Capital Restructuring Of Enterprises In Economic Groups

Hypothesis 3: Capital structure is inversely related to business risk.

- Tangible asset structure

The structure of tangible assets is measured through the ratio of tangible fixed assets to total assets. Because tangible fixed assets can be used by enterprises as collateral when borrowing, if the tangible fixed assets of an enterprise are large, the lender (such as a bank) can reduce the risk and thereby also reduce the cost of lending. Thus, in theory, when the proportion of tangible fixed assets accounts for a large proportion, the enterprise has the opportunity to mortgage these assets to access external capital sources more easily, or in other words, the enterprise will increase its "borrowing capacity". The studies of Scott, 1976 – 1977  52  and Harris and Ravis, 1990  24  have shown that for firms with a high ratio of fixed assets to total assets, lenders will be more willing to provide loans and thus the debt to equity ratio will be higher. Most studies such as Titman and Wessels (1988)  58  , Rajan and Zingales (1995)  48  , Ozkan (2001)  47  have shown that there is a positive relationship between the structure of tangible assets and the capital structure of the firm. Therefore, it can be hypothesized that:

Hypothesis 4: Capital structure is positively related to tangible asset structure.

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- Factors of management level and capital usage habits of business managers. Measured by the risk acceptance level of the head (Chairman, CEO, CFO). In theory, if the manager accepts risks and has good management skills, the business will boldly use more borrowed capital. Thus, it can be assumed that:

Hypothesis 5: Capital structure is positively related to management level and debt preference of business managers.

- Factor of Relevance to the Group's core business: This is a "specific" factor for the model of Vietnamese economic groups with a multi-industry, multi-field operating model. In principle, the

Enterprises whose fields of operation are in the main fields of operation of the economic group will take advantage of the brand, reputation and operational advantages of the group to attract credit institutions when considering granting loans. Therefore, the ability to access loan sources of these enterprises will be better than enterprises operating outside the main fields of operation of the group.

Hypothesis 6: Firms use more debt when they are more closely related to their core business.

- Equity structure factor : This is a "special" factor affecting the capital structure of enterprises in the State Economic Group model when equity includes (i) State capital; (ii) Capital of other shareholders, or in other words, State shareholders become special shareholders of these enterprises.

This factor is measured by the ratio of State capital/total equity. The relationship between the equity structure (ratio of State capital to total equity) and the capital structure of the enterprise is a relatively special relationship in some economies, including Vietnam, when State-owned enterprises with a high ratio of "State capital" will have easier access to loan sources than private enterprises, joint-stock enterprises whose capital is from shareholders other than State shareholders. Thus, there is a positive correlation between these two factors, or in other words, the factor of State capital ratio in the equity structure of enterprises belonging to the Oil and Gas Group has a positive impact on the capital structure of enterprises.

Hypothesis 7: The capital structure of an enterprise is positively related to the equity structure of the enterprise.

2.2.4.3. Quantitative research model of the impact of internal factors of the enterprise on capital structure

Through the above analysis, theoretically we can see the influence relationship of some internal factors of the enterprise on the capital structure of the enterprise.

The theoretical model for studying the influence of internal factors of the enterprise on the capital structure of the enterprise is determined as follows:

Capital structure i = α t + β 1 * G i + β 2 * S i + β 3 * R i + β 4 *A i + β 5 *M i + β 6 *E i + β 7 *C i

In there:

- Capital structure i : Debt/Equity ratio of company i

- G i : Growth rate indicator of enterprise measured by the average growth rate of total assets of enterprise i in the research period

- S i : Enterprise size index is measured by the average revenue of enterprise i

- R i : Business risk index is measured through the standard deviation of the profit of enterprise i in the research period.

- A i: Asset structure index is measured by the ratio of average long-term assets to average total assets of enterprise i in the research period.

- M i : Risk tolerance index of the manager of enterprise i (Does the CEO like to use borrowed capital?)

- E i: Equity structure index is measured by the ratio of State capital to total equity of enterprise i

- C i: Indicator of the level of relevance to the main business field of enterprise i (Ci has a value from 1 - 3, in which 3 is very relevant)

2.3. Capital restructuring of enterprises in economic groups

In a market economy, capital structure decisions are a very important issue for every business, because it is a factor that greatly affects the rate of return on equity and the financial risks that the business may face. From a financial perspective, the most important goal of businesses is to maximize the value of the business, while the value of the business is closely related to the capital structure. Therefore, the goal of every business is to achieve the "optimal capital structure".

