Optimal Capital Structure

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

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

ii

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





CHAPTER IV CONCLUSION AND SUGGESTION

4.1 Conclusion ............................................................................................ 21

4.2 Suggestion ............................................................................................ 21

LITERATURE ...................................................................................................... 22

APPENDIX ......................................................................................................... 23

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

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

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).

4

=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 =

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

6

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

=

+

7

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 =


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%

8




Cost Of Capital

a. Cost of Long - Term Debt


=


8.109.640.548

118.993.117.324= 0,0682 = 6,82%


= (1 )


0,0682 1 0,35 = 0,0443 = 4,43%


=1

+


840.55

39.000+ 0,1869 = 0,2085 = 20,85%


661,11 + 1.020

2= 840,55

9


=

+


118.993.117.324

118.993.117.324 + 630.982.040.872= 0,1587

=

+


is

630.982.040.872

118.993.117.324 + 630.982.040.872= 0,8413

= +


0,1587 0,0443 + 0,8413 0,2085 = 0,1824 = 18,24%


Value of The Firm

= (1 )

=


258.884.895.383 (1 0,35)

0,1824= 922.561.304.800

Estimating Value

0 =


3.912

0,1824= 21.447.37

10

Debt Ratio

=


460.601.074.226

1.091.583.115.098= 0,4219 = 42,19%

11




Cost Of Capital



=


12.925.825.299

134.391.701.934= 0,0962 = 9,62%


= (1 )


0,0962 1 0,35 = 0,0625 = 6,25%


=1

+


900

50.000+ 0,1869 = 0,2049 = 20,49%

12


1.000 + 800

2= 900


=

+


134.391.701.934

134.391.701.934 + 760.541.257.156= 0,1502

=

+


is

760.541.257.156

134.391.701.934 + 760.541.257.156= 0,8498

= +


0,1502 0,0625 + 0,8498 0,2049 = 0,1835 = 18,35%


Value of The Firm

= (1 )

=


299.796.707.565 (1 0,35)

0,1835= 1.061.950.190.000

13

Estimating Value

0 =


440

0,1835= 2397,82

Debt Ratio

=


579.028.772.664

1.339.570.029.820= 0,4322 = 43,22%

14




Cost Of Capital



=


11.650.595.380

175.731.390.933= 0,0663 = 6,63%


= (1 )


0,0663 1 0,35 = 0,0431 = 4,31%


=1

+


550

6.650+ 0,1869 = 0,2696 = 26,96%


100 + 1.000

2= . 550

15


=

+


175.731.390.933

175.731.390.933 + 898.164.900.513= 0,1636

=

+


is

898.164.900.513

175.731.390.933 + 898.164.900.513= 0,8364

= +


0,1636 0,0431 + 0,8364 0,2696 = 0,2325 = 23,25%


Value of The Firm

= (1 )

=


342.972.150.032 (1 0,35)

0,2325= 958.846.871.100

16

Estimating Value

0 =


476

0,2325= 2047,31

Debt Ratio

=


624.499.013.875

1.522.663.914.388= 0,4101 = 41,01%

17




Cost Of Capital



=


15.002.417.990

214.032.439.472= 0,0701 = 7,01%


= (1 )


0,0701 1 0,35 = 0,0456 = 4,56%


=1

+


100

7.700+ 0,1869 = 0,1999 = 19,99%


18

100 + 100

2= . 100


=

+


214.032.439.472

214.032.439.472 + 1.035.650.413.675= 0,1713

=

+


is

1.035.650.413.675

214.032.439.472 + 1.035.650.413.675= 0,8287

= +


0,1713 0,0456 + 0,8287 0,1999 = 0,1735 = 17,35%


Value of The Firm

= (1 )

=


332.815.933.721 (1 0,35)

0,1735= 1.246.860.847.000

Estimating Value

0 =

19


239

0,1735= 1377,52

Debt Ratio

=


710.527.268.893

1.746.177.682.268= 0,4069 = 40,69%

20

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).

21

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

22

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

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