Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Optimal Capital Structure Analysis for Energy Companies
Listed in Indonesia Stock Exchange
Nadhila Qamarani*
The main goal of managerial finance is to maximize shareholders’ wealth which is highly affected
by decisions made by a firm, including long-term financial decisions. The company’s most basic
long-term financial decision is selecting the appropriate proportions of a firm’s mix of debt and
equity financing commonly known as capital structure. Debt and equity financing have their own
benefits and drawbacks. Therefore, it is highly important to attain the proportions of debt and
equity that maximizes the value of the corporation and therefore the value of shareholder wealth.
In Indonesia, energy sector is a critical aspect. Based on data from Badan Pusat Statistik (BPS),
the growth of Electricity, Gas, and Water sector in the first to third quarter of 2012 compared to the
same quarter of 2013 is increasing up to 5.80%. This sector also took part in giving positive
contribution towards economic growth in 2013. With its critical role, energy companies needs to
implement the optimal capital structure to increase value of the firm and have more opportunities
for development and expansion plan.
Hence, this study aims to analyze the optimal capital structure in energy companies concentrating
on three energy companies listed in Indonesia Stock Exchange (IDX) which are LAPD, PGAS and
RAJA. The period used as a sample is from 2009 to 2013. The method used in this study is the
Weighted Average Cost of Capital (WACC). To do so, some preliminary calculations are required
including cost of debt, cost of equity, debt to equity ratio, cost of capital and the value of the firm
using companies’ financial data and market data.
This research results in several conclusions. First, all companies in energy industry listed in IDX
have not reach the optimal capital structure. The average of optimal debt ratio for LAPD during
2009 to 2013 is 24.75%, RAJA’s average optimal debt ratio is 19.8% and PGAS is 24%. The
average of actual debt ratio for this industry is 37% while the optimal debt ratio for the industry is
22.71%. By closing this 14.29% gap, this industry will obtain the optimal capital structure that will
increase the average of firm value in energy industry by 23.31%.
Key Word: Optimal Capital Structure, Energy Companies, Cost of capital, Value of the
Firm, Indonesia.
1 . Introduction
The main goal of managerial finance is to maximize shareholders’ wealth. In order to
achieve the goal, some decisions need to be made, including long-term financial
decisions. The company’s most basic long-term financial decision is selecting the
appropriate proportions of a firm’s mix of debt and equity financing commonly known as
capital structure.
In Indonesia energy sector is also a critical aspect. Based on data from Badan Pusat
Statistik (BPS), the growth of Electricity, Gas, and Water sector in the first to third quarter
of 2012 compared to the same quarter of 2013 is increasing up to 5.80%. This sector also
took part in giving positive contribution towards economic growth in 2013.
____________________________________________________________________
* Nadhila Qamarani, School of Business and Management, Institut Teknologi Bandung Indonesia. Email:
nadhila.qr@gmail.com
1
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Optimal capital structure is a critical issue for every business especially in a competitive
and fast growing situation. However, there hasn’t been any further research regarding
capital structure optimization for companies in energy sector in Indonesia. Therefore the
writer is interested to find out and discover more about optimal capital structure for
companies in energy sector.
2 Literature Review
2.1
Capital Structures
Optimal capital structure is defined by Terry S. Maness (1998) as the mix of debt and
equity which maximizes the value of the corporation and therefore the value of
shareholders wealth. The optimal capital structure is achieved when the weighted average
cost of capital is minimized and eventually maximizing the company’s value.
2.2
Cost of Debt
The cost of debt is simply the cost of borrowing. Ross noted that “the cost of debt is the
return that the lenders require on the firm’s debt” (2008:485). A debt will inflict a fixed
obligation for a company not only to make regular payments but also to provide the
lenders with prior claims if the company is in financial trouble in the future. All of these
obligations are summed and determined as the cost of debt.
