optimal capital structure
DESCRIPTION
Managerial FinanceTRANSCRIPT
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MODULE ASSIGNMENT REPORT FINANCIAL MANAGEMENT II PT Surya Toto Indonesia Tbk
Tia Nurul Afifah(022131012)
Shinta Hanifah R(022131072)
Ashfira Selina R(022131099)
Nora Muliandini(022131266)
FACULTY OF ECONOMY
TRISAKTI UNIVERSITY
JAKARTA
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i
Foreword
Assalamualaikum wr.wb. Thanksgiving to Allah, so we can complete the
preparation of the module assignment. In the preparation of the module
assignment, we get a lot of guidance and assistance from various parties.
Therefore, on this occasion not to forget that most of our conveying thanks to:
(1) Prof. Dr.Farah Margaretha, PhD, a lecturer of Managerial finance.
(2) Susy Muchtar, SE, MM, a lecturer of Managerial finance.
(3) Friends of excellent class 2013 that many have helped us.
(4) Family that many have helped us.
We hope that God will reward all the virtues of all those who have
helped. Hopefully this module assignment bring benefit for readers .
Jakarta, May 22, 2015
Writer
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Table of Contents
FOREWORD ...................................................................................................... i
CONTENTS ........................................................................................................ ii
CHAPTER I INTRODUCTION
1.1 Company Profile ................................................................................... 1
CHAPTER II THEORIES
2.1 The Cost of Capital ............................................................................... 2
2.2 Choosing the Optimal Capital Structure .............................................. 4
CHAPTER III CALCULATION
3.1 Calculation Cost of Capital in 2009 ...................................................... 5
3.2 Calculation Cost of Capital in 2010 ...................................................... 8
3.3 Calculation Cost of Capital in 2011 ...................................................... 11
3.4 Calculation Cost of Capital in 2012 ...................................................... 14
3.5 Calculation Cost of Capital in 2013 ...................................................... 17
CHAPTER IV CONCLUSION AND SUGGESTION
4.1 Conclusion ............................................................................................ 21
4.2 Suggestion ............................................................................................ 21
LITERATURE ...................................................................................................... 22
APPENDIX ......................................................................................................... 23
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1
Cost of capital is representing the firms cost of financing and is the minimum
rate of return that a project must earn to increase the value. The cost of capital is
extremely important for financial concept. It acts as a major link between the firms
long term investment decisions and the wealth of the firms owners as determined
by the market value as their shares.
1.1 Company Profile
Name :PT. Surya Toto Indonesia Tbk
Address : Tomang Raya Street No. 18 JatiPulo, Palmerah, West Jakarta,
Indoneia
TOTO Ltd. was founded in 1917 as a manufacturer of ceramic sanitary
wares and plumbing hardware. Before long, TOTO Ltd. grew to become
Japan's industrial leader in sanitary and plumbing related products. And now in
the 21st century, TOTO Ltd., with it's expanded corporate vision is poised to
move forward and provide products as well as services to improve the
cleanliness, comfort and convenience of residential and non-residential
spaces. TOTO Ltd. is also a company that is devoted to enhancing our lifestyle
while preserving the purity of our environment.
Chapter I Introduction
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2
2.1 The Cost of Capital
Cost of capital represents the firms cost of financing an is the minimum
rate of return that a project must earn to increase firm value. Cost of capital is
an extremely important financial concept because it acts as a major link
between the firms long term investment decisions and the wealth of the
firms owners as determined by the market value of their shares. Financial
managers are ethically bound to invest only in projects that they expect to
exceed the cost of capital. To capture all of the relevant financing costs,
assuming some desired mix of financing, we need to loot at the overall cost of
capital rather than just the cost of any single source of financing. There are
four basic sources of long term capital for firms, they are :
Long term debt
Preffered stock
Common stock
Retained earnings
A. Cost of Long Term Debt
Is the financing cost associated with new funds raised through long
term borrowing. Typically, the funds are raised through the sale of
corporate bonds.