2.3.1. Optimal capital structure of the enterprise

2.3.1.1. Theoretical schools of thought on optimal capital structure

The traditional view of capital structure holds that when a firm begins to borrow, the advantages outweigh the disadvantages. The low cost of debt, combined with the tax advantage, causes the WACC (Weighted Average Cost of Capital) to decrease as debt increases. However, as the debt-equity ratio increases, the effect of the debt-to-equity ratio on total capital forces owners to increase their required return (i.e., the cost of equity increases). At higher debt-to-equity ratios, the cost of debt also increases because the probability of the firm defaulting on its debt is higher (higher risk of bankruptcy). Therefore, at higher debt-to-equity ratios, the WACC increases. The main problem with the traditional view is that there is no underlying theory that shows how much the cost of equity should increase due to the debt-to-equity ratio or how much the cost of debt should increase due to the risk of default.

Modern capital structure theory began with the paper by Modigliani and Miller in 1958 (referred to as the M&M model). According to the M&M model, the choice between equity and debt is irrelevant to the value of the firm. In other words, this model points to a direction of hypotheses about how capital structure should be better, showing under what conditions capital structure is irrelevant to the value of the firm. Modern capital structure theory continued to develop in the following years, until now there are 4 main models/theories of capital structure known, including:

- Modigliani and Miller's capital structure theory (M&M Model)

+ M&M model with the assumption of no impact of Tax (1958)

+ M&M model with the assumption of Tax impact (1963)

- The "Pecking order" theory (Pecking order hypothesis - The pecking order theory) (developed by Stewart C. Myers and Nicolas Majluf in 1984)

- Signaling hypothesis

- The Trade-off Model (The Trade-off Model - "Equilibrium" theory)

* M&M Model : Contrary to the conventional view, Modilligani and Miller (1958) investigated whether the cost of capital increases or decreases as a firm increases or decreases its borrowing  40  . To demonstrate a viable theory, Modilligani and Miller (M & M) made some simplifying assumptions that are common in finance theory: they assumed that capital markets are perfect, so there are no transaction costs and the borrowing rate is the same as the lending rate and equals the free borrowing rate; taxation is ignored and risk is calculated entirely by the volatility of cash flows. If capital markets are perfect, M & M argued, then firms with identical business risk and identical expected annual returns should have identical total values regardless of capital structure because the value of a firm should depend on the present value of its operations, not on how it is financed. From this it follows that if all such firms have identical expected returns and identical values they should also have identical WACCs at all levels of debt-equity ratios. Although the assumptions of perfect capital markets are unrealistic, two assumptions need to be emphasized and they have a significant impact on the results.

1. Assume no taxation: this is an important issue and one of the key advantages of debt is the tax relief on interest expenses.

2. The risk in M&M theory is calculated entirely by the variability of cash flows. They ignore the possibility that cash flows may stop due to default. This is another significant problem with this theory if debt is high.

Making these assumptions means that there is only one advantage to borrowing money (debt is cheaper and less risky for investors) and one disadvantage (the cost of equity increases with debt because of the ratio of debt to total capital). Modigliani and Miller show that these effects are exactly balanced. The use of debt gives owners a higher rate of return, but this higher return is exactly what they compensate for the increased risk from the ratio of debt to total capital. With these assumptions, this leads to the equations for M&M theory: Vg = Vu (Total value of the leveraged firm equals the total value of the unlevered firm).

In 1963, Modilligani and Miller conducted a follow-up study by eliminating the assumption of corporate income tax  41  . According to M & M, with corporate income tax, the use of debt will increase the value of the enterprise. Because interest expense is a reasonable cost deductible when calculating corporate income tax, a part of the income of the enterprise using debt is transferred to investors according to the equation: Vg = Vu + TD (In which, D is the total amount of debt used, T is the corporate income tax rate, TD is the benefit from using debt). The value of the enterprise using debt is equal to the value of the enterprise not using debt plus the benefit from using debt. Thus, according to the M & M tax model (1963), capital structure is related to the value of the enterprise. The higher the use of debt, the higher the value of the enterprise and increases to the maximum when the enterprise is financed by 100% debt.

 Thus, the M&M model has set the starting point for theoretical models of capital structure. The original M&M model (1958) assumed a perfect capital market, no tax impact, no transaction costs, no asymmetric information, so the value of the enterprise does not depend on the capital structure of the enterprise. In 1963, Modigliani and Miller continued to develop the M&M model assuming the impact of tax factors. According to this theoretical model, enterprises will want to use 100% of borrowed capital to maximize the benefits of tax deductions, but in reality, enterprises with 100% borrowed capital do not exist because the capital structure with 100% borrowed capital is too risky for the enterprise.