In this project, a synthetic rating system to calculate cost of debt will be used instead. A
rating system is a measurement of cost of debt based on the company’s financial ratio by
giving a rating based on the ratio. This method requires a circular process.
Interest Coverage Ratio
Earning before interest and Taxes
Interest Expense
The value of interest coverage ratio is important to determine the bond rating of a debt
ratio. Damodaran classifies the rating into table 2.1.
2
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Table 2.1 Interest Coverage Ratio and Bond Rating (Source: Damodaran 2006:96)
Interest Coverage Ratio
>12.50
9.50 – 12.50
7.50 – 9.50
6.00 – 7.50
4.50 – 6.00
4.00 – 4.50
3.50 – 4.00
3.00 – 3.50
2.50 – 3.00
2.00 – 2.50
1.50 – 2.00
1.25 – 1.50
0.08 – 1.25
0.50 – 0.80
<0.50
Rating
AAA
AA
A+
A
ABBB
BB+
BB
B+
B
BCCC
CC
C
D
Typical Default spread (%)
0.35
0.50
0.70
0.85
1.00
1.50
2.00
2.50
3.25
4.00
6.00
8.00
10.00
12.00
20.00
It is necessary to estimate the rating from Indonesian Market Interest Rate as illustrated in
table 2.2 to find out the interest rate of the company’s debt according to the rating
determined earlier and calculate the interest expense to find the interest coverage ratio
Table 2.2 Indonesian Market Interest Rate (Harry, 2007)
Rating
AAA
AA
A+
A
ABBB
BB+
BB
B+
B
BCCC
CC
C
D
Indonesian Market Interest Rate (%)
12.20
12.72
13.24
13.76
14.28
14.80
15.32
15.84
16.36
16.88
17.40
17.92
18.44
18.96
19.48
3
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
2.3
Cost of Equity
According to Gitman, “Capital asset pricing model (CAPM) describes the relationship
between the required return, rs, and the nondiversifiable risk of the firm as measured by
the beta coefficient, b.”(2012:366).
The CAPM method will be used instead to find out each company’s cost of equity (RE).
RE = Rf + (β x (Rm – Rf)
Where,
RE
= Cost of equity
Rf
= Risk free rate
β
= Beta coefficient
Rm = Market Return
The formula to find current beta is
βi
Where,
βi
= Current Beta
Covim Covariance between the security’s return and market’s return
σ²m = Variance of the market return
Afterwards, calculate unlevered beta based on the current beta using this function below
βunlevered =
(
)(
)
Where,
TC
= Corporate tax rate
Debt = Actual debt capital
Equity
= Actual Equity capital
The third step is calculating the levered beta
β
βunlevered [1 + (1 – TC)
]
Where,
= Debt Equity Ratio
3 The Methodology and Model
In the research, there are three companies in energy industry that is listed in Indonesia
stock exchange. The research will used data from 2009 to 2013 as the samples. The
capital structure analysis will use the cost of capital approach that considers cost of debt
and cost of equity. Then the weighted average cost of capital will be calculated which will
affect the value of the firm calculation. The optimal capital structure analysis will be done
by using scenario analysis. This method provides several possible scenarios in cost of
debt and equity calculation.
WACC is a straightforward method to calculate the firm’s overall cost of capital. The
equation for WACC is
4
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
WACC = WE x RE + WD x RD x (1-T)
Optimal capital structure is a condition where the company arrives at its maximum value
because the weighted average cost of capital has been minimized. It is clear that optimal
capital structure have a strong financial relationship with the value of the firm. The value of
the firm itself means the present value of expected future cash flows.
