Final thesis
Academy of finance
ENGAGEMENT
I would like to engage that I made this thesis by myself. The figures and
information in the thesis are all honest.
The author
Tran Thi Minh Nguyet
Tran Thi Minh Nguyet
i
CQ50/11.18
Final thesis
Academy of finance
TABLE OF CONTEND
ENGAGEMENT ............................................................................................. i
LIST OF ABBREVIATED WORDS ............................................................ v
PREFACE ...................................................................................................... 1
CHAPTER 1: OVERVIEW OF CAPITAL STRUCTURE AND TARGET
CAPITAL STRUCTURE ............................................................................... 3
1.1. Capital structure ...................................................................................... 3
1.1.1. Definition ............................................................................................. 3
1.1.2 The theories of capital structure ............................................................. 4
1.1.2.1. Modigliani and Miller approach......................................................... 4
1.1.2.2. Capital Structure theory – Traditional approach................................. 5
CHAPTER 2: SITUATION OF CAPITAL STRUCTURE OF COMPANY
THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT
STOCK COMPANY .................................................................................... 19
2.1 Overview of company Thang Long mechanical four and construction joint
stock company.............................................................................................. 19
2.1.1 The basic information about company Thang Long mechanical four and
construction joint stock company ................................................................. 19
2.1.1.1. The basic information. ..................................................................... 19
2.1.1.2. The organization chart of
Thang Long mechanical four and
construction joint stock company. ................................................................ 20
2.1.1.3. The system of accounting of the company. ...................................... 21
PICTURE 2.2: SYSTEM OF ACCOUNTING OF THE COMPANY .......... 21
2.1.2 The business characteristics of company Thang Long mechanical four
and construction joint stock company. .......................................................... 22
2.1.2.1. Material and technical facilities. ...................................................... 22
2.1.2.2. Situation of material supply. ........................................................... 23
Tran Thi Minh Nguyet
ii
CQ50/11.18
Final thesis
Academy of finance
2.1.2.3. The capability of skilled workmanship of Thang Long mechanical
four and construction joint stock company. .................................................. 24
2.1.2.4. Output market and the ability to compete of the company. .............. 24
2.1.3 Overview of financial situation and performance of company Thang
Long mechanical four and construction joint stock company . ..................... 25
2.2 Situation of capital structure of
Thang Long mechanical four and
construction joint stock company . ............................................................... 27
2.2.1. Situations of capital structure.............................................................. 27
2.2.1.2. The situation of financial leverage ............................................... 35
2.2.2. Evaluating the effect of capital structure to the firm ........................... 36
2.2.2.1. The effect of financial leverage to ROE. ......................................... 36
2.3 Assessment of the company’s capital structure decisions ....................... 42
2.3.1 The achievements ................................................................................ 42
2.3.2 The shortcomings and reasons ............................................................. 43
2.3.2.1. The shortcomings. ........................................................................... 43
2.3.2.2. The reasons...................................................................................... 44
CHAPTER 3: SOLUTIONS FOR
MECHANICAL
FOUR
AND
ESTABLISHING THANG LONG
CONSTRUCTION
JOINT
STOCK
COMPANY ’ TARGET CAPITAL STRUCTURE ...................................... 46
3.1. The development strategies of Thang Long mechanical four and
construction joint stock company ................................................................. 46
3.1.1 Social and economic background......................................................... 46
3.1.2.1. Objectives of business operation ...................................................... 47
3.1.2.2. The orientation of business .............................................................. 47
3.2. Solutions for establishing Thang Long mechanical four and construction
joint stock company ’ target capital structure ............................................... 48
3.2.1.Improving capital structure by decreasing gearing. .............................. 48
Tran Thi Minh Nguyet
iii
CQ50/11.18
Final thesis
Academy of finance
3.2.2.Strengthening the management of recievable account to recover capital
in short term. ................................................................................................ 51
3.2.3. The solutions to improve the situation of net working capital of the