* "Pecking Order" theory - The "pecking order" theory gives the priority order of using capital sources of enterprises, first they use internal funds, then external debt and finally equity. This theory emphasizes that enterprises prefer to use debt capital rather than increasing equity capital once internal funds do not meet their capital needs  16  .

 Thus, according to the "Pecking Order" Theory, capital structure decisions are not based on the optimal Debt/Asset ratio but are decided from the market classification. First, managers will intend to use internal financial resources,

Next, it can issue loans, and finally issue equity. The focus of this theory is not on the optimal capital structure but on the current upcoming financing decision.

Debt Ratio

Asset

= f {business activities, investment needs}

Thus, Myers and Majluf argue that there is no optimal capital structure for firms  45  .

* "Signaling" theory - The "Signaling" theory of capital structure is the inheritance of the M & M model, in which this theory has taken into consideration a very practical factor, which is the ability to access information of investors. The "Signaling" theory argues that in reality, the information about the business that investors have is not the same, "business managers and owners know better" so when the business operates well, they will use borrowed capital to only have to pay a smaller fixed interest rate instead of sharing profits with other shareholders, on the contrary, when the business's operations are likely to deteriorate, they will mobilize capital from shareholders to share losses, if any, with other shareholders while reducing the risk of not being able to pay debts leading to bankruptcy  50  .

* The "Trade-off" model - The "equilibrium" model is an important development in the theory of capital structure. While the "Pecking order" and "Signaling" theories focus on studying sample capital structures, however, these theories do not help to provide an optimal capital structure for a business, the Trade-off Model provides a way to determine the optimal capital structure. The "Trade-off" theory states that capital structure is based on the balance between "tax savings" and "distress costs of debt". This means that the ratio of debt and equity that a business chooses depends on the balance between the benefits of tax savings from borrowing and the "price" to pay for that borrowing, which is the risk and cost of bankruptcy. More specifically, when increasing borrowed capital, the marginal benefit of increasing borrowed capital will decrease while the marginal cost increases, so businesses must optimize the ratio of borrowed capital and equity capital  18  .

Value

business

Bankruptcy costs

Benefits from tax “shield”

D/E

D/E*

(In which D: Total long-term debt, E: Owner's equity of the enterprise

 The "equilibrium" theory determines the optimal capital structure by adding various imperfect factors, including taxes, financial distress costs and intermediation costs, to the Modilligani and Miler (1958) model, without losing the assumptions of market efficiency and balanced information. Thus, the combined effects of three factors: taxes, financial distress costs and intermediation costs when using debt with opposite effects form the theory of optimal financial structure. In general, the inclusion of financial distress costs and intermediation costs in the Modilligani and Miler (1958) model leads to the equilibrium theory of capital structure. These models all acknowledge an optimal capital structure for enterprises.

The above theories/models on capital structure will play a key role in the process of researching factors affecting the capital structure between equity and debt capital of enterprises.

2.3.1.2. Concept of optimal capital structure

Determining a capital structure to achieve the highest efficiency for a business is a big and very important issue in corporate finance because for businesses, both equity and debt have "advantages" and "disadvantages".

- Advantages and disadvantages of businesses when using "Debt"

One of the biggest advantages of using debt instead of equity is that the interest that a company pays on debt is tax-free. In other words, the company benefits from a “tax shield”. In principle, if we replace equity with debt, we will reduce the corporate tax payable, and thus increase the value of the company. The second advantage of debt is that debt is usually cheaper than equity (bank loan interest rates, or bond interest rates are much lower than investors’ expected interest rates). Thus, increasing debt means reducing the cost of capital and thus increasing profits, as well as the value of the company. Because of this property, the debt-to-equity ratio is also called the leverage ratio.

Debt helps managers be more cautious when investing: in companies that are flush with cash and unlikely to grow quickly, managers tend to invest money in “noisy” but ineffective projects, or increase costs to create growth (overinvestment). But if a company uses debt to finance its investments, the periodic interest payments, as well as the periodic capital payments, will prevent or reduce this overinvestment.

However, the enterprise cannot increase the debt to a level that is too high compared to the owner. Then the company will fall into an unhealthy financial situation and lead to risks for the enterprise. High debt ratio will lead to the risk of bankruptcy. When the debt ratio increases, the enterprise must face the risk of bankruptcy or in other words, "bankruptcy costs" begin to appear and increase faster than the benefit from the "tax shield" that the enterprise enjoys due to using more debt. In addition, a company with a high debt level also affects the psychology of investors and creates a conflict between creditors and investors, when investors will seek to underinvest (focus on investing in high-risk projects that create low value in the future, but can bring in cash that can be distributed as dividends right now) while creditors want the company to invest in low-risk projects that create high value in the future and conflicts arise.