Gitman (2012) mentioned in other words that the present value of future cash flow is at its
highest when the discount rate (cost of capital) at its lowest and further explain the
equation to find the value of the firm using the simple valuation model below
Value of the firm (V) =
(
)
Where,
EBIT
= earnings before interest and taxes
By assuming that EBIT is constant, it is clear that the value of the firm is maximized by
minimizing the weighted average cost of capital. The value of the firm rises as the cost of
capital falls, and it goes downwards as the cost of capital rises. The optimal capital
structure is located at the optimum point where value of the firm is at its highest and the
cost of capital at its lowest
4. Findings
There are 14 samples used in this research from three energy companies in 5 years
(2009-2013). These companies are PT Leyand International Tbk. (LAPD), PT Perusahaan
Gas Negara Tbk. (PGAS), and PT Rukun Raharja Tbk. (RAJA). In 2013, LAPD has
negative EBIT, therefore this sample is excluded from the analysis. Below are the
background data which is the key assumption in the research.
Year
2009
2010
2011
2012
2013
Table 4.1 Risk Free Rate and Market Return
Risk Free Rate (%) Market Return (%) Tax Rate (%)
7.15
59.53
28
6.50
38.30
25
6.58
5.18
25
5.77
12.13
25
6.48
0.58
25
Source: Tabulated Data, Bank of Indonesia rate data and Indonesia Stock Exchange (IDX)
4.1 Actual Capital Structure Analysis
This part describes how the cost of debt and equity, debt ratio, and EBIT of each company
vary every year and affect the actual weighted average cost of capital and value of the
firm. The cost of capital are summed and weighed based on each proportion as implied by
debt ratio and equity ratio. Finally, the WACC is used to estimate the value of the firm.
5
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
In 2009, the average of actual WACC of this industry is 62.38% with the range from
32.80% to 97.94%. PGAS has the least WACC which signifies its ability to control its cost
of capital followed by LAPD and RAJA with the biggest WACC among the three. In this
period, the average debt proportion for this industry is 31% from the total capital.
In the following year, the average WACC for the industry decreases by 45.09% from
previous year to 17.29%. The three companies had its cost of equity lower due to the
decrease in market return compared to the previous year. The average of debt proportion
in this industry rises to 52% of the total capital.
In 2011, the average proportion of debt in this industry falls back to 39% of the total
capital. The gap between WACC of each company is not as big as the previous year. The
actual WACC ranged from 9.19% to 10.09% with the average of 8.72%. RAJA had the
highest WACC between the three companies. In this period, the average of the value of
the firm goes upward to IDR 27,973,942,620,000. In 2012, the actual WACC of the
industry are ranged from 6.97% to 13.82% with the average of 10.29%. The average ratio
of debt is 31%. The average value of the firm decreases from the previous year to IDR
26,932,078,907,000.
In 2013, the market shows the lowest return compared to previous four years. The risk will
get lower as the return decreases causing the cost of equity in 2013 to also be the lowest
compared to previous years. As expressed in table 4.2, the average debt proportion is
22% of the total capital. The actual WACC are ranged from 2.50% to 7.66%.
Table 4.2 Actual Capital Structure in Energy Companies
Year
Company
2009
LAPD
Actual
Debt
Ratio
(%)
D/E
(%)
Cost of
Equity
(%)
Cost of
Debt
(%)
WACC
(%)
EBIT
(in million IDR)
Value of The
Firm
(in million IDR)
PGAS
46
47
86
90
88.64
53.16
18.84
10.28
56.39
32.80
7,996
8,247,172
10,209
18,103,786
RAJA
2010
LAPD
PGAS
RAJA
2011
LAPD
PGAS
RAJA
2012
LAPD
PGAS
RAJA
2013
PGAS
RAJA
Industry Average
0
32
44
80
27
34
57
19
26
47
18
43
37
0
47
77
353
37
52
132
23
36
89
22
76
97.94
0.07
38.69
21.71
6.07
5.08
5.17
5.07
10.28
13.82
1.00
3.29
0
18.25
10.71
18.93
17.61
10.32
13.83
15.28
9.54
13.83
9.15
13.44
97.94
253
5.89
16,028
26.48
8,063,173
19.49
6,048
9.19
19,244
6.88
7,654,188
10.09
45,155
6.97
23,939
10.08 10,750,0922
13.82
108,297
2.50
11,754,274
7.66
112,290
21.87
186
204,068
22,839,130
23,270
157,128
83,429,191
335,507
257,619
79,951,026
587,590
353,209,848
1,099,457
40,014,858
6
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
4.2 Optimal Capital Structure Analysis
The actual condition of capital structure in energy companies has been elaborated and
analyzed in the previous part. This section will focus on the determining the optimal capital
structure for energy companies. Many aspects that influence the optimal capital structure
analysis such as debt ratio, cost of capital, and value of the firm. All of these factors will be
included in the optimal analysis. The author will elaborate the process of determining
optimal capital structure by taking PT Perusahaan Gas Negara Tbk. in 2009 as the
sample.