company. ...................................................................................................... 53
3.2.4. The company should have solutions to improve the performance in next
fiscal year to increase the benefit for shareholders....................................... 54
3.3. The petitions for the government. .......................................................... 55
CONSCLUTION.......................................................................................... 57
BIBLIOGRAPHY ........................................................................................ 59
Tran Thi Minh Nguyet
iv
CQ50/11.18
Final thesis
Academy of finance
LIST OF ABBREVIATED WORDS
DFL
EBIT
EPS
NWC
ROA
ROE
ROS
WACC
Tran Thi Minh Nguyet
:
:
:
:
:
:
:
:
Degree financial leverage
Earning before interest and tax
Earning per share
Networking capital
Return on assets
Return on equity
Return on sale
Weight average cost of capital
v
CQ50/11.18
Final thesis
Academy of finance
LIST OF TABLE AND PICTURE
PICTURE 2.1: THE ORGANIZATION CHART OF THE COMPANY ...... 20
TABLE 2.1: THE CAPABILITY OF SKILLED WORKMANSHIP ........... 24
THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT
STOCK COMPANY .................................................................................... 24
TABLE 2.2: SOME FINANCIAL RATIOS OF THE COMPANY IN
RECENT YEARS. ....................................................................................... 25
TABLE 2.3: SIZE, STRUCTURE AND FLUCTUATION OF CAPITAL
STRUCTURE FROM FISCAL 2013 TO 2015. ........................................... 28
TABLE 2.4: GEARING AND DEBT/EQUITY OF THE COMPANY FROM
FISCAL 2013 TO FISCAL 2015.................................................................. 32
TABLE 2.5: DEGREE OF FINANCIAL LEVERAGE FROM FISCAL 2013
TO FISCAL 2015......................................................................................... 35
TABLE 2.6: THE EFFECT OF FINANCIAL LEVERAGE TO ROE .......... 37
TABLE 2.7: THE RATIOS OF THE ABILITY TO PAY FOR CREDITORS
OF THE COMPANY .................................................................................. 39
TABLE 2.8: THE SITUATION OF NET WORKING CAPITAL OF THE
COMPANY.................................................................................................. 41
Tran Thi Minh Nguyet
vi
CQ50/11.18
Final thesis
Academy of finance
PREFACE
In the market economy, to start a business, people need to the certain
amount of capital. Capital is the important condition with business process of
the company. Morever, when the competition between companies in the
market is more and more violent, the decisions which relate to capital
management will influence on the success of the companies, so they are not
easy for managers. And one of those decisions is to establish capital structure
to maximize the value of the company and owners. It also decides the
company’s product ability in the market.
Because of Understanding the importance of establishing capital
structure, I decided chose the topic “ Capital structure – case study in Thang
Long mechanical four and construction joint stock company”.
1.
Research problem.
Research problem is about overview and the solutions of capital
structure in Thang Long mechanical four and construction joint stock
company: capital structure and target capital structure with its affects.
2.
Purpose and thesis questions
-
Systematizing the issues about capital structure in the company
and the factors affecting target capital structure.
-
Researching situation of capital structure :
+ Studying and evaluating about situation of capital structure in Thang
Long mechanical four and construction joint stock company
+ Proposing solutions for establishing capital structure in mechanical
four and construction joint stock company
3.
Scope of research
-
About space: Studying about capital structure and solutions for
establishing capital structure for Thang Long mechanical four and
Tran Thi Minh Nguyet
1
CQ50/11.18
Final thesis
Academy of finance
construction joint stock company.
-
About time: the figures provided by financial statements of the
company in 2014 and 2015.
4.
Methodology
The thesis uses the methodologies: analytical method, statistical
method, experimental method…to clear the topic of the thesis.
5.
Thesis structure
Apart from preface, conclusion and bibliography,the thesis structure
includes three major parts:
Chapter 1: Overview of capital structure and target capital structure
Chapter 2: Situation of capital structure of company in Thang Long
mechanical four and construction joint stock company
Chapter 3: Solutions for establishing the Thang Long mechanical four
and construction joint stock company ‘s target capital structure.
Because of limited time and knowledge, my thesis also has some
mistakes in research process. I would like to express my thanks to PhD. Pham
Thi Thanh Hoa and the managers of Thang Long mechanical four and
construction joint stock company because they helped me finish this thesis.
Tran Thi Minh Nguyet
2
CQ50/11.18
Final thesis
Academy of finance
CHAPTER 1
OVERVIEW OF CAPITAL STRUCTURE AND TARGET CAPITAL
STRUCTURE
1.1. Capital structure
1.1.1. Definition
In market economy, a company is able to use many different sources of
capital to satisfy its demand in the business. However, it is very important to
combine sources of capital to establish the best capital structure for the value
objective.