a) Net Proceeds
Funds actually received by the firm from the sale of a security. The
total proceeds are reduced by the flotation costs (the total costs of
issuing and selling a security) which represent the total costs of
issuing and selling securities.
b) Before Tax Cost of Debt (rd)
= +
+
2
I = annual interest in dollars
Nd = net proceeds from the sale of debt (bond)
Chapter II Theories
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3
N = number of years to the bonds maturity
Simply the rate of return the firm must pay on new borrowing. A
firms before tax cost of debt for bonds can be found in anyof
three ways :quotation,calculation or approximation.
c) After Tax Cost of Debt
The interest payments paid to bond holders are tax deductible for
the firm, so the interest expense on debt reduces the firms
taxable income and therefore, the firms tax liability.
= (1 )
rd = Before tax cost of debt
B. Cost of Preffered Stock
It represents a special type of ownership interest in the firm. It gives
preffered stockholders the right to receive their stated dividends before
the firm can distribute any earnings to common stockholders.
=
The ratio of the preffered stock dividend to the firms net proceeds from
the sale of preffered stock.
C. Cost of Common Stock
The rate at which investors discount the expected dividends of the
firm to determine its share value.
0 =1
P0 : Value of Common Stock
D1 : Per-Share Dividend Expected at The End of Year 1
rs : Required Return of Common Stock
g : Constant Rate of Growth in Dividends
=1
+
Cost of New Issue of Common Stock
Is the cost of common stock, net of underpricing and associated
flotation costs. Normally, when new sahres are issued they are
underpriced (sold aa discount relative to the current market price, Po).
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=1
+
D. Weighted Average Cost of Capital (WACC)
Reflects the expected average future cost of capital over the long
run, found by weighting the cost of each specific typeof capital by its
proportion in the firms capital structure.
= + +
wi : Proportion of long term debt in capital structure
ws : Proportion of common stock equity in capital structure
wp : Proportion of preferred stock in capital structure
wi + wp + ws = 1.0
2.2 Choosing the Optimal Capital Structure
Value of The Firm
= (1 )
=
EBIT : Earnings before interest and taxes
WACC : Weighted average cost of capital
NOPAT : Net operating profit after taxes
Estimating Value
The value of the firm associated with alternative capital structures can
be estimated by using one of the standard valuation models.
0 =
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5
THE CALCULATION OF COST OF CAPITAL FROM 2009 TO 2013
PT Surya Toto Indonesia Tbk
Cost of Capital December 2009
(Expressed in Rupiah, Except Per Share Data)
Cost Of Capital
a. Cost of Long Term Debt
Before tax cost of debt
=
The before tax cost of debt for PT Surya Toto Indonesia Tbk in 2009 is
9.317.307.417
185.830.860.884= 0,0501 = 5,01%
After tax cost of debt
= (1 )
The after tax cost of debt for PT Surya Toto Indonesia Tbk in 2009 is
0,0501 1 0,35 = 0,0326 = 3,26%
b. Cost of Common Stock Equity
=1
+
The cost of common stock equity for PT Surya Toto Indonesia Tbk in 2009 is
708,19
8.500+ 0.1869 = 0,2702 = 27,02%
Chapter IIICalculation
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Dividend for PT. Surya Toto Indonesia Tbk in 2009 is
2010 = 2009 (1 + )
