertainties in the financial landscape confidently. The calculated ratios provide a snapshot of RBC's financial health and highlight its strategic prowess in managing capital effectively.

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19 A table on Analyzing Debt-to-Capital Ratio and Its Implications for Capital Structure Financial Ratio Description Implications for Capital Structure Debt Ratio (2022) Approximately 63.1% of total assets were financed through debt. RBC maintains a conservative financing approach, relying more on equity financing, reducing financial risk. Debt-to-Equity Ratio (2022) For each dollar of equity, there was approximately $0.41 in debt. RBC's capital structure consistently prioritizes equity financing, mitigating financial risk, and maintaining a robust equity base. Debt-to- Capital Ratio (2022) Debt constituted approximately 28.9% of total capital. RBC sustains a balanced capital structure with a significant equity component, consistently below industry averages. Source: RBC, 2022 Annual Report, Page 119 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Data Visualization to Illustrate the Capital Structure of RBC The capital structure of RBC (Royal Bank of Canada) Capital Markets describes how this financial institution finances its activities and allocates its financial resources. RBC Capital Markets, one of Canada's biggest and most significant banks, relies on a mix of equity and debt financing to fund its many business ventures, including investment banking, trading, and asset management. A well-balanced capital structure is normally maintained by the bank, which optimizes its capital mix to guarantee financial stability, liquidity, and regulatory compliance. RBC Capital Markets can effectively offer a variety of financial services to its clients while also protecting against possible hazards in the financial markets because of the careful management of its capital resources. Source: RBC, 2022 Annual Report, Page 107 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf The capital adequacy of RBC's operations will be evaluated against its capital plan on a yearly basis, and the plan will be updated to take into account changes to business operations, risk

20 profiles, or operating environments. RBC has been able to keep its credit ratings high as seen by the table below by using the framework to manage capital. Source: RBC, 2022 Annual Report, Page 89 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Debt Financing Subordinated Debt Subordinated debt borrowed by RBC as subordinated debt in the form of notes and debentures, which are a crucial component of RBC's capital structure. Over the year prior, subordinated debt increased by $432 million. The below table outlines RBC’s current Subordinated Debt Source: RBC, 2021 Annual Report, Page 211 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf

21 Source: RBC, 2021 Annual Report, Page 202 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2020_e.pdf Equity Financing By issuing ordinary and preferred shares to investors, RBC is able to finance itself. With this strategy, RBC may get funds without taking on debt, strengthening its financial position and lowering interest-related costs. The bank utilizes this cash for a variety of things, including growing its business, making wise investments, and assisting with regular banking operations. RBC is a popular option for investors looking for equity possibilities in the banking industry due to its reputation as one of Canada's biggest and most reliable financial organizations. A table on Preferred shares and other equity instrument outstanding

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22 Both common and preferred shares are issued by the corporation, with certain restrictions on dividend distributions in accordance with legal requirements. For stockholders in Canada and the United States, they provide a Dividend Reinvestment Plan (DRIP), which enables them to receive extra common shares rather than cash dividends. There were 42.7 million common shares available for future issuance as of October 31, 2022, mostly for the DRIP and prospective stock option exercises. Additionally, under a valid savings and securities purchase plan, treasury may issue up to 38.9 million common shares. Source: RBC, 2022 Annual Report, Page 212 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Both common and preferred shares are included in the company's share capital, with neither having a designated nominal or par value. First Preferred Shares and Second Preferred Shares may be issued in an infinite number under the authorized share capital with aggregate consideration caps of $20 billion (about $62 per person in the US) and $5 billion (about $15 per person in the US) (about $15 per person in the US), respectively. Dividend payments are subject

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23 to limitations set out by the Bank Act (Canada). If doing so contravenes the Act's restrictions on capital adequacy and liquidity, dividends on preferred or ordinary shares cannot be issued. All dividends due to preferred shareholders must be declared, paid, or set aside for payment before common share dividends can be paid. The company provides common and preferred shareholders with a Dividend Reinvestment Plan (DRIP), which enables them to obtain extra common shares in lieu of cash dividends. The DRIP can be used by shareholders who live in Canada or the US, and it can be completed by buying shares on the open market or issuing shares from the company's treasury. 42.9 million common shares were available for future issuance as of October 31, 2020, largely for the DRIP and anticipated stock option and award exercises. Additionally, the RBC Umbrella Savings and Securities Purchase Plan, which was authorized by shareholders on February 26, 2009, permitted the corporation to issue up to 38.9 million common shares from its treasury. A table on preferred shares and equity instrument outstanding