The first step is calculating cost of debt using scenario analysis. The first step to do in
calculating cost of debt (2009) is identifying the debt amount and its portion in the whole
capital which then indicated as debt ratio. The next step to be done is finding the interest
expense. This part requires trial and error process.
For example, PGAS for 5% debt ratio the author first assumes that based on Indonesian
Market Interest Rate in chapter 2, this debt rated as AAA. With this rating, the pre-tax cost
of debt is 12.20%. Then, the interest expense can be found by multiplying debt amount
with the pre-tax cost of debt. With the findings of interest expense, the author proceeds to
calculate the interest coverage ratio by dividing EBIT with interest expense. Finally we get
60.53 as interest coverage ratio, then the author check the bond rating from Damodaran,
with the same rating AAA as assumed earlier, the interest coverage ratio should be above
12.50, since 60.53 is above 12.50, so the rate AAA is appropriate for this debt ratio. Table
4.3 will illustrate the cost of debt calculation with scenario analysis
Table 4.3 Scenario Analysis of Cost of Debt for PT Perusahaan Gas Negara
Debt
Ratio
(%)
Debt
(in million
IDR)
Interest
Expense
(in million IDR)
Interest
Coverage
Ratio
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
1,116,855
2,233,711
3,350,566
4,467,422
5,584,277
6,701,133
7,817,988
8,934,844
10,051,699
11,168,555
12,285,410
13,402,266
14,519,122
15,635,977
16,752,833
136,256
272,512
408,769
545,025
710,320
852,384
1,035,101
1,229,434
1,435,382
1,594,869
1,754,356
1,983,535
2,224,329
2,476,738
2,653,648
∞
60.53
30.26
20.18
15.13
11.61
9.68
7.97
6.71
5.75
5.17
4.70
4.16
3.71
3.33
3.11
Bond
Rating
Pre-tax
cost of
debt (%)
Tax
Rate
(%)
AAA
AAA
AAA
AAA
AAA
AA
AA
A+
A
AAABBB
BB+
BB
BB
12.20
12.20
12.20
12.20
12.20
12.72
12.72
13.24
13.76
14.28
14.28
14.28
14.80
15.32
15.84
15.84
28
28
28
28
28
28
28
28
28
28
28
28
28
28
28
28
Aftertax
Cost of
debt
(%)
0
8.78
8.78
8.78
8.78
9.16
9.16
9.53
9.91
10.28
10.28
10.28
10.66
11.03
11.40
11.40
7
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
80
85
90
95
99
17,869,688
18,986,544
20,103,399
21,220,255
22,113,739
2,923,481
3,106,198
3,288,916
3,581,979
3,732,799
2.82
2.66
2.51
2.30
2.21
B+
B+
B+
B
B
16.36
16.36
16.36
16.88
16.88
28
28
28
28
28
11.78
11.78
11.78
12.15
12.15
PT Perusahaan Gas Negara tends to have low cost of debt due to its high amount of
EBIT. It gives the company a higher bond rating with rating B as the lowest rate that affect
the cost of debt to be low.
The next step is calculating cost of equity with scenario analysis as presented in table 4.4.