840,55 = 2009 (1 + 0,1869)1
2009 =840,55
(1 + 0,1869)1
2009 = 708,19
Finding Growth Rate for PT. Surya Toto Indonesia Tbk
Using Retention Rate X ROE
g = retention rate X ROE
= 1
2010 = 1 . 840,55
. 3.912
. 193.797.649.353
. 630.982.040.872 = 0,2411
2011 = 1 . 900
. 440
. 218.724.016.284
. 760.541.257.156 = 0,3001
2012 = 1 . 550
. 476
. 236.695.643.357
. 898.164.900.513 = 0,0401
2013 = 1 . 100
. 239
. 236.557.513.162
. 1.035.650.413.675 = 0,1328
So, the growth rate for PT. Surya Toto Indonesia Tbk Is
0,2411 + 0,1328
2= 0,1869 = 18,69%
Weighted Average Cost of Capital (WACC)
=
+
The proportion of long-term debt for PT Surya Toto Indonesia Tbk in 2009 is
185.830.860.884
185.830.860.884 + 528.673.291.519= 0,2601
=
+
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The proportion of common stock equity for PT Surya Toto Indonesia Tbk in 2009
is
528.673.291.519
185.830.860.884 + 528.673.291.519= 0,7399
= +
The weighted average cost of capital for PT Surya Toto Indonesia Tbk in 2009 is
0,2601 0,0326 + 0,7399 0,2702 = 0,2084 = 20,84%
Choosing the Optimal Capital Structure
Value of The Firm
= (1 )
=
The value of the firm for PT Surya Toto Indonesia Tbk in 2009 is
202.927.209.827 (1 0,35)
0,2084= 632.930.356.900
Estimating Value
0 =
The value of the firm for PT Surya Toto Indonesia Tbk in 2009 is
3.691
0,2084= 17.711,13
Debt Ratio
=
The debt ratio for PT Surya Toto Indonesia Tbk in 2009 is
482.219.117.502
1.010.892.409.021= 0,4770 = 47,70%
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PT Surya Toto Indonesia Tbk
Cost of Capital December 2010
(Expressed in Rupiah, Except Per Share Data)
Cost Of Capital
a. Cost of Long - Term Debt
Before tax cost of debt
=
The before tax cost of debt for PT Surya Toto Indonesia Tbk in 2010 is
8.109.640.548
118.993.117.324= 0,0682 = 6,82%
After tax cost of debt
= (1 )
The after tax cost of debt for PT Surya Toto Indonesia Tbk in 2010 is
0,0682 1 0,35 = 0,0443 = 4,43%
b. Cost of Common Stock Equity
=1
+
The cost of common stock equity for PT Surya Toto Indonesia Tbk in 2010 is
840.55
39.000+ 0,1869 = 0,2085 = 20,85%
Dividend for PT. Surya Toto Indonesia Tbk in 2010 is
661,11 + 1.020
2= 840,55
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Weighted Average Cost of Capital (WACC)
=
+
The proportion of long-term debt for PT Surya Toto Indonesia Tbk in 2010 is
118.993.117.324
118.993.117.324 + 630.982.040.872= 0,1587
=
+
The proportion of common stock equity for PT Surya Toto Indonesia Tbk in 2010
is
630.982.040.872
118.993.117.324 + 630.982.040.872= 0,8413
= +
The weighted average cost of capital for PT Surya Toto Indonesia Tbk in 2010 is
0,1587 0,0443 + 0,8413 0,2085 = 0,1824 = 18,24%
Choosing the Optimal Capital Structure
Value of The Firm
= (1 )
=
The value of the firm for PT Surya Toto Indonesia Tbk in 2010 is
258.884.895.383 (1 0,35)
0,1824= 922.561.304.800
Estimating Value
0 =
The value of the firm for PT Surya Toto Indonesia Tbk in 2010 is
3.912
0,1824= 21.447.37
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Debt Ratio
=
The debt ratio for PT Surya Toto Indonesia Tbk in 2010 is
460.601.074.226
1.091.583.115.098= 0,4219 = 42,19%
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PT Surya Toto Indonesia Tbk
Cost of Capital December 2011
(Expressed in Rupiah, Except Per Share Data)
Cost Of Capital
a. Cost of Long Term Debt
Before tax cost of debt
=
The before tax cost of debt for PT Surya Toto Indonesia Tbk in 2011 is
12.925.825.299