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24 Source: RBC, 2020 Annual Report, Page 204 https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2020_e.pdf 2020-2023 Historical Information About Common Share Price for RBC

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25 Below is RBC’s common share price trend over the past five years: Based on the report above, we can see after the pandemic, RBC has grown significantly. Source: Google Finance: TSE: RBC https://www.google.com/search?client=firefox-b-d&q=RY+share+price Recent Financial News Related to RBCs Performance and its Impact on Share Price TORONTO, Aug. 24, 2023 - Royal Bank of Canada (RY on TSX and NYSE) announced today that its board of directors has declared a quarterly common share dividend of $1.35 per share, payable on and after November 24, 2023, to common shareholders of record at the close of business on October 26, 2023. The board also declared dividends for the following Non-Cumulative First Preferred Shares, payable on and after November 24, 2023, to shareholders of record at the close of business on October 26, 2023.  Series AZ Dividend No. 39 of $0.23125 per share.  Series BB Dividend No. 38 of $0.228125 per share.  Series BD Dividend No. 35 of $0.20 per share.  Series BF Dividend No. 34 of $0.1875 per share.  Series BH Dividend No. 33 of $0.30625 per share.

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26  Series BI Dividend No. 33 of $0.30625 per share.  Series BO Dividend No. 20 of $0.30 per share. The board also declared dividends for the following Non-Cumulative First Preferred Shares.  Series C-2, Dividend No. 32 of US$16.875 per share (equivalent to US$0.421875 per related depositary share), payable on and after November 7, 2023, to shareholders of record on October 27, 2023. In lieu of receiving their dividends in cash, holders of the Bank's common and preferred shares who reside in Canada and holders of common shares who reside in the United States may elect to have their dividends reinvested in additional common shares of the Bank, in accordance with the Bank's Dividend Reinvestment Plan (the "Plan"). Under the Plan, the Bank is entitled to determine whether the additional common shares are purchased in the secondary market by the agent for the Plan or issued from the treasury. As previously announced and until further notice, the Bank has decided to issue additional shares from the treasury at a 2% discount from the Average Market Price (as defined in the Plan). Shareholders who currently participate in the Plan and who continue to do so on the November 24, 2023, payment date will automatically have the discount applied to the reinvestment of their dividends. Registered holders of record residing in Canada or the United States who wish to participate in the Plan can obtain an enrollment form from the Bank's Plan agent, Computershare Trust Company of Canada, from their website at www.investorcentre.com/rbc , or by calling 1-866-586-7635. Eligible, beneficial or non-registered holders of the Bank's common and preferred shares must contact their financial institution or broker if they wish to participate in the Plan. In order to participate in the Plan in time for the November 24, 2023, dividend payment date, enrollment forms from registered holders must be received by Computershare Trust Company of Canada at 100 University Avenue, 8th Floor, Toronto, Ontario M5J 2Y1 before the close of business on October 26, 2023. All shareholders considering enrollment in the Plan should carefully review the terms of the Plan and consult with their advisors as to the implications of enrollment in the Plan. Registered participants in the Plan who would prefer to receive a cash dividend rather than reinvest their dividends on and after November 24, 2023, may terminate their participation in the Plan by delivering written notice to Computershare Trust Company of Canada at the above address by no later than October 26, 2023. Beneficial or non-registered participants in the Plan should contact their financial institution or broker in advance of October 26, 2023, for instructions on how to terminate participation in the Plan so that the November 24, 2023, dividend is not reinvested in common shares. The dividend announcement from the Royal Bank of Canada, which offers $1.35 per share and a 2% discount through its dividend reinvestment plan, may have a conflicting effect on the share price. Although dividends are a sign of sound finances and draw in income-seeking investors, they may also cause short-term volatility if investors are disappointed or have different

