Strategic Financing Decision of PT.S2P for Project Extension Cilacap CFSPP Unit 3 Extension (1x600MW) 2307 kcal/kWh at the year of 2012
By Yasmin Trianti Pratiwi 19007042
Undergraduate Program School of Business and Management Institut Teknologi Bandung i
ABSTRACT In order to meet the electricity demand in Indonesia and increasing the growth of the Company, PT.Sumber Segara Primadaya, a private company, which in this report called as the Company, wants to identify the best financing decision, mostly for debt and equity proportion, for the Cilacap CFSPP Unit 3 Project Extension (1x600MW) at the super critical point of 2307 kcal/kWh at the year of 2012.
Based on the feasibility study, the Company requires preparing some amount of fund, which the source can be from the debt or the equity. However, the debt and equity proportion is very important for the return that the Company will gain, because it is related to the cost of the financing; Weighted Average Cost of Capital (WACC). With the WACC method, the Company will determine the best financing proportion based on the lowest WACC. Furthermore, the result of the WACC approach will be compared with the financial projection of the Company when the project will start. Instead of using one method, the Company will also use the EPS (Earnings Per Share) approach as the comparing method. EPS method is a way to determined the best financing decision for the Company with considering the greatest Earnings Per Share in every debt-equity proportion level.
The strategic financing decision result of for this new project based on the WACC method is 50,60% of debt and 49,40% of equity. At this level, the value of the Company also reach the highest point, USD 497.408.734. Based on the EPS method, the optimum debt level is 0% with the equity of 100%. The different result from both method can be occured because of the EPS does not considering the cost of each financing decision.
Overall, the WACC method will be the preference because the EPS method is not include the every financing cost of both equity and debt on its consideration. Furthermore, it has to be considered that by considering the cost of financing, the future EPS will increase because the lower financing cost that the Company pay, the greater income that they will gain.
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ABSTRAKSI
Demi mencukupi permintaan akan kebutuhan listrik di Indonesia serta membawa perusahaan untuk lebih berkembang, PT.Sumber Segara Primadaya, sebuah perusahaan privat yang selanjutnya di dalam riset ini disebut “the Company”, ingin mengidentifikasi keputusan yang terbaik dalam mendanai sebuah proyek baru, yakni Cilacap CFSPP Unit 3 Project Extension (1x600 MW) di titik super kritis 2307 kcal/kWh pada akhir tahun 2012, terutama untuk menentukan proporsi hutang dan modal. Berdasarkan studi kelayakan, PT.S2P diharuskan untuk mempersiapkan sejumlah dana, yang dapat berbentuk baik modal maupun hutang. Bagaimanapun juga, proporsi dari modal dan hutang ini sangatlah penting dalam menentukan pengembalian untuk perusahaan, terutama karena berkaitan dengan biaya-biaya yang muncul akibat pendanaan yang biasa disebut “Weighted Average Cost of Capital (WACC)”. Lebih lanjut, dengan pendekatan menggunakan metode WACC, perusahaan dapat menentukan proporsi hutang dan modal yang terbaik berdasarkan jumlah WACC yang terkecil. Selanjutnya, hasil dari pendekatan WACC akan dibandingkan dengan proyeksi keuangan dari perusahaan saat proyek akan berlangsung. Selain menggunakan satu metode, perusahaan juga akan menggunakan metode “EPS (Earnings Per Share) sebagai metode pembanding. Metode EPS adalah cara untuk menentukan proporsi pendanaan yang optimum dengan melihat EPS yang paling besar di setiap level proporsi pendanaan. Dari riset ini, didapat strategi pendanaan yang dihasilkan dari metode WACC yakni 50,60% hutang dan 49,40% modal. Pada level ini, nilai perusahaan juga mencapai titik tertinggi yakni 497.408.734 Dollar Amerika. Sedangkan, berdasarkan metode EPS, tingkat tingkat hutang yang maksimum adalah 0% dengan 100% modal. Perbedaan hasil dari kedua metode tersebut dapat terjadi karena metode EPS tidak mengkaitkan biayabiaya yang timbul dari setiap keputusan pendanaan. Sejauh ini, metode WACC adalah metode yang lebih layak dipilih dikarenakan metode EPS tidak mengkaitkan biaya pendanaan baik hutang maupun modal. Lebih jauh lagi, harus diingat bahwa dengan menimbang biaya pendanaan yang akan muncul, nilai dari EPS pada kemudian hari akan bertambah karena dengan biaya pendanaan yang lebih rendah akan menghasilkan pemasukan yang lebih tinggi bagi perusahaan.
