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FINAL EXAM

FINANCIAL MANAGEMENT

PT XL AXIATA Tbk.

BY :

MUHAMMAD RAMADHAN PAMUNGKAS


(29118168)
YOUNG PROFESIONAL 59 CLASS C

Lecturer: Mr. Mandra Lazuardi K

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CHAPTER I
FINANCING DECISION

Optimal Capital Structure


Optimal capital structure is a financial measurement that firms use to determine the best
mix of debt and equity financing to use for operations and expansions. This structure seeks to
lower the cost of capital so that a firm is less dependent on creditors and more able to finance its
core operations through equity. The optimal capital structure is estimated by calculating the mix
of debt and equity that minimizes the weighted average cost of capital (WACC) while
maximizing its market value. By the weighted average cost of equity and add up the results from
each security involved in the total capital of the company.
Thus, the chief goal of any corporate finance department should be to find the optimal
capital structure that will result in the lowest WACC and the maximum value of the film
(shareholder wealth). The value of the firm, V, can be define as
𝐸𝐵𝐼𝑇 𝑥 (1 − 𝑇)
𝑉=
𝑟𝑑
Where;
 EBIT= earnings before interest and taxes, the different leverage does not have an impact
on the company’s EBIT.
 T = tax rate
 Rd = weight average cost of capital
Since this leverage doesn’t have an effect on EBIT, the value of the firm, V can be
maximized by minimizing the weighted average cost of capital. The cost of debt and the cost of
equity indicate the required return on debt and on equity so that investors buy the company’s
stock.

The method that is used in order to determine the optimum of capital structure is Value of
assets assessment. The following data is the calculation result for value of assets, WACC, cost of
debt and cost of equity.

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Table 1. Current Capital Structure

Capital Structure Composition 2017 (in Million) Proportion


Long Term Debt 9.096.617 40,75%
Common Stock Equity 13.226.606 59,25%
Total Capital 22.323.223 100,00%

Number of share 10.687.960.623


Market price Rp 2.980
Interest Expense Paid
Rp 1.242.606
2017 (in Million)
Market Value 31.850.123

Table 2. Debt and Equity Variety Portion

Equity Debt
Long Debt Equity Cost of Debt (rd) Cost of Equity(rs)
Ratio Ratio
95% 5% Rp 1.116.161 Rp 21.207.062 8,69% 10,22%
85% 15% Rp 3.348.483 Rp 18.974.740 9,69% 10,46%
75% 25% Rp 5.580.806 Rp 16.742.417 10,69% 10,77%
65% 35% Rp 7.813.128 Rp 14.510.095 11,69% 11,17%
55% 45% Rp 10.045.450 Rp 12.277.773 12,69% 11,72%
45% 55% Rp 12.277.773 Rp 10.045.450 13,69% 12,51%
35% 65% Rp 14.510.095 Rp 7.813.128 14,69% 13,75%
25% 75% Rp 16.742.417 Rp 5.580.806 15,69% 15,99%
15% 85% Rp 18.974.740 Rp 3.348.483 16,69% 21,22%
5% 95% Rp 21.207.062 Rp 1.116.161 17,69% 47,35%

Equity Debt Shares of common


Total Capital Long Debt Equity
Ratio Ratio stock outstanding
95% 5% Rp 22.323.223 Rp 1.116.161 Rp 21.207.062 19.432.655.678,18
85% 15% Rp 22.323.223 Rp 3.348.483 Rp 18.974.740 16.517.757.326,45
75% 25% Rp 22.323.223 Rp 5.580.806 Rp 16.742.417 14.574.491.758,64
65% 35% Rp 22.323.223 Rp 7.813.128 Rp 14.510.095 12.631.226.190,82
55% 45% Rp 22.323.223 Rp 10.045.450 Rp 12.277.773 10.687.960.623,00
45% 55% Rp 22.323.223 Rp 12.277.773 Rp 10.045.450 8.744.695.055,18
35% 65% Rp 22.323.223 Rp 14.510.095 Rp 7.813.128 6.801.429.487,36
25% 75% Rp 22.323.223 Rp 16.742.417 Rp 5.580.806 4.858.163.919,55
15% 85% Rp 22.323.223 Rp 18.974.740 Rp 3.348.483 2.914.898.351,73