PGAS unlevered beta is 0.53 in 2009. Then the levered beta must be calculated for each
amount of debt ratio according to the various scenarios made. In 2009 the cost of equity of
PT Perusahaan Gas Negara tends to be high due to the high market return that reaches
59.53% in that period. High return comes along with high risk which explains the high cost
of equity PT Perusahaan Gas Negara had.
Table 4.4 Scenario Analysis of Cost of Equity for PT Perusahaan Gas Negara
Debt Ratio (%)
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
99
D/E
0.00
0.05
0.11
0.18
0.25
0.33
0.43
0.54
0.67
0.82
1.00
1.22
1.50
1.86
2.33
3.00
4.00
5.67
9.00
19.00
99.00
Levered Beta
0.53
0.55
0.57
0.60
0.63
0.66
0.70
0.74
0.79
0.85
0.92
1.00
1.11
1.24
1.43
1.68
2.06
2.70
3.98
7.81
38.46
Cost of Equity (%)
35.02
36.08
37.25
38.56
40.04
41.71
43.62
45.83
48.40
51.44
55.09
59.55
65.12
72.29
81.84
95.22
115.29
148.73
215.62
416.29
2021.65
The next step is calculating WACC and firm value to determine which debt ratio is the
optimal debt ratio with the lowest WACC and highest firm value. This stage focuses on
combining both cost of debt and cost of equity with scenarios of debt ratio from 0% to 99%
with the interval of 5%. The weighted average cost of capital can be found by multiplying
cost of debt with debt ratio, multiplying cost of equity with equity ratio, and adding both
results. The calculation will be provided in table 4.5.
8
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
The firm value can be found by dividing net operating profit after tax (NOPAT) with the
WACC. The EBIT for PT Perusahaan Gas Negara Tbk in 2009 is 8,247,172,354,167 while
the tax rate is 28%. Therefore the NOPAT is 5,937,964,095,000 and this amount is
assumed to be the same while the WACC varies according to the debt ratio.
In 2009, with its high EBIT, PGAS tends to have lower cost of debt and higher cost of
equity. From the scenarios made, it is found that the optimal debt ratio for PT Perusahaan
Gas Negara in 2009 is 90% which means that the optimal proportion for equity financing is
20% from total capital. With this ratio, the company achieves the lowest WACC and
highest value of the firm. This optimal capital structures results in 32.26% WACC with IDR
18,461,750,730,263 as its firm value.
Table 4.5 Optimal WACC and Value of the Firm of PT Perusahaan Gas Negara
Debt
Ratio (%)
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
99
Equity
Ratio
(%)
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
1
Cost of
Debt (%)
Cost of
Equity (%)
0.00
8.78
8.78
8.78
8.78
9.16
9.16
9.53
9.91
10.28
10.28
10.28
10.66
11.03
11.40
11.40
11.78
11.78
11.78
12.15
12.15
35.02
36.08
37.25
38.56
40.04
41.71
43.62
45.83
48.40
51.44
55.09
59.55
65.12
72.29
81.84
95.22
115.29
148.73
215.62
416.29
2021.65
WACC
(%)
35.02
34.71
34.40
34.10
33.79
33.57
33.28
33.12
33.00
32.92
32.68
32.45
32.44
32.47
32.54
32.36
32.48
32.32
32.16
32.36
32.25
Firm Value (in million
IDR)
16,955,558
17,106,243
17,259,631
17,415,794
17,574,809
17,687,304
17,841,299
17,926,796
17,992,681
18,038,513
18,167,441
18,298,226
18,303,286
18,287,238
18,250,193
18,350,274
18,281,310
18,371,087
18,461,750
18,349,390
18,413,123
4.3 Summary of Optimal Capital Structure Analysis
During 2009, the market grew actively which droves the market return in Jakarta Stock
Exchange to be very high. High return comes with greater risk which influenced the cost of
equity to be higher. This explains the reason why in 2009 the optimal capital structures
tend to be at higher debt ratio. By maximizing debt financing, companies can avoid the
high cost generated from equity financing.
