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
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
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
ii
Chapter I Introduction
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 II Theories
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)
2
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 =
P0
D1
rs
g
: Value of Common Stock

: Per-Share Dividend Expected at The End of Year 1
: Required Return of Common Stock
: 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).
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 =
Chapter IIICalculation
THE CALCULATION OF COST OF CAPITAL FROM 2009 TO 2013
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
= 0,0501 = 5,01%
185.830.860.884
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
+ 0.1869 = 0,2702 = 27,02%
8.500
Dividend for PT. Surya Toto Indonesia Tbk in 2009 is

2010
= 2009 (1 + )
840,55 = 2009 (1 + 0,1869)1

840,55
(1 + 0,1869)1
2009
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
. 193.797.649.353
= 0,2411
. 3.912
. 630.982.040.872
2011 = 1
. 900
. 218.724.016.284
= 0,3001
. 440
. 760.541.257.156
2012 = 1
. 550
. 236.695.643.357
= 0,0401
. 476
. 898.164.900.513
2013 = 1
. 100
. 236.557.513.162
= 0,1328
. 239
. 1.035.650.413.675
So, the growth rate for PT. Surya Toto Indonesia Tbk Is
0,2411 + 0,1328
= 0,1869 = 18,69%
2
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
= 0,2601
185.830.860.884 + 528.673.291.519
=
The proportion of common stock equity for PT Surya Toto Indonesia Tbk in 2009
is
528.673.291.519
= 0,7399
185.830.860.884 + 528.673.291.519
= +
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)
= 632.930.356.900
0,2084
Estimating Value
0 =
3.691
= 17.711,13
0,2084
Debt Ratio
=
The debt ratio for PT Surya Toto Indonesia Tbk in 2009 is

482.219.117.502
= 0,4770 = 47,70%
1.010.892.409.021

Cost Of Capital
a. Cost of Long - Term Debt
=
8.109.640.548
= 0,0682 = 6,82%
118.993.117.324

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

=
1
+
840.55
+ 0,1869 = 0,2085 = 20,85%
39.000

661,11 + 1.020
= 840,55
2

=
118.993.117.324
= 0,1587
118.993.117.324 + 630.982.040.872
=
is
630.982.040.872
= 0,8413
118.993.117.324 + 630.982.040.872
= +
0,1587 0,0443 + 0,8413 0,2085 = 0,1824 = 18,24%

Value of The Firm
=
(1 )
=
258.884.895.383 (1 0,35)
= 922.561.304.800
0,1824
Estimating Value
0 =
3.912
= 21.447.37
0,1824
Debt Ratio
=

460.601.074.226
= 0,4219 = 42,19%
1.091.583.115.098
10

Cost Of Capital
=
12.925.825.299
= 0,0962 = 9,62%
134.391.701.934

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

=
1
+
900
+ 0,1869 = 0,2049 = 20,49%
50.000
11

1.000 + 800
= 900
2

=
134.391.701.934
= 0,1502
134.391.701.934 + 760.541.257.156
=
is
760.541.257.156
= 0,8498
134.391.701.934 + 760.541.257.156
= +
0,1502 0,0625 + 0,8498 0,2049 = 0,1835 = 18,35%

Value of The Firm
=
(1 )
=
299.796.707.565 (1 0,35)
= 1.061.950.190.000
0,1835
12
Estimating Value
0 =
440
= 2397,82
0,1835
Debt Ratio
=

579.028.772.664
= 0,4322 = 43,22%
1.339.570.029.820
13

Cost Of Capital
=
11.650.595.380
= 0,0663 = 6,63%
175.731.390.933

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

=
1
+
550
+ 0,1869 = 0,2696 = 26,96%
6.650

100 + 1.000
= . 550
2
14

=
175.731.390.933
= 0,1636
175.731.390.933 + 898.164.900.513
=
is
898.164.900.513
= 0,8364
175.731.390.933 + 898.164.900.513
= +
0,1636 0,0431 + 0,8364 0,2696 = 0,2325 = 23,25%

Value of The Firm
=
(1 )
=
342.972.150.032 (1 0,35)
= 958.846.871.100
0,2325
15
Estimating Value
0 =
476
= 2047,31
0,2325
Debt Ratio
=