134.391.701.934= 0,0962 = 9,62%
After tax cost of debt
= (1 )
The after tax cost of debt for PT Surya Toto Indonesia Tbk in 2011 is
0,0962 1 0,35 = 0,0625 = 6,25%
b. Cost of Common Stock Equity
=1
+
The cost of common stock equity for PT Surya Toto Indonesia Tbk in 2011 is
900
50.000+ 0,1869 = 0,2049 = 20,49%
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Dividend for PT. Surya Toto Indonesia Tbk in 2011 is
1.000 + 800
2= 900
Weighted Average Cost of Capital (WACC)
=
+
The proportion of long-term debt for PT Surya Toto Indonesia Tbk in 2011 is
134.391.701.934
134.391.701.934 + 760.541.257.156= 0,1502
=
+
The proportion of common stock equity for PT Surya Toto Indonesia Tbk in 2011
is
760.541.257.156
134.391.701.934 + 760.541.257.156= 0,8498
= +
The weighted average cost of capital for PT Surya Toto Indonesia Tbk in 2011 is
0,1502 0,0625 + 0,8498 0,2049 = 0,1835 = 18,35%
Choosing the Optimal Capital Structure
Value of The Firm
= (1 )
=
The value of the firm for PT Surya Toto Indonesia Tbk in 2011 is
299.796.707.565 (1 0,35)
0,1835= 1.061.950.190.000
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Estimating Value
0 =
The value of the firm for PT Surya Toto Indonesia Tbk in 2011 is
440
0,1835= 2397,82
Debt Ratio
=
The debt ratio for PT Surya Toto Indonesia Tbk in 2011 is
579.028.772.664
1.339.570.029.820= 0,4322 = 43,22%
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PT Surya Toto Indonesia Tbk
Cost of Capital December 2012
(Expressed in Rupiah, Except Per Share Data)
Cost Of Capital
a. Cost of Long Term Debt
Before tax cost of debt
=
The before tax cost of debt for PT Surya Toto Indonesia Tbk in 2012 is
11.650.595.380
175.731.390.933= 0,0663 = 6,63%
After tax cost of debt
= (1 )
The after tax cost of debt for PT Surya Toto Indonesia Tbk in 2012 is
0,0663 1 0,35 = 0,0431 = 4,31%
b. Cost of Common Stock Equity
=1
+
The cost of common stock equity for PT Surya Toto Indonesia Tbk in 2012 is
550
6.650+ 0,1869 = 0,2696 = 26,96%
Dividend for PT. Surya Toto Indonesia Tbk in 2012 is
100 + 1.000
2= . 550
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Weighted Average Cost of Capital (WACC)
=
+
The proportion of long-term debt for PT Surya Toto Indonesia Tbk in 2012 is
175.731.390.933
175.731.390.933 + 898.164.900.513= 0,1636
=
+
The proportion of common stock equity for PT Surya Toto Indonesia Tbk in 2012
is
898.164.900.513
175.731.390.933 + 898.164.900.513= 0,8364
= +
The weighted average cost of capital for PT Surya Toto Indonesia Tbk in 2012 is
0,1636 0,0431 + 0,8364 0,2696 = 0,2325 = 23,25%
Choosing the Optimal Capital Structure
Value of The Firm
= (1 )
=
The value of the firm for PT Surya Toto Indonesia Tbk in 2012 is
342.972.150.032 (1 0,35)
0,2325= 958.846.871.100
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Estimating Value
0 =
The value of the firm for PT Surya Toto Indonesia Tbk in 2012 is
476
0,2325= 2047,31
Debt Ratio
=
The debt ratio for PT Surya Toto Indonesia Tbk in 2012 is
624.499.013.875
1.522.663.914.388= 0,4101 = 41,01%
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PT Surya Toto Indonesia Tbk
Cost of Capital December 2013
(Expressed in Rupiah, Except Per Share Data)
Cost Of Capital
a. Cost of Long Term Debt
Before tax cost of debt
=
The before tax cost of debt for PT Surya Toto Indonesia Tbk in 2013 is
15.002.417.990
214.032.439.472= 0,0701 = 7,01%
After tax cost of debt
= (1 )
The after tax cost of debt for PT Surya Toto Indonesia Tbk in 2013 is