9
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
In 2010, the market return decreased from the previous year but still considered to be
high. The downfall in return also lowers the risk and eventually lowers the cost of equity.
This condition gave the same effect
Year
Company
LAPD
PGAS
2009
RAJA
Average
LAPD
PGAS
2010
RAJA
Average
LAPD
PGAS
2011
RAJA
Average
LAPD
PGAS
2012
RAJA
Average
PGAS
2013 RAJA
Average
Average
Debt Ratio (%)
99
90
99
96
0
30
0
10
0
0
0
0
0
0
0
0
0
0
0
22.71
WACC (%)
55.46
32.16
84.88
57.50
2.18
26.40
10.76
13.11
6.52
5.47
5.87
5.95
5.45
9.33
10.59
8.46
1.79
4.44
3.89
18.66
Value of The Firm (in million IDR)
10,381
18,461,750
214
6,157,448
552,644
22,908,511
42,176
7,834,444
221,419
104,904,980
576,538
35,234,312,932
329,180
86,436,074
766,868
29,177,374
493,481,625
1,829,323
165,621,057
52,180,120
on PGAS optimal capital structure in 2010. The optimal debt ratio shifted to the lower debt
ratio which means that there are more portions given to equity financing. However, LAPD
and RAJA which has much lower beta than PGAS had their cost of equity drastically
decreased. This caused their optimal debt ratio to be 0% since their cost of debt is high
compared to PGAS. So it is more beneficial for them to utilize equity financing rather than
debt. From 2011 to 2013, the market return became much lower compared to 2009 and
2010. In this period, all three companies had 0% debt ratio as their optimal capital
structure. The market return during 2011 and 2013 is lower than the risk free rate, causing
market risk premium to be negative and lower the cost of equity. Summary of optimal
capital structure analysis for companies in energy industry will be provided in table 4.6.
Table 4.6 summary of optimal capital structure analysis
For companies in energy industry
After the optimal capital structure for each company in each year has been determined, it
is necessary to compare the actual capital structure with the optimal condition and see
whether the actual condition has reached the optimal point. There are three main things to
compare which are debt ratio, WACC, and value of the firm.
During 2009 to 2013, none of the companies made the optimal capital structure. In 2009,
the debt ratios from all three companies were below the optimal debt ratio. On the
10
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
contrary, during 2010 to 2013, all companies’ actual debt ratios were above the optimal
debt ratios.
The average of actual debt ratio for this industry is 37% while the optimal debt ratio for the
industry is 22.71%. By closing this 14.29% gap, this industry will obtain the optimal capital
structure that will increase the average of firm value in energy industry by 23.31% which is
up to IDR 52,180,120,762,000 from IDR 40,014,858,764,654. The WACC for companies
in energy industry will also be minimized by 3.21%. Nevertheless, the author especially
noted that this ratio may vary as time goes by. Moreover, with the volatility and economic
fluctuation happening in Indonesia, it is compulsory for all financial managers to carefully
reconsider factors in determining debt ratio for capital structure. Table below will
demonstrate the impact of implementing optimal capital structure in energy companies.
