OPTIMAL CAPITAL STRUCTURE ANALYSIS A STUDY FROM INDONESIA TELECOMMUNICATION COMPANIES LISTED IN IDX FOR PERIOD FINAL PROJECT

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1 OPTIMAL CAPITAL STRUCTURE ANALYSIS A STUDY FROM INDONESIA TELECOMMUNICATION COMPANIES LISTED IN IDX FOR PERIOD FINAL PROJECT By Debby Nurhikmah Undergraduate Program School of Business and Management Institut Teknologi Bandung

2 VALIDATION PAGE OPTIMAL CAPITAL STRUCTURE ANALYSIS A STUDY FROM INDONESIA TELECOMMUNICATION COMPANIES LISTED IN IDX FOR PERIOD FINAL PROJECT By: Debby Nurhikmah ID No: Undergraduate Program School of Business and Management Institut Teknologi Bandung Supervisor (Ir. Drs. H. Arson Aliludin, SE, DEA)

3 OPTIMAL CAPITAL STRUCTURE ANALYSIS A STUDY FROM INDONESIA TELECOMMUNICATION COMPANIES LISTED IN IDX FOR PERIOD Debby Nurhikmah Date of Final Presentation: August 1st 2012 Date of Graduation: October 20th 2012 Undergraduate Program, Institut Teknologi Bandung, 2012 Final Project Advisor: Ir. Drs. H. Arson Aliludin, SE, DEA ABSTRACT Telecommunication is an important sector that support the economic growth in Indonesia. Growth from this sector and transportation sector is the highest compared to other sectors in first quartal of There are five telecommunication companies that are listed in Indonesia Stock Exchange; they are Bakrie Telecom, XL Axiata, Indosat, Inovisi Telecom, Telekomunikasi Indonesia, and Smartfren Telecom. Those companies have good performance in Indonesia capital market with high total value trading and the highest market capitalization in The economic growth in Indonesia gives telecommunication companies great opportunity to expand their business. To support their business activities, those companies need more capital. Therefore, determing the right proportion of capital is important in order to reach the optimal value of the firm. Author uses cost of capital approach to define the optimal capital structure for those telecommunication companies. This costs consist of cost of equity and cost of debt, and both costs are weighted to calculate the weighted average cost of capital. By using this approach, Author calculate the cost of capital for each level of debt and then find out debt ratio that result the minimal cost of capital. At this ratio, this company will have the highest value of the firm, and it is the best capital structure for the company. The calculation of cost of equity uses capital asset pricing model, while cost of debt calculation uses synthetic rating approach. From the data, every company has different actual capital structure every year and almost all telecommunication companies actual capital structure have not been optimal. Moreover, result optimal capital structure for every company every year in telecommunication sector are different. It is because every company has different action that result different earning before interest and tax (EBIT), and every year has different capital market condition. Average optimal capital structure for the companies in telecommunication sectors is 9%. Some companies can adapt their capital following this debt ratio and other companies can have this debt ratio for fund their new projects. To reach its optimal capital structure, companies can increase their debt amount or increase their equity. The choice of increasing debt amount is issuing new bonds and the choice of increasing equity is issuing new stocks outstanding or preferred stock. If the companies can not increase both debt and equity, they have to reduce their needed funds. Key word: Telecommunication Companies, Cost of Capital, Optimal Capital Structure iii