0,0701 1 0,35 = 0,0456 = 4,56%
b. Cost of Common Stock Equity
=1
+
The cost of common stock equity for PT Surya Toto Indonesia Tbk in 2013 is
100
7.700+ 0,1869 = 0,1999 = 19,99%
Dividend for PT. Surya Toto Indonesia Tbk in 2013 is
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100 + 100
2= . 100
Weighted Average Cost of Capital (WACC)
=
+
The proportion of long-term debt for PT Surya Toto Indonesia Tbk in 2013 is
214.032.439.472
214.032.439.472 + 1.035.650.413.675= 0,1713
=
+
The proportion of common stock equity for PT Surya Toto Indonesia Tbk in 2013
is
1.035.650.413.675
214.032.439.472 + 1.035.650.413.675= 0,8287
= +
The weighted average cost of capital for PT Surya Toto Indonesia Tbk in 2013 is
0,1713 0,0456 + 0,8287 0,1999 = 0,1735 = 17,35%
Choosing the Optimal Capital Structure
Value of The Firm
= (1 )
=
The value of the firm for PT Surya Toto Indonesia Tbk in 2013 is
332.815.933.721 (1 0,35)
0,1735= 1.246.860.847.000
Estimating Value
0 =
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The value of the firm for PT Surya Toto Indonesia Tbk in 2013 is
239
0,1735= 1377,52
Debt Ratio
=
The debt ratio for PT Surya Toto Indonesia Tbk in 2013 is
710.527.268.893
1.746.177.682.268= 0,4069 = 40,69%
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Year Debt Ratio
ri Growth rs wi ws WACC Value
Description V P0
2009 47,70% 3,26% 18,69% 27,02% 0,2601 0,7399 20,84% Rp632.930.356.900 Rp17.711,13
2010 42,19% 4,43% 18,69% 20,85% 0,1587 0,8413 18,24% Rp922.561.304.800 Rp 21.447,37
2011 43,22% 6,25% 18,69% 20,49% 0,1502 0,8498 18,35% Rp 1.061.950.190.000 Rp2397,82
2012 41,01% 4,31% 18,69% 26,96% 0,1636 0,8364 23,25% Rp958.846.871.100 Rp2047,31
2013 40,69% 4,56% 18,69% 19,99% 0,1713 0,8287 17,35% Rp 1.246.860.847.000 Rp1377,52 *Optimal Capital Structure
The optimal capital structure for PT. Surya Toto Indonesia Tbk is in 2013 because it had lowest debt ratio (40,69%),
lowest Weighted Average Cost of Capital (17,35%), and highest Value of The Firm (Rp1.246.860.847.000).
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4.1 Conclusion
The optimal capital structure for PT. Surya Toto Indonesia Tbk is in
2013 because it had lowest debt ratio (40,69%), lowest Weighted Average
Cost of Capital (17,35%), and highest Value of The Firm
(Rp1.246.860.847.000).
If the next year debt ratio is higher than debt ratio of 2013, it means
they have so much debt, so they have to reduce it by either increase
profitable sales, reduce overhead, watch inventory, restructure debt, sell
assets and lease them back, bring in an investor.
But, if next year debt ratio is lower than debt ratio of 2013, the
company should increase their debt by doing debt/equity swap and/or
borrow money & buy shares.
4.2 Suggestion
The Optimal Capital Structure is at 40,69% Debt Ratio in 2013.
2014 =
=
796.096.371.054
2.027.288.693.678= 39,27%
Because the debt ratio in 2014 is lower than 2013, we suggest that
they should increase their debtby doing debt/equity swap and/or borrow
money & buy shares, so they will reach the optimal capital structure.
Chapter IV Conclusion and Suggestion
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Literature
Gitman, Lawrence J and Chad J. Zutter. 2013. Principles of Managerial Finance,
Thirteenth Edition. Pearson Education
http://finance.yahoo.com/q/hp?s=TOTO.JK+Historical+Prices
http://www.idx.co.id/idid/beranda/perusahaantercatat/laporankeuangandantah
unan.aspx