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FOREWORD
I can’t get enough to say Thank You for your Gratefulness, Allah SWT; My Lord, My Savior, the One who will always besides me whenever I need, and surely the One who give me strength and bless to finish my Bachelor Degree from School of Business and Management Institut Teknologi Bandung. This is the best school ever, and once again, thankyou for both life and academic experiences that this school and Allah SWT gave me. Allow me to present My second gratefulness to My parents, Ir.Achmad Ilham Rasyid and Dr.Sri Redjeki, my sister Monita Rachmawati who will always encourage me, my brother and sister-in-law; Rendy Wahyu and Monic Nisa, also my little angel Raissa Lareina Anata Virya. Instead, I also would like to send many thanks to: 1. Prof.Dr.Sudarso Kaderi Wiryono as my Lecturer Guide for this final research. Thankyou for all of your kindness, direction, and patience. Allah SWT bless you. 2. Adityo Wicaksono, someone who will always support yet critisize me for being a better person each day, you mean a lot, no idea. 3. Ines Puti, Mevira Munindra, Zahra Aldila, Nidia Olanda, Evita Nirmala, Rinindi Filanda, Yaya Wulandari, Dorojatun Prakoso, Rizky Alfa, Emyr Giovani, Ikrom Ibadillah, you guys will always be my syalmon. Forever ours. 4. Eyang Ci and Eyang Gi, my parents in Bandung for always become my Guardians, thankyou for the patience to wait for me every night. 5. Bapak Subiakto as my Final Presentation Examiner, thankyou for all your help. 6. Colleagues at PT.S2P I also hope that this final research can give the benefits for every person who read this and also for the Company. PT.Sumber Segara Primadaya (PT.S2P).
Bandung, 23 July 2010 Author,
Yasmin Trianti Pratiwi 19007042
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LIST OF CONTENTS ABSTRACT
ii
ABSTRAKSI
iii
FOREWORD
iv
LIST OF CONTENTS
v
LIST OF FIGURE
vii
LIST OF TABLE
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LIST OF APPENDIXES
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CHAPTER 1 INTRODUCTION
1
1.1
Background
1
1.2
Problem Identification
2
1.3
Research Objective
2
1.4
Scope and Limitation
3
1.5
The Importance of Problem Solving
3
1.6
Writing Systemathic
3
CHAPTER II THEORITICAL FOUNDATIONS
5
2.1
Capital Structure Decisions
5
2.2
Earnings Per Share Approach
5
2.3
Weighted Average Cost of Capital Approach
6
2.3.1
Cost of Equity (r s )
2.3.1.1 2.3.2 2.4
Unlevered and Levered Beta
Cost of Debt
Capital Structure and the Cost of Equity Capital
6 7 9 11
2.4.1 Optimal Capital Structure
12
CHAPTER III METHODOLOGY
14
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3.1
Problem Identification
15
3.2
Theoritical Foundation
15
3.3
Data Gathering
15
3.4
Data Analysis
16
3.5
Conclusion and Suggestion
16
CHAPTER VI DATA ANALYSIS
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4.1
Company Profile
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4.1.1 Company History
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4.1.2 Ownership Structure
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4.1.3 Business Sector
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4.1.4 Business Issue
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4.2
Research Object Data
4.2.1 Financial Report Overview 4.3
Data Analysis and Interpretation
4.3.1 Cost of Capital Approach
20 20 20
4.3.1.1
Key Assumption
20
4.3.1.2
Cost of Equity
21
4.3.1.3
Cost of Debt
23
4.3.1.4
Weighted Average Cost of Capital and the Comparison with the Financial Condition
4.3.2 Earnings Per Share Approach 4.4
20
Summary of the Data Calculation
CHAPTER V CONCLUSION AND RECOMMENDATION
25 28 36 38
5.1
Conclusion
38
5.2
Recommendation
38
REFERENCE
40
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LIST OF FIGURE
Figure 3.1 Process Chart of Research Methodology
14
Figure 4.1 Ownership Structure of PT.S2P
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Figure 4.2 PT.S2P WACC Plotting
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Figure 4.3 PT.S2P Cost Functions and Value
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Figure 4.4 PT.S2P Expected EPS Plotting
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Figure 4.5 Coefficient of Variation of EPS
35
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LIST OF TABLE
Table 2.1 Interest Coverage Ratios and Ratings (Source : Damodaran, 2006)
10
Table 2.2 Indonesian Market Interest Rate (Source : Harry, 2007)
10
Table 4.1 Share Capital Amount of the PT.S2P Ownership Structure
18
Table 4.2 Benchmarking Beta from the Similar Industry Company
21
Table 4.3 PT.S2P Cost of Equity
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Table 4.4 PT.S2P Cost of Debt
24
Table 4.5 PT.S2P Cost of Capital
25
Table 4.6 PT.S2P Financial Projection (Balance Sheet)
27
Table 4.7 Sales and Associated EBIT Calculations for PT.S2P
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Table 4.8 Capital Structure Associated with Alternative Debt Ratios for PT.S2P
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Table 4.9 Level of Debt, Interest Rate, and Dollar Amount of Annual Interest Associated with PT.S2P Alternative Capital Structures 30 Table 4.10 Calculation of EPS for Selected Debt Ratios($000) for PT.S2P 31 Table 4.11 Expected EPS, Standard Deviation, and Coefficient of Variation for Alternative Capital Structures for PT.S2P
34
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LIST OF APPENDIXES
APPENDIX A FINANCIAL STATEMENT OF PT.S2P (2009)
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APPENDIX B ADVANCE CAPITAL OF PT.S2P
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APPENDIX C ASSUMPTTIONS AND SIMULATIONS OF CILACAP EXTENSION CFSPP (1X600 MW)
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APPENDIX D Country Default Spread and Risk Premiums January
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2010 by Prof.Aswath Damodaran
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