Capital structure is a term that refers to the propotion of capital sources
in total of capital which the company finances for its business operations. In
other word, it can show how a company decides to finance its assets by
various sources of capital like: borrowing from banks, issuing shares or
bonds, retained earning from the business…
The dicision about capital structure is very important with the company
because:
- Capital structure of the company affects the cost of capital.
- Capital structure affects the company’s return on equity or earning per
share and financial risk.
Capital structure of the company is usually expressed by the relationship
between debts and equity ( owner’s capital). Capital structure is discribed
through some main ratios:
𝐺𝑒𝑎𝑟𝑖𝑛𝑔 =
𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑜𝑟 𝑠𝑜𝑢𝑟𝑐𝑒 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
This ratio shows the percentages of debt in capital structure of the
company.
Tran Thi Minh Nguyet
3
CQ50/11.18
Final thesis
Academy of finance
Debt/ Equity=
𝐷𝑒𝑏𝑡
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦
The company can have various capital structure, but all of them are to
maximize the value of the company.
1.1.2 The theories of capital structure
1.1.2.1. Modigliani and Miller approach
This theory was devised by Modigliani and Miller during 1950s.
Modigliani and Miller advocates capital structure irrelevancy theory. The
valuation of a firm does not depend on the capital structure of a company.
Whether a firm is highly leveraged or not in the financing mix, the value of
the company is not affected.
Modigliani and Miller Approach proposes that the market value of a firm
is affected by its future growth prospect apart from the risk involved in the
investment. If a company has high growth prospect, its market value is higher
and its stock prices would be high.
Assumptions of Modigliani and Miller Approach
o There
are no taxes.
o Transaction
cost for buying or selling securities and bankruptcy cost
are zero.
o There
is symmetry of information. This means that an investor can
have access to same information that a company can access.
o The
cost of borrowing is the same for investors as well as companies.
o Debt
financing does not affect to companies EBIT
Modigliani and Miller Approach: Two Propositions without Taxes
Proposition 1: With the assumptions of no taxes, the capital structure
does not influence the valuation of a firm. In other way, if the company
finances debt, it does not increase the market value of the company.
Proposition 2: It says that financial leverage is in direct proportion to the
Tran Thi Minh Nguyet
4
CQ50/11.18
Final thesis
Academy of finance
cost of equity. With increase in debt component, the investors realize a higher
risk for the company. So the cost of equity is higher to make up the risk, the
weight average cost capital of the company does not change, because the
increase in the cost of equity is same to the decrease in the cost of debt.
Modigliani and Miller Approach: Propositions with Taxes (The
Trade-Off Theory of Leverage)
Proposition 1: The value of the company which combines debt in capital
structure is higher than the value of the company which does not use debt. In
other word, the value of the company which has a mix of debt and equity
equals the value of the company which does not use plus present value tax
shield.
Proposition 2: If there is income tax, the cost of equity of a company
which has a mix of debt and equity is higher than the company which
doesnot. The more debt financing the company uses, the higher required rate
of return of the owners is, because of the higher risk. However, the increase in
the cost of equity is lower than the defference between the rate of return of
asset and the cost of debt, the weight average cost capital decreases.
1.1.2.2. Capital Structure theory – Traditional approach.
This theory states that there is a optimal capital structure where the value
of the company can be magnified by suitable financial leverage level.
According to this theory, the cost of capital can be decreased by using debt
financing. However, when the company increases debt financing, risk of the
company will increase too. The creditors require the higher rate of return.
When the gearing increases to a certain level, risk is higher, the increase in the
required rate of return of debt and equity makes the cost of capital increase
too. It makes the the benefit of using debt disappear.
Assumptions under Traditional Approach:
Tran Thi Minh Nguyet
5
CQ50/11.18
Final thesis
Academy of finance
1. The rate of interest on debt is constant for a certain period and
thereafter with increase in leverage, it increases.
2. The expected rate by equity shareholders remains constant or increase
gradually. After that the equity shareholders starts perceiving a financial risk
and then from the optimal point and the expected rate increases speedily.
3. As a result of activity of rate of interest and expected rate of return,
the WACC first decreases and then increases. The lowest point on the curve is
optimal capital structure.
Diagrammatic Representation of Traditional Approach to Capital Structure
PICTURE 1.1. COST OF CAPITAL AND TRADITIONAL APPROACH
1.1.2.3. Capital Structure theory – Net operating income approach
This theory believes that WACC and the value of the company do not
change when financial leverage level changes. In other word, the theory
claims there is no optimal capital structure, the value and the price of shares
of the company do not depend on capital structure.