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5% 95% Rp 22.323.223 Rp 21.207.062 Rp 1.116.161 971.632.783,91

Table 3. Debt and Equity Value Variation

Debt 5% 15% 25% 35% 45%


Equity 95% 85% 75% 65% 55%
Book Value of Rp 1.116.161 Rp 3.348.483 Rp 5.580.806 Rp 7.813.128 Rp 10.045.450
Debt
Book Value of Rp21.207.062 Rp18.974.740 Rp16.742.417 Rp 14.510.095 Rp 12.277.773
Equity
Market Value of
1.116.161 3.348.483 5.580.806 7.813.128 10.045.450
Debt*
Market Value of
30.257.617 27.072.604 23.887.592 20.702.580 17.517.567
Equity
Pretax Cost of Debt 8,69% 9,69% 10,69% 11,69% 12,69%
After-tax Cost of
6,52% 7,27% 8,02% 8,77% 9,52%
Debt

Debt 55% 65% 75% 85% 95%


Equity 45% 35% 25% 15% 5%
Book Value of
Rp12.277.772,65 Rp14.510.094,95 Rp16.742.417,25 Rp 18.974.739,55 Rp21.207.061,85
Debt
Book Value of
Rp10.045.450,35 Rp 7.813.128,05 Rp 5.580.805,75 Rp 3.348.483,45 Rp1.116.161,15
Equity
Market Value of
12.277.773 14.510.095 16.742.417 18.974.740 21.207.062
Debt*
Market Value of
14.332.555 11.147.543 7.962.531 4.777.518 1.592.506
Equity
Pretax Cost of Debt 13,69% 14,69% 15,69% 16,69% 17,69%
After-tax Cost of
10,27% 11,02% 11,77% 12,52% 13,27%
Debt

Table 4. Cost of Equity Variation

Debt 5% 15% 25% 35% 45%


Equity 95% 85% 75% 65% 55%
Debt 0,04 0,11 0,19 0,27 0,36
Equity 0,96 0,89 0,81 0,73 0,64
Levered Beta 1,35 1,47 1,63 1,83 2,10
Risk-free Rate 7,50% 7,50% 7,50% 7,50% 7,50%
Market Premium 2% 2% 2% 2% 2%
Cost of Equity 10,22% 10,46% 10,77% 11,17% 11,72%

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Debt 55% 65% 75% 85% 95%
Equity 45% 35% 25% 15% 5%
Debt 0,46 0,57 0,68 0,80 0,93
Equity 0,54 0,43 0,32 0,20 0,07
Levered Beta 2,49 3,11 4,23 6,83 19,83
Risk-free Rate 7,50% 7,50% 7,50% 7,50% 7,50%
Market Premium 2% 2% 2% 2% 2%
Cost of Equity 12,51% 13,75% 15,99% 21,22% 47,35%

Table 5. WACC and FCF Variation

Change in
- Taxes + Net Free Cash
Debt Equity WACC EBIT EBIAT
(@25%) Depreciation Working Flow
Capital
10,03% -Rp Rp
0,05 0,95 Rp 221.238 -Rp 55.310 Rp 165.929 Rp6.757.453
10.933.553 17.856.935
9,98% -Rp Rp
0,15 0,85 Rp 221.238 -Rp 55.310 Rp 165.929 Rp6.757.453
10.933.553 17.856.935
10,08% Rp6.757.453 -Rp Rp
0,25 0,75 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935
10,33% Rp6.757.453 -Rp Rp
0,35 0,65 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935
10,73% Rp6.757.453 -Rp Rp
0,45 0,55 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935
11,28% Rp6.757.453 -Rp Rp
0,55 0,45 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935
11,97% Rp6.757.453 -Rp Rp
0,65 0,35 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935
12,82% Rp6.757.453 -Rp Rp
0,75 0,25 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935
13,82% Rp6.757.453 -Rp Rp
0,85 0,15 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935
14,97% Rp6.757.453 -Rp Rp
0,95 0,05 Rp 221.238 -Rp 55.310 Rp 165.929
10.933.553 17.856.935