Table 4.7 Impact of Capital Structure Optimization in Energy industry in 2013
Year
Company
LAPD
PGAS
2009
RAJA
Average
LAPD
PGAS
2010
RAJA
Average
LAPD
PGAS
2011
RAJA
Average
LAPD
PGAS
2012
RAJA
Average
PGAS
2013 RAJA
Average
Industry
Average
(2009-2013)
Difference
in Decrease in Increase
Debt Ratio (%) WACC (%)
Value (%)
(53)
0.93
(43)
0.64
(99)
13.06
(65.00)
4.88
32
3.71
14
0.08
80
8.73
42.00
4.17
27
2.67
34
1.41
57
4.22
39.33
2.77
19
1.52
26
0.75
47
3.23
30.67
1.83
18
0.71
43
3.22
22
2.31
14.29
3.21
in
Firm
2
2
13
2
63
0
45
2
29
20
42
21
22
8
23
8
28
42
52
23
4 Conclusion
.Three companies in energy industry that are listed in Indonesia Stock Exchange compose
their capital structures in various proportions throughout 2009 to 2013. The actual debt
11
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
ratio in 2009 for LAPD, PGAS, and RAJA are 46%, 47%, and 0%. The actual debt ratio in
2010 for LAPD, PGAS, and RAJA are 32%, 44%, and 80%. In the following year, the
actual debt ratios are 27%, 34%, and 57%. During 2012 the actual debt ratios for LAPD,
PGAS and RAJA are 19%, 26%, and 47%. In 2013, actual debt ratio for PGAS and RAJA
are 18% and 43%, while LAPD in 2013 is excluded because of its negative EBIT. The
average of actual debt ratios for this industry are 31%, 52%, 39%, 31% and 22%
respectively. The average of actual debt ratio in five years is 37%. Which means that in
five years, companies in energy industry uses 37% of their capital from debt financing and
63% from equity financing.
Using the cost of capital approach with scenario analysis for cost of debt and equity, the
optimal capital structures for energy industry were determined. With the volatility and
fluctuation in Indonesia’s economic condition, the optimal capital structures in 2009 and
2010 are significantly different compared to 2011 to 2013. The average of optimal debt
ratio of companies in energy industry for five years is 22.71%. In 2013 only PGAS and
RAJA were analyzed because LAPD’s earnings before interest and tax (EBIT) was
negative. In 2009, the optimal debt ratio for LAPD, PGAS, and RAJA are 99%, 90%, and
99%. In the following year the optimal debt ratio are 0%, 30%, and 0% respectively. From
2011 to 2013, the optimal debt ratios for all companies are the same which is 0%. The 0%
optimal debt ratio for the last three years is mainly because the market return that turned
drastically low compared to the first two years that lowers the cost of equity. In the
meantime, the cost of debt is still high, especially for companies with low EBIT. This
attracts companies to increase the portion of equity financing instead of debt financing.
From 2009 to 2013, no companies in energy industry had achieved the optimal capital
structure. The average of actual debt ratio for this industry is 37% while the optimal debt
ratio for the industry is 22.71%. By closing this 14.29% gap, this industry will obtain the
optimal capital structure that will increase the average of firm value in energy industry by
23% which is up to IDR 52,180,120,762,000 from IDR 40,014,858,764,654. The WACC for
companies in energy industry will also be minimized by 3.21%.
References
Badan Pusat Statistik, 2014, Statistic Indonesia, accessed June 10th 2014,
< http://www.bps.go.id/eng/menutab.php?tab=1>
Bank of Indonesia, 2014, Data BI Rate – Bank Sentral Indonesia, accessed June 28th
2014, < http://www.bi.go.id/en/moneter/bi-rate/data/Default.aspx>.
Damodaran, A 2001, Corporate Finance: Theory and Practice, (2nd ed.), Wiley, New York.
Gitman, Lawrence J., 2009, Principles of Managerial Finance (12th ed.), New York: John
Wiley & Sons, Inc.
Harry Nurhadi, 2007, Optimal Capital Structure Analysis Using Adjusted Present Value
(APV) Approach A Study of PLN Year 2004-2006.
Indonesia Stock Exchange, 2014, Laporan Keuangan dan Tahunan, accessed June 12th
2014, <http://www.idx.co.id>.
12
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Maness, Terry S 1988, Introduction to Corporate Finance, McGraw-Hill, Singapore
Ross, Stephen A., 2008, Corporate Finance Fundamentals (8th ed.), New York: McGraw
Hill.