4 OPTIMAL CAPITAL STRUCTURE ANALYSIS A STUDY FROM INDONESIA TELECOMMUNICATION COMPANIES LISTED IN IDX FOR PERIOD Debby Nurhikmah Date of Final Presentation: August 1st 2012 Date of Graduation: October 20th 2012 Undergraduate Program, Institut Teknologi Bandung, 2012 Final Project Advisor: Ir. Drs. H. Arson Aliludin, SE, DEA ABSTRAKSI Telekomunikasi merupakan sektor penting yang mendukung pertumbuhan ekonomi di Indonesia. Pertumbuhan dari sektor ini dan sektor transportasi merupakan yang tertinggi dibandingkan sektor lain di quartal pertama Ada lima perusahaan telekomunikasi yang terdaftar di Bursa Efek Indonesia, mereka adalah Bakrie Telecom, XL Axiata, Indosat, Inovisi Telecom, Telekomunikasi Indonesia, dan Smartfren Telecom. Perusahaan tersebut memiliki kinerja yang baik di pasar modal Indonesia dengan total nilai perdagangan yang tinggi dan kapitalisasi pasar tertinggi di Pertumbuhan ekonomi di Indonesia memberikan perusahaan telekomunikasi kesempatan besar untuk memperluas bisnis mereka. Untuk mendukung kegiatan bisnis mereka, perusahaan tersebut memerlukan lebih banyak modal. Oleh karena itu, menentukan proporsi modal yang tepat penting untuk mencapai nilai perusahaan yang optimal. Penulis menggunakan pendekatan biaya modal untuk menentukan struktur modal yang optimal bagi perusahaan telekomunikasi. Biaya ini terdiri dari biaya ekuitas dan biaya hutang, dan kedua biaya tersebut ditimbang untuk menghitung biaya rata-rata modal tertimbang. Dengan menggunakan pendekatan ini, Penulis menghitung biaya modal untuk setiap tingkat hutang dan kemudian mengetahui rasio utang yang memberikan biaya modal terkecil. Pada rasio ini, perusahaan akan memiliki nilai tertinggi, dan ini merupakan struktur modal terbaik bagi perusahaan. Perhitungan biaya ekuitas menggunakan Capital Asset Pricing Model, sementara untuk biaya utang perhitungan menggunakan pendekatan sintetis rating. Dari data, setiap perusahaan memiliki kondisi struktur modal yang berbeda setiap tahun dan hampir seluruh kondisi struktur modal perusahaan telekomunikasi ini belum optimal. Selain itu, hasil struktur modal yang optimal bagi setiap perusahaan setiap tahun di sektor telekomunikasi juga berbeda. Hal ini karena setiap perusahaan memiliki tindakan yang berbeda, sehingga pendapatan sebelum bunga dan pajaknya juga, selain itu juga karena adanya perbedaan kondisi pasar modal setiap tahun. Rata-rata struktur modal yang optimal bagi perusahaan di sektor telekomunikasi adalah 9%. Beberapa perusahaan dapat mengadaptasi modal mereka mengikuti rasio hutang ini dan perusahaan lain dapat menggunakan rasio utang ini untuk mendanai proyek-proyek baru mereka. Untuk mencapai struktur modal yang optimal, perusahaan dapat meningkatkan jumlah utang mereka atau meningkatkan ekuitas mereka. Pilihan meningkatkan jumlah utang adalah mengeluarkan obligasi baru dan pilihan meningkatkan ekuitas adalah menerbitkan saham baru di pasaran atau saham preferen. Jika perusahaan tidak dapat meningkatkan hutang dan ekuitas, mereka harus mengurangi dana yang dibutuhkan. Kata Kunci: Perusahaan Telekomunikasi, Biaya Modal, Struktur Modal Optimal iv

5 FOREWORD My gratefulness to Allah SWT for His blessing and guidance so that I can finish this final project. Final project is completed in order to meet graduation requirement to obtain bachelor degree from undergradate program of School of Business and Management Institut Teknologi Bandung. I also express my gratefulness to my beloved mother and father, Dasmi and Eppy Salim, for pray, care, and happiness that support myself to always study. Besides, I would also say many thanks to: 1. My supervisor, Arson Aliludin, DEA, for his sharing knowledge, not only about finance but also about other lesson. His guidance and supports are also helpful so that I can finish it on time. 2. Anggoro Budi Nugroho, MBA, as my examiner. 3. My lecturers, tutors, and other SBM staffs, for the knowledge and helps during three years at SBM. 4. My siblings: Eka, Sari, Rana, and Randi who always motivate myself to become a better person. 5. My best colleagues : Fifi, Fina, Katherin, Falen, Gayatri, Sarah, Ayundha, Ayi, Cathy, Sania, Hedy, Nia, Linda, and others for the great learning experience and meaningful moment during three years at SBM. 6. Mirah, Lee Marvin, and Daniel who acknowledge myself from the questions I asked about this final project. 7. My course mate Nadhira and Tika for the happiness they share and for unforgettable new experiences. 8. My best friends at Unit Budaya Lampung ITB: Noura, Fira, Nia, Ridho, Kevin, Gilbran, and others who become my family in Bandung that always give helps when I need and also for the cultural learning program that I got. 9. My best friends: Salmani, Ami, Dhita, Opialeta, Dyah, Tya, Nia, Anggun, Venny, Nefa, Aming, Tiara, and Hani, who always give support and suggestion whenever I need. Bandung, July 2012 Debby Nurhikmah v