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Table 6. Value of Asset Result

Debt 5% 15% 25% 35% 45% 55%


Equity 95% 85% 75% 65% 55% 45%
Value of Rp Rp Rp Rp Rp Rp
Asset 178.013.719,68 178.924.734,25 177.168.605,71 172.898.490,63 166.468.538,83 158.364.595,98

Debt 65% 75% 85% 95%


Equity 35% 25% 15% 5%
Value of Asset Rp 149.121.408,46 Rp 139.249.607,42 Rp 129.186.392,95 Rp 119.272.549,66

Value of Asset to % of Debt


200,000,000.00
180,000,000.00
160,000,000.00
140,000,000.00
120,000,000.00
100,000,000.00
80,000,000.00
60,000,000.00
40,000,000.00
20,000,000.00
-
0% 20% 40% 60% 80% 100% 120%

Figure 1. Value of Asset to % of Debt

WACC to % of Debt
16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
0% 20% 40% 60% 80% 100% 120%

Figure 2. WACC to % of Debt

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Based on the table above, the base ratio of debt and equity of PT XL Axiata Tbk based
on calculation from the earlier assignment (midterm exam) is 40.75%:59.25% and the cost of
debt is 12.69%. From the current interval debt ratio, the value of assets is 178.124.734,25 million
rupiahs. However compared to the reality, the optimal debt ratio is still below the current debt
ratio which is 15% debt of capital structure. The cost of debt and the cost of equity indicate the
required return on debt and on equity so that investors buy the company’s stock.

As the leverage increases, the cost of debt and the cost of equity are also increased,
respectively, suggesting that investors require a higher return to undertake a higher risk. But on
the other hand, the optimum debt ratio from the calculation is already fulfill in the reality yet PT
XL Axiata Tbk still occur loses in the last 5 years. The real debt ratio exceeds the optimum debt
ratio of PT XL Axiata Tbk. This company doesn’t need to change the debt ratio in order to
restructure the capital structure itself since the company has already has a lot of debt.

The calculation above is done to determine the interval of debt ratio scenarios that can
produce the most optimal company value. For this case, we assume that the company before a
cost of debt increase of 1% for every 10% increase in the proportion of debt. For example, if the
current cost of debt is 3.93% in the debt ratio interval of 41%, then, when the debt ratio interval
is 51%, the cost of debt is 4.93%, and so on. The value of interest expense increases parallel with
the increase in the proportion of the debt and the cost of debt.

Recommendation
Leverage is good for shareholders at this point because it is increasing the value of the
company’s assets. Furthermore, leverage is good for shareholders because of the potential of a
higher return on investment, although there is a greater risk involved. In this case, it is not just
leverage that influence the value of company’s assets. For this case, we assume that the
company’s before cost of debt will increase 1% for every 10% increase in the proportion using
10% interval of debt ratio scenario.

Based on the table above, cost of debt increases from 0% to 7.93% as the interval debt
ratio scenario increase 10% and the value of equity will decrease. As debt ratio of zero, the firm
is 100 % equity financed. As debt is substituted for equity and as the debt ratio increases, the

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WACC declines because the after-tax debt cost is less than equity cost. However, as the debt
ratio continue to increase, for example, the debt ratio is 80% while ratio of equity is only 20%, it
will affect the WACC. The increases debt and equity cost eventually cause the WACC to rise. It
happens because the higher debt that firm has, the higher risk that firm will get. The firm can’t
return their debt because their debt is too high and gets interest from the debt. The firm may only
get slight net income and can’t pay their debt. In other words, the bankruptcy costs, agency costs,
and other cost associated with higher debt levels eventually outweigh the additional tax benefits
that the firm could generate by borrowing even more. Below is the graphic of value of asset,
WACC, and earning per share using interval of debt ratio scenario.

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