- Advantages and disadvantages of businesses when using Equity

One of the disadvantages of equity is that its cost is higher than the cost of debt. Because no investor (owner of the business) invests money in a company, bears the risks of the company's operations and business results, and receives interest at the rate of interest on debt. This, along with the non-tax exempt nature, makes the cost of capital even higher. In addition, there is another disadvantage, which is that the higher the equity, the greater the number of owners, the greater the pressure of investor expectations as well as their management and supervision on the company's executives. However, equity will still have to increase when the company needs money. Increase to balance with debt and keep the company in a healthy financial condition.

-With the advantages and disadvantages of both Debt and Equity as analyzed above, borrowed capital with tax-deductible interest expenses increases the value of the enterprise; the enterprise value reaches its maximum if 100% of borrowed capital is used. However, in reality, no enterprise will use 100% borrowed capital, because borrowed capital, in addition to the burden of interest, also carries many financial risks. That is the risk of bankruptcy if the burden of interest is too large (especially when market interest rates fluctuate and the enterprise does not have a buffer, which is equity capital). Therefore, companies must decide on their own capital structure on the basis of balancing the benefits obtained from borrowed capital and financial risks.

The value of a debt-financed firm will be increased by tax deductions, but will bear financial risk, which will increase with the debt ratio. The value of the firm will increase to a certain threshold, then gradually decrease due to increasing financial risk. Thus, the optimal capital structure is the capital structure achieved when the value of the firm is the largest and the cost of capital is the lowest.

2.3.1.3. Criteria for evaluating optimal capital structure

As mentioned above, the objective of capital restructuring is to use different methods to move the capital structure of the enterprise towards a more balanced structure.

optimal capital. Therefore, to achieve this goal or in other words, to carry out the process of restructuring the enterprise's capital, it is necessary to determine a " system of criteria for evaluating the optimal capital structure ", in which the basic view is that the optimal capital structure is the "achievable" capital structure, aiming to harmoniously resolve the relationship between increasing efficiency, maximizing the value of the enterprise by minimizing the cost of capital and controlling the risks brought about by the use of debt.

a) Minimize the cost of capital of the enterprise

Cost of capital is a very important financial concept because the main goal of a business is to maximize the value of the business or in other words, to maximize the value of shareholders' assets. Therefore, to determine a reasonable capital structure for the business, studying the cost of capital is very important. On the other hand, if determining the optimal capital structure quantitatively is relatively difficult, the approach through determining the minimum cost of capital will help the business establish the optimal capital structure quantitatively.

Cost of capital is generally understood as the cost of using a certain source of capital. If a business uses debt, it is interest, interest payable to bondholders and other costs payable to access bank capital and bond investors. If a business uses equity, it is dividends paid to shareholders. Thus, corresponding to the two parts of a business's capital structure, Debt and Equity, people will consider and calculate two types of capital costs, which are Cost of Equity and Cost of Debt.

-Cost of Equity:

As mentioned above, a company's equity consists of three main components: preferred stock, common stock, and retained earnings. The cost of each type of equity constitutes the cost of equity and thus the company's cost of capital.

- Cost of preferred stock (Kp): Determining the cost of preferred stock is quite simple because preferred stock dividends are predetermined and paid regularly each year.

period and are perpetual. However, unlike interest, preferred stock dividends are not tax deductible. The cost of preferred stock capital (Kp) is determined on the basis of a fixed annuity of annual dividends, and is calculated using the following formula

 32-TV  :

Kp = D

(CT 2.1)

In which: D - Annual dividends paid to shareholders owning preferred shares Po - Price of preferred shares.

- Cost of common equity: The cost of common equity is the interest rate required by common stock shareholders for the business. The cost of common stock is determined based on two basic approaches (i) the approach using the Dividend Growth Model (DGM) and (ii) the approach using the Capital asset pricing model (CAPM) - The CAPM model will be analyzed in the section on determining the cost of retained earnings.

+ Dividend growth model DGM : The DGM model is studied based on the income from stocks being the present value of the total cash flows received from dividends, with a certain annual dividend growth rate. If Po is the stock price at the present time, Di is the dividend received at the end of year i, then we have  32-TV  :

(CT 2.2)

Where R is the market required rate of return, n is the number of years the stock will exist, up to infinity.

In general, we can represent the present value of a stock by the present value of future dividends received as follows  32-TV  :

(CT 2.3)

The above model is applied to some special cases as follows: (i) Dividends with a growth rate of 0; (ii) Dividends with a fixed growth rate; (iii) And dividends grow at a fixed rate after a certain period of time.

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