6 TABLE OF CONTENTS ABSTRACT... iii ABSTRAKSI... iv FOREWORD... v TABLE OF CONTENTS... vi LIST OF FIGURES... viii LIST OF TABLES... ix LIST OF APPENDICES... x CHAPTER I INTRODUCTION Background Problem Identification Objectives Problem Limitation Systematical Writing... 3 CHAPTER II THEORITICAL FOUNDATION Capital Structure Cost of Capital Approach Cost of Equity Cost of Debt Weighted Average Cost of Capital (WACC) Optimal Capital Structure and Cost of Capital CHAPTER III METHODOLOGY Problem Identification Theoritical Foundation Data Collection Data Analysis Conclusion and Suggestion CHAPTER IV DATA ANALYSIS Research Data Collection Key Assumption Actual Capital Structure Optimal Capital Structure Analysis Using Cost of Capital Approach Cost of Equity Calculation Cost of Debt Calculation Optimal Capital Structure Calculation vi

7 4.5 Actual and Optimal Capital Structure Factors that Influence Optimal Capital Structure Capital Market Condition Earning Before Interest and Tax Average Optimal Capital Structure for Telecommunication Companies CHAPTER V CONCLUSION Conclusion Recommendation REFERENCES APPENDICES vii

8 LIST OF FIGURES 2.1 Types of Capital Optimal Capital Structure Flow Chart of Research Methodology Value of the Firm EXCL Weighted Average Cost of Capital (WACC) EXCL viii

9 LIST OF TABLES 2.1 Bond Rating and Interest Coverage Ratio Indonesia Market Interest Rate Risk Free Rate and Market Return Actual Capital Structure Unlevered Beta Cost of Equity EXCL Cost of Debt EXCL Optimal Capital Structure EXCL Detail Optimal Capital Structure EXCL Actual and Optimal Capital Structure Optimal Capital Structure Indosat Optimal Capital Structure TLKM Optimal Capital Structure TLKM Optimal Capital Structure TLKM Optimal Capital Structure BTEL Optimal Capital Structure BTEL Average Optimal Debt Ratio Company Rating Actual Debt Ratio and Average Optimal Debt Ratio ix

10 LIST OF APPENDICES A. Cost of Equity Bakrie Telecom (BTEL) B. Cost of Debt BTEL C. Optimal Capital Structure BTEL D. Cost of Equity Indosat (ISAT) E. Cost of Debt ISAT F. Optimal Capital Structure ISAT G. Cost of Equity Telekomunikasi Indonesia (TLKM) H. Cost of Debt TLKM I. Optimal Capital Structure TLKM J. Cost of Equity BTEL K. Cost of Debt BTEL L. Optimal Capital Structure BTEL M. Cost of Equity XL Axiata (EXCL) N. Cost of Debt EXCL O. Optimal Capital Structure EXCL P. Cost of Equity ISAT Q. Cost of Debt ISAT R. Optimal Capital Structure ISAT S. Cost of Equity INVS T. Cost of Debt INVS U. Optimal Capital Structure INVS V. Cost of Equity TLKM W. Cost of Debt TLKM X. Optimal Capital Structure TLKM Y. Cost of Equity EXCL Z. Cost of Debt EXCL AA. Optimal Capital Structure EXCL AB. Cost of Equity ISAT AC. Cost of Debt ISAT AD. Optimal Capital Structure ISAT AE. Cost of Equity INVS AF. Cost of Debt INVS AG. Optimal Capital Structure INVS x

11 AH. Cost of Equity TLKM AI. Cost of Debt TLKM AJ. Optimal Capital Structure TLKM xi