PT Leyand International Tbk. 2014, 2010-2013 Audited Annual Financial Report,
Indonesia Stock Exchange, Indonesia
PT Perusahaan Gas Negara Tbk. 2014, 2009-2013 Audited Annual Financial Report,
Indonesia Stock Exchange, Indonesia
PT Rukun Raharja Tbk. 2014, 2009-2013 Audited Annual Financial Report, Indonesia
Stock Exchange, Indonesia
Yahoo! Finance, 2014, Business Finance, Stock Market, Quotes, News, accessed June 1 st
2014, < https://finance.yahoo.com>
Appendices
Current Beta
LAPD
PGAS
RAJA
2009
1.556
0.878
1.733
2010
-0.184
1.014
0.488
2011
0.056
1.103
1.002
2012
-0.110
0.709
1.265
2013
0.186
0.929
0.542
Unlevered Beta
Year
2009
2010
2011
2012
2013
Company
LAPD
PGAS
RAJA
LAPD
PGAS
RAJA
LAPD
PGAS
RAJA
LAPD
PGAS
RAJA
LAPD
PGAS
RAJA
Current
Beta
1.556
0.878
1.733
-0.184
1.014
0.488
0.056
1.103
1.002
-0.110
0.709
1.265
0.186
0.929
0.542
Tax Rate (%)
D/E (%)
28
28
28
25
25
25
25
25
25
25
25
25
25
25
25
85.9
90.4
00.0
47.1
77.5
352.8
37.0
52.4
131.7
22.8
35.7
89.2
5.4
22.4
75.7
Unlevered
Beta
0.961
0.532
1.733
(0.136)
0.641
0.134
0.044
0.791
0.504
(0.094)
0.559
0.758
0.179
0.796
0.346
13
Proceedings of 7th Asia-Pacific Business Research Conference
25 - 26 August 2014, Bayview Hotel, Singapore ISBN: 978-1-922069-58-0
Financial Data of PT Leyand International Tbk. (LAPD)
Long Term Debt
(in million IDR)
Equity
(in million IDR)
Total Capital
(in million IDR)
Debt Ratio (%)
Equity Ratio (%)
Debt Equity Ratio (%)
EBIT
(in million IDR)
2009
2010
2011
2012
2013
349,951
325,180
257,145
162,618
38,280
407,511
690,789
695,809
712,105 707,860
757,463
1,015,970
952,954
874,723 746,141
46
54
85.9
32
68
47.1
27
73
37
19
81
22.8
5
95
5.4
7,996
16,028
19,244
23,939
(3)
Financial Data of PT Perusahaan Gas Negara Tbk. (PGAS)
2009
Long
Term
Debt
(in million IDR)
Equity
(in million IDR)
Total Capital
(in
million
IDR)
Debt Ratio (%)
Equity
Ratio
(%)
Debt
Equity
Ratio (%)
EBIT
(in million IDR)
2010
2011
2012
2013
10,605,030 10,742,889
9,013,375
7,863,872
6,393,611
11,732,080 13,868,573
17,184,711
22,044,809
28,492,658
22,337,110 24,611,462
26,198,087
29,908,682
34,886,270
47
44
34
26
18
53
56
66
74
82
90.4
77.5
52.4
35.7
22.4
8,247,172
8,063,173
7,654,188
10,750,092
11,754,274
Financial Data of PT Rukun Raharja Tbk. (RAJA)
2009
Long Term Debt
(in million IDR)
Equity
(in million IDR)
Total Capital
(in million IDR)
Debt Ratio (%)
Equity Ratio (%)
Debt Equity Ratio (%)
EBIT
(in million IDR)
2010
2011
2012
2013
0
272,820
241,105
498,470
439,399
69,348
77,331
183,008
558,761
580,516
69,348
350,151
424,114
1,057,232
1,019,915
0
78
57
47
43
100
22
43
53
57
0
352.8
131.7
89.2
75.7
253
6,048
45,155
108,297
112,290
14