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Analysis of Capital Structure and Cost of Capital at Some Typical Enterprises


Business results between enterprises are often different, influenced by many different factors such as enterprise size, business characteristics, business fields, etc. Therefore, the research process needs to develop new research methods and models to verify this relationship.

3.3. Analysis of capital structure and cost of capital at some typical enterprises

In order to better understand the capital structure and average cost of capital of enterprises as well as to verify the average cost of capital of enterprises in the context of changing capital structure, the thesis analyzes the capital structure and cost of capital at some typical enterprises.

The criteria for selecting typical enterprises are enterprises with stable capital structure policies and enterprises in popular industries on the Vietnamese stock market. Through the process of consulting experts and managers in the enterprise, the thesis selected the following two enterprises:

- VICEM Packaging Hai Phong Joint Stock Company (BXH): Total assets reached 120 billion VND at the end of 2017, an enterprise with an average capital scale on the Vietnamese stock market. The enterprise belongs to the Industrial sector, which is the industry group with the largest number of listed enterprises at present. The debt to total assets ratio is maintained at 50-60%, which is also the common capital structure of industrial enterprises and many other industry groups on the Vietnamese stock market.

- Kido Group Joint Stock Company (KDC): Total assets reached 11,300 billion VND at the end of 2017, is an enterprise with a capital scale above average compared to listed enterprises. The enterprise belongs to the Consumer Goods industry group, second only to the Industrial industry group in terms of the number of listed enterprises. The enterprise has a large brand, long-standing reputation on the stock market and constantly expands its scale and competitiveness to increase the enterprise value. The debt ratio to total assets of the enterprise over the years is quite stable, maintained around 23-33%, lower than the average debt ratio to total assets of other listed enterprises.

When determining the average cost of capital at the enterprise, the thesis does not consider the cost of capital from non-interest-bearing debt, including payables to suppliers, taxes and


payable to the State, other payables... because there is no basis to determine the costs for these items. The thesis uses Damodaran country risk data updated in January 2018, as shown in Table 3.4:

Table 3.4: Vietnam data to determine average cost of capital

(updated January 2018)


TT

Index

Value

Source

1

Determine the cost of debt


Vietnam's risk-free rate of return (R f )

4.87%

Damodaran A. (2018) https://papers.ssrn.com/sol3

/papers.cfm?abstract_id=32

17944


Enterprise risk spread (Conversion table from Liquidity ratio)

interest calculation

Table 2.1

http://pages.stern.nyu.edu/~ adamodar/


Country Risk Spread - Vietnam (based on international bond yields)

1.52%

http://pages.stern.nyu.edu/~ adamodar/

2

Determine the cost of equity


The industry average beta for unlevered firms (β u - unlevered beta), operating in the equity market

US stock market

Appendix 5

http://pages.stern.nyu.edu/~ adamodar/New_Home_Pag e/datafile/Betas.html


Current risk premium for the market

mature market premium

5.08%

http://pages.stern.nyu.edu/~

adamodar/


Equity and Bond Yield Volatility Rate (S&P Emerging BMI Index/BAML Public Sector US Emerging Markets Corporate Plus Index Yield for 5 years from 2012 to 2017 =13.31%/11.84%)

1.12

S&Phttp://us.spindices.com

/indices/equity/sp- emerging-bmi-us-dollar FRED https://research.stlouisfed.org/fred2/series/BAMLEMPBPUBSICRPIEY/do

download data


Country Risk Premium (Spread)

country risk * volatility of equity and bonds)

1.52% *

1.12 =

1.71%

http://pages.stern.nyu.edu/~ adamodar/

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Analysis of Capital Structure and Cost of Capital at Some Typical Enterprises

Source: Author's own compilation


3.3.1. Analysis of capital structure and average cost of capital for VICEM Hai Phong Packaging JSC

Introduction to VICEM Hai Phong Packaging JSC

VICEM Hai Phong Packaging Joint Stock Company (BXH) was formerly Hai Phong Cement Packaging Enterprise (under Hai Phong Cement Company). The company is the pioneer in the production transformation program of Hai Phong Cement Company following the industrialization and modernization policy. In 2009, the company registered for listing and on November 25, 2009, the company's shares were officially traded on the Hanoi Stock Exchange. The main business lines of the enterprise are the production and trading of cement packaging and other types of packaging, production of raw materials for the packaging industry... The company's main customers include: VICEM Hai Phong Cement One Member Co., Ltd., VICEM Hoang Thach Cement One Member Co., Ltd., But Son Cement Joint Stock Company, Dien Bien Cement Joint Stock Company, Ha Long Cement Joint Stock Company...