This means that when the company finances more debt, the general rate
of return of the company is fixed, so the price of share and the value of the
company do not change.
Tran Thi Minh Nguyet
6
CQ50/11.18
Final thesis
Academy of finance
Assumptions under Traditional Approach:
1. The overall capitalization rate remains constant irrespective of the
degree of leverage. At a given level of EBIT, value of the firm would be
“EBIT/Overall capitalization rate
2. Value of equity is the difference between total firm value less value
of debt i.e. Value of Equity = Total Value of the Firm – Value of Debt
3. WACC (Weightage Average Cost of Capital) remains constant; and
with the increase in debt, the cost of equity increases. Increase in debt in the
capital structure results in increased risk for shareholders. As a compensation
of investing in highly leveraged company, the shareholders expect higher
return resulting in higher cost of equity capital.
1.1.2.4. Capital Structure theory - Pecking order theory.
In fact, there is not symmetry of information. That means the directors
understand about their company clearlier than thr investors from outside. So
the projects first financed by internal sources of capital, usually retained
earning, then issuing new debt and final is issuing shares. Issuing shares is the
final choice when the company had used debt which can be financed. This
theory explains why the companies which have the low profitability usually
use more debt financing because they don’t have internal capital and debt
financing is at top of external sources of capital.
The companies having the high profitibility and limited investment
chances will try to establish the low rate of debt, the companies having
investment choices more than internal source of capital must borrow more.
This theory is not right with all of companies, there are many firms still
issue common shares althought they can borrow easilly. But this theory can
explain why most of them prefer debt financing in raising fund.
Tran Thi Minh Nguyet
7
CQ50/11.18
Final thesis
Academy of finance
1.2 Effect of capital structure to the firm value
1.2.1 The financial leverage
In
maitaining the business operation, the company uses debts or
liabilities to make up a deficit of capital and increase return on equity (ROE)
or earning per share (EPS). This decision also increases the company’s
financial risk.
Financial risk refers to the uncertainty of return on equity or earning per
share and it can affect the company ‘s payable at maturity when the company
uses debt or the other type sources of capital which have fixed financial cost.
Althougt financing by debt or liabilities can increase ROE or EPS, it can
make ROE waver more drasticlly. When basic earning power ratio (BEP) of
the company is higher than the cost of debt, financial leverage can make an
increase in ROE. But if BEP is lower than the cost of debt, financial leverage
can make a decrease in ROE quicklier. On the other hand, if the firm finances
debt, it must pay the fixed cost for the creditors and this cost does not depend
on its profit. The more a firm finances debt, the riskier it can face to.
Financial leverage is the degree of debt financing use in a firm’s capital
structure to increase ROE or EPS of the company. The more debt financing
the company uses, the higher its financial leverage.
- Effect of financial leverage to ROE or EPS:
When the company uses financial leverage, its managers hope to make
an increase in ROE. However, if it does not use the debt effectivelly, that
means earning before income tax is lower than the interest, ROE or EPS will
decrease more rapidlly.
Formular of ROE:
𝑅𝑂𝐸 =
Tran Thi Minh Nguyet
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝐸𝑞𝑢𝑖𝑡𝑦
8
CQ50/11.18
Final thesis
Academy of finance
EBIT: earning before income tax
BEP: basic earning power ratio
D: debt
E: equity
V: total of asset
I: interest
r : interest rate
t: corporate income tax rate.
So we have formular to caculate ROE:
𝑅𝑂𝐸 =
𝑅𝑂𝐸 =
(𝐸𝐵𝐼𝑇 − 𝐼)𝑥 (1 − 𝑡)
𝐸
[𝐵𝐸𝑃(𝐷+𝐸)−𝐷𝑟](1−𝑡)
𝑅𝑂𝐸 = [𝐵𝐸𝑃 +
𝐸
𝐷
𝐸
(𝐵𝐸𝑃 − 𝑟)] (1 − 𝑡)
Because (1-t) is constant, ROE is depends on BEP, r and D/E.
Proposition 1: BEP >r, the more debt financing the company use, the
higher ROE is. That means financial leverage magnifies an increase in ROE.
Proposition 2: BEP
- Xem thêm -
.PDF 
65 
260 
113 