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27 expectations. Individual preferences for cash or reinvested dividends may cause variations in investor sentiment, which might have long-term effects on the shareholder base. Share prices, however, are also heavily impacted by general market circumstances and RBC's overall financial performance. Source: Article - RBC. (2023). https://www.rbc.com/newsroom/news/article.html? article=125823 Short-Term Financing Deposits 1. Definition: Deposits is a liability account found on a company's balance sheet. It represents funds that have been deposited by customers or other entities, which the company is obligated to return or use for specific purposes in the near future, typically within one year. Deposits can come from sources like customer prepayments, security deposits, bank deposits, or other types of deposits related to the company's operations. These liabilities are listed under current liabilities on the balance sheet like in RBC. The accounting treatment of deposits may vary based on accounting standards and the nature of the deposits. 2. Importance: It is an essential component because they provide valuable information about an entity's liquidity, financial strength, and ability to manage short-term financial obligations. They contribute to transparency, financial planning, and overall confidence in an organization's financial health. 3. Components: Deposits can be derived from adjustments by considering the following:  Notes or Disclosures: May contain additional notes or disclosures about the deposit account, including details about the account type, the bank or institution, and any associated restrictions or contingencies.  Cash and Cash Equivalents: Includes the principal balance, which represents the funds available for immediate use or short-term investments, and any interest earned (if applicable), which contributes to the total cash and cash equivalents up to the financial statement date. RBC's Context : For a bank like RBC, deposits would primarily come from the following below:

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28 Source: RBC, 2022 Annual Report, p. 203 Advantage : Deposits is one of the safest ways to invest because they don’t affect the principal, so this means the prices are stable. Another reason why its good for RBC is that deposit interest every month can be used as alternative income. Indicator of Health : A strong deposit account is essential for a corporation's financial stability like RBC. It should maintain a high average balance, steady deposits, minimal or no overdrafts, reasonable interest earnings, minimal fees and charges, purposeful segmentation, an emergency fund, easy access and control, clear documentation, diversification, compliance with regulatory requirements, regular reconciliation with other financial records, planning and forecasting, and a relationship with a reputable financial institution. These factors help corporations cover expenses, invest in growth opportunities, and maintain a strong financial position. Additionally, a well-organized and clear documentation of transactions is crucial for efficient tracking and reconciliation. A strong deposit account is also essential for diversification, compliance with regulatory requirements, and alignment with financial goals and strategies. Long-Term Financing Shares 1. Definition: The shares account found on the balance sheet represents in RBC the ownership interests in the company held by its shareholders. This provides information about the company’s equity and capital contributed by shareholders. 2. Importance: It is a fundamental component of a corporation's financial reporting and serves as a key indicator of its financial health, governance, and attractiveness to investors. It plays a central role in facilitating capital formation, transparency, and decision-making for both the company and its shareholders. 3. Components: Shares can be derived from,  Common stocks  Preferred stocks  Retained earnings  Stockholder’s equity RBC's Context : For a bank like RBC, shares would come from the following below, Source: RBC, Annual Report 2022, p. 212 Advantage : Issuing shares allows corporations to raise capital for operations, expansion, and debt repayment. It also promotes diversified ownership, reducing financial risk for individual investors and allowing them to invest in various companies and industries. Shares are highly

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29 liquid, allowing shareholders to convert their ownership into cash when needed, enhancing their financial flexibility. Indicator of Health : A strong share account indicates a company's stable earnings growth, healthy dividend payments, and low debt levels. Consistent and increasing dividends indicate financial strength and commitment to shareholders. Low debt levels reduce financial risk and provide a cushion for economic downturns. Recent News Article Regarding New Financing Royal Bank of Canada (RBC) has announced a significant financial move by revealing its intention to redeem all of its issued and outstanding Non-Cumulative First Preferred Shares, Series C-2, on November 7, 2023. This strategic decision will see the bank repurchase these shares for cash at a redemption price of U.S. $1,000 per share, which equates to U.S. $25.00 per related depositary share. This action will also include the settlement of all declared and unpaid dividends associated with these Series C-2 shares. Simultaneously, the NYSE-listed Series C-2 depositary shares, each representing a 1/40th interest in a Series C-2 share, will also be redeemed alongside the Series C-2 shares. In addition to the redemption of the Series C-2 shares, RBC will distribute a final quarterly dividend of U.S. $16.875 per share (equivalent to U.S. $0.421875 per related depositary share) on November 7, 2023. This dividend payment will be made to shareholders of record as of October 27, 2023. The move to redeem these shares, which amounts to 15,385 Series C-2 shares in total, will be funded using the general corporate funds of the Royal Bank of Canada. This strategic financial decision reflects RBC's commitment to optimizing its capital structure and managing its resources efficiently while providing shareholders with appropriate compensation. The redemption of the Series C-2 shares represents a noteworthy financial development for RBC and its shareholders. By retiring these shares and simultaneously distributing the final dividend, RBC aims to enhance its financial flexibility and streamline its capital allocation strategy. This move underscores the bank's commitment to maximizing shareholder value and ensuring a prudent approach to its capital management initiatives. Source: RBC, 2023, para. 1-3 https://www.rbc.com/newsroom/news/article.html?article=125823 Conclusion In conclusion, the Royal Bank of Canada (RBC) demonstrates a strong commitment to prudent financial management and capital structure optimization. Several key factors influence RBC's capital structure decisions, and the bank's financial ratios from 2020 to 2022 reflect its steadfast approach to capital allocation.