Analysis of capital structure and business performance

The capital structure and business efficiency of VICEM Hai Phong Packaging JSC are shown in the following chart 3.11:

Table 3.11: Capital structure and average business efficiency of VICEM Hai Phong Packaging JSC

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1.4

1.2

1

0.8

0.6

0.4

0.2

0

Equity/Total Assets Ratio

Debt to Total Assets Ratio ROE


Tobin's Q

Year Year Year Year Year Year 2011 2012 2013 2014 2015 2016 2017

Source: Compiled from Stoxplus data


VICEM Hai Phong Packaging Joint Stock Company maintains a capital structure that has not changed much over the years with the debt to total assets ratio always reaching 50-60% from 2011 to 2017. This is also a fairly common debt ratio of industrial enterprises listed on the stock market. In general, during the research period, the debt to total assets ratio of the enterprise tended to decrease from 64% in 2011 to 52% in 2017. The business performance of the enterprise through the two indicators ROE and Tobin's Q tended to increase slightly, although it was not stable in the period from 2011 to 2016. In 2017, the company's business results tended to decrease when the return on equity ratio only reached 5.5%. According to the company's explanatory report, the reason for the decrease in profit margin in 2017 compared to 2016 was due to the differentiation and competition of the packaging market, causing the selling price of packaging to decrease by 114 VND (equivalent to 2.14%), in addition to the increase in the price of main raw materials (plastic price increased by 7% to 9%, paper increased by 3% compared to 2016). This is also a common difficulty of some businesses in the same industry such as But Son Cement Packaging Joint Stock Company, Bien Hoa Packaging Joint Stock Company, when the ROE index decreased significantly in 2017.

When analyzing the financial balance shown through the Net Working Capital (NWC) indicator, the results show that the enterprise has always maintained a good financial balance. Net working capital in the period of 2011 - 2017 has always been between 33 billion VND and 44 billion VND. The solvency indicator has fluctuated around 1.5 times in recent years, which is relatively good compared to some enterprises in the same packaging industry such as Bim Son Packaging JSC and Vegetable Oil Packaging JSC.

Details of the company's debt structure are shown in Table 3.12:


Table 3.12: Debt structure of VICEM Hai Phong Packaging JSC


100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

39%

57%

65%

53%

60%

54%

65%

Non-interest bearing debt/Total liabilities ratio

0%

5%

0%

17%

4%

13%

0%

61%

Long-term debt/Total liabilities ratio

43%

46%

25%

37%

22%

35%

2011 2012 2013 2014 2015 2016

2017

Current Debt/Total Liabilities Ratio

Source: Compiled from Stoxplus data

Through table 3.12 on debt structure, it can be seen that the enterprise mainly relies on short-term loans and interest-free debt. The enterprise's short-term loans mainly supplement working capital and serve the enterprise's production and business. The ratio of short-term debt to total liabilities of the enterprise is unstable and tends to increase in recent years. In 2017, the ratio of short-term debt reached its highest value when it accounted for 61% of total liabilities. Thus, in addition to some objective reasons regarding the market and input material prices, the increase in debt arising from costs (short-term debt) in 2017 may be a reason for the decline in business efficiency of the enterprise.

Regarding long-term debt, the company started to mobilize a loan of 10 billion VND in 2010, with a term of 5 years, with the purpose of investing in the project "Investing in construction of works and production lines to expand the Hai Phong cement packaging factory with a capacity of 25 million bags/year". The company gradually paid off the principal and interest in the following years, so the chart shows that the long-term debt ratio gradually decreased from 17% of total debt payable in 2011, to 4% in 2014 and no longer used long-term debt in the following years.


Regarding equity, the Company has not had many changes in its business operations. During the research period from 2011 to 2017, BXH only increased capital once from offering shares to the market in 2011. The Company successfully issued 12,040 shares with a total proceeds of VND 180,600,000. After this share issuance, the number of common shares outstanding of the Company has remained stable up to the present time at 3,012,040 shares. The Company's annual dividend payout ratio on earnings per share fluctuates around 35% -65%. The Company does not issue preferred shares or buy back treasury shares.