624.499.013.875
= 0,4101 = 41,01%
1.522.663.914.388
16

Cost Of Capital
=
15.002.417.990
= 0,0701 = 7,01%
214.032.439.472

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

=
1
+
100
+ 0,1869 = 0,1999 = 19,99%
7.700
17
100 + 100
= . 100
2

=
214.032.439.472
= 0,1713
214.032.439.472 + 1.035.650.413.675
=
is
1.035.650.413.675
= 0,8287
214.032.439.472 + 1.035.650.413.675
= +
0,1713 0,0456 + 0,8287 0,1999 = 0,1735 = 17,35%

Value of The Firm
=
(1 )
=
332.815.933.721 (1 0,35)
= 1.246.860.847.000
0,1735
Estimating Value
0 =
18
239
= 1377,52
0,1735
Debt Ratio
=

710.527.268.893
= 0,4069 = 40,69%
1.746.177.682.268
19
ri
Growth
rs
wi
ws
WACC
2009
2010
2011
2012
Debt
Ratio
47,70%
42,19%
43,22%
41,01%
3,26%
4,43%
6,25%
4,31%
18,69%
18,69%
18,69%
18,69%
27,02%
20,85%
20,49%
26,96%
0,2601
0,1587
0,1502
0,1636
0,7399
0,8413
0,8498
0,8364
2013
40,69%
4,56%
18,69%
19,99% 0,1713
0,8287
Year
Value
20,84%
18,24%
18,35%
23,25%
V
Rp632.930.356.900
Rp922.561.304.800
Rp 1.061.950.190.000
Rp958.846.871.100
P0
Rp17.711,13
Rp 21.447,37
Rp2397,82
Rp2047,31
17,35%
Rp 1.246.860.847.000
Rp1377,52
Description
*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).
20
Chapter IV Conclusion and Suggestion

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
=
= 39,27%

2.027.288.693.678
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.
21
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
22

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MODULE ASSIGNMENT REPORT

Tia Nurul Afifah(022131012)

Jakarta, May 22, 2015

1.1 Company Profile

Long term debt

A. Cost of Long Term Debt

N = number of years to the bonds maturity

B. Cost of Preffered Stock

C. Cost of Common Stock

: Value of Common Stock

Cost of New Issue of Common Stock

D. Weighted Average Cost of Capital (WACC)

2.2 Choosing the Optimal Capital Structure

Cost of Capital December 2009

After tax cost of debt

b. Cost of Common Stock Equity

Dividend for PT. Surya Toto Indonesia Tbk in 2009 is

840,55 = 2009 (1 + 0,1869)1

Finding Growth Rate for PT. Surya Toto Indonesia Tbk

Weighted Average Cost of Capital (WACC)

Choosing the Optimal Capital Structure

The debt ratio for PT Surya Toto Indonesia Tbk in 2009 is

PT Surya Toto Indonesia Tbk

Cost of Capital December 2010

After tax cost of debt

b. Cost of Common Stock Equity

Dividend for PT. Surya Toto Indonesia Tbk in 2010 is

Weighted Average Cost of Capital (WACC)

Choosing the Optimal Capital Structure

The debt ratio for PT Surya Toto Indonesia Tbk in 2010 is

PT Surya Toto Indonesia Tbk

Cost of Capital December 2011

After tax cost of debt

b. Cost of Common Stock Equity

Dividend for PT. Surya Toto Indonesia Tbk in 2011 is

Weighted Average Cost of Capital (WACC)

Choosing the Optimal Capital Structure

The debt ratio for PT Surya Toto Indonesia Tbk in 2011 is

PT Surya Toto Indonesia Tbk

Cost of Capital December 2012

After tax cost of debt

b. Cost of Common Stock Equity

Dividend for PT. Surya Toto Indonesia Tbk in 2012 is

Weighted Average Cost of Capital (WACC)

Choosing the Optimal Capital Structure

The debt ratio for PT Surya Toto Indonesia Tbk in 2012 is

PT Surya Toto Indonesia Tbk

Cost of Capital December 2013

After tax cost of debt

b. Cost of Common Stock Equity

Dividend for PT. Surya Toto Indonesia Tbk in 2013 is

Weighted Average Cost of Capital (WACC)

Choosing the Optimal Capital Structure

The debt ratio for PT Surya Toto Indonesia Tbk in 2013 is

Chapter IV Conclusion and Suggestion

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