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30  Debt Ratio : RBC's debt ratio decreased slightly from 64.5% in 2021 to 63.1% in 2022. This signifies that approximately 63.1% of its total assets were financed through debt. RBC's debt ratio consistently remains significantly lower than the industry average of 211%, highlighting its conservative financing approach.  Debt-to-Equity Ratio : RBC's debt-to-equity ratio decreased from 42.5% in 2021 to 40.7% in 2022. For each dollar of equity, there was approximately $0.41 in debt. This ratio consistently remains well below industry averages, indicating RBC's preference for equity financing to mitigate financial risk.  Debt-to-Capital Ratio : RBC's debt-to-capital ratio decreased from 29.8% in 2021 to 28.9% in 2022, significantly lower than the 2020 ratio of 33.9%. This ratio remains below industry averages, highlighting RBC's commitment to a balanced capital structure with a substantial equity component.  Deposits : RBC's deposits increased from $1,100,831 million in the prior year to $1,208,814 million in the current year. This growth signifies RBC's ability to attract and retain customer deposits, which serve as a crucial source of short-term financing.  Retained Earnings : Retained earnings decreased from $78,037 million to $71,795 million over the same period. This decline may be attributed to factors such as changes in net income, dividend distributions, and other comprehensive income adjustments.  Equity Capital : RBC's total equity attributable to shareholders increased from $98,667 million to $108,064 million. This rise reflects the bank's efforts to strengthen its long- term capital base through the issuance of preferred shares, common shares, and prudent utilization of retained earnings. These financial ratios underscore RBC's conservative capital structure, prioritizing equity financing and minimizing debt reliance to mitigate financial risk. The bank's dedication to financial stability positions it well to absorb potential losses even in a dynamic financial landscape. Recent financial news from RBC, including the redemption of Series C-2 shares and the declaration of dividends, reflects the bank's commitment to optimizing its capital structure and efficiently managing its resources. The redemption of these shares, totaling 15,385 Series C-2 shares, along with the distribution of the final dividend, enhances RBC's financial flexibility and capital allocation strategy. In summary, RBC's capital structure remains conservative and aligns with its long-term financial stability goals. The bank's consistent efforts to balance equity and debt financing, coupled with strategic financial decisions, position RBC to navigate uncertainties in the financial markets effectively. This commitment to prudent financial management enhances shareholder value and strengthens the bank's position in the industry.

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31 References FIN74000 - Fall 2023 - Ross 9ce Ross (CDN),Corporate Finance, 9ce ( ) Instructor Anna Czegledi Ross (CDN),Corporate Finance, 9ce sectiorn FIN74000 - Fall 2023 - Section 1&2 Stacked RBC. (2023). Royal Bank of Canada to Redeem Non-Cumulative First Preferred Shares, Series C- 2. Retrieved from, https://www.rbc.com/newsroom/news/article.html?article=125823

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32 Ross, S. A., Westerfield, R., Jaffe, J. F., Roberts, G. S., & Driss, H. (2022). Corporate finance. Toronto: McGraw-Hill Ryerson Limited. Royal Bank of Canada. (2022). Royal Bank of Canada Annual Report 2022 . Retrieved from, https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf Royal Bank of Canada. (2023). Royal Bank of Canada (RY) financial ratios. Retrieved from, https://ca.investing.com/equities/royal-bank-of-canada-rbc-ratios

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Integrated Project - Part 2 Capital Structure with comments Revised v2-2 (1)

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