Determine the cost of debt

Based on the formula for calculating the cost of debt and cost of equity mentioned in chapter 2, the thesis applies it to calculate the cost of debt and cost of equity of VICEM Hai Phong Packaging Joint Stock Company for 2017 as follows:

Table 3.5: Debt cost in 2017 of VICEM Hai Phong Packaging JSC


TT

Target

Interpretation

Value

Unit

1

Earnings before interest and tax


6,367

Million Dong

2

Interest expense


2,328

Million Dong

3

Interest payment capacity

(1)/(2)

2,735

Time

4

Rating

Convert from (3)

B1/B+


5

Enterprise risk spread

Convert from (4)

2.98%

%/year

6

Country risk spread


1.52%

%/year

7

Risk-free return


4.87%

%/year

8

Corporate income tax rate


20.00%

%/year

9

Pre-tax cost of debt

(5)+(6)+(7)

9.37%

%/year

10

After-tax cost of debt

(9)*(1-(8))

7.50%

%/year


Table 3.6: Calculation table of 2017 Cost of Equity of VICEM Hai Phong Packaging JSC

STT

Target

Interpretation

Value

Unit


1


Unleverd beta

Industry average beta for construction materials industry companies

no debt


0.95


Time

2

Loan value


37,921

Million Dong

3

Market value of equity

own


34,939

Million Dong

4

Corporate income tax rate


20

%/year

5

Debt to Equity Ratio

Possession (D/E)

(2)/(3)

1.0853

Time

6

Beta

(1)*(1+(1-(4))*(5))

1,775

Time

7

Risk-free return


4.87%

%/year

8

Current risk premium

for market development


5.08%

%/year

9

Country risk premium


1.71%

%/year

10

Cost of equity

(7)+(6)*((8)+(9))

16.92%

%/year


Average cost of capital of the enterprise in 2017: WACC = R E (E/(D+E)) +R D (D/(D+E))

= 16.92%* 34,939/72,860 + 7.5% *37,921/72,860 = 12.02%/year

In order to evaluate the capital structure decision of Vicem Hai Phong Packaging Joint Stock Company, the thesis determines the average cost of capital of the enterprise when the debt ratio changes. To determine the average cost of capital in cases of changing the debt ratio, the thesis makes the following assumptions:

- The business's capital needs remain unchanged or total debt and equity remain unchanged: D+E = 37,921 + 34,939 = 72,860 million VND.

- When the business changes the debt ratio, the interest rate remains unchanged and equals the current level: Current interest expense/Current debt value = 2,328/37,921= 6.14%/year.


- When the enterprise changes the debt ratio, the profit before interest and tax remains unchanged and equals the current level: 6,367 million VND.

On that basis, the Thesis builds the following cases of debt ratio adjustment:



Present

(D/E=1.09)

Assumption A

(D/E=0.25)

Assumption B

(D/E=1.5)

Debt

37,921 million VND

14,572 million VND

43,716 million VND

Market value

Equity

34,939 million VND

58,288 million VND

29,144 million VND

Total

72,860 million VND

72,860 million VND

72,860 million VND

The cost of debt and equity in hypothetical case A, when adjusted to reduce the debt ratio, is determined as follows:

Table 3.7: Assumed cost of debt A of VICEM Hai Phong Packaging JSC


TT

Target

Interpretation

Value

Unit

1

Earnings before interest and taxes (Assuming constant)


6,367

Million Dong


Interest rate (assuming constant)

2,328/37,921

6.14%

%/year

2

Interest expense

6.14%*14,572

894.72

Million Dong

3

Interest payment capacity

(1)/(2)

7.12

Time

4

Rating

Convert from (3)

A2/A


5

Enterprise risk spread

Convert from (4)

0.99%

%/year

6

Country risk spread


1.52%

%/year

7

Risk-free return


4.87%

%/year

8

Corporate income tax rate


20.00%

%/year

9

Pre-tax cost of debt

(5)+(6)+(7)

7.38%

%/year

10

After-tax cost of debt

(9)*(1-(8))

5.90%

%/year

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