MM5006 -Financial Management and Policy Mid Exam 2022/2023
Lecturer:
Oktofa Yudha Sudrajad,Ph.D
Name : Maura Chrisanti Husein
Student ID (NIM) : 29122076
“I affirm that I will not give or receive unauthorized help on this exam, and that all work will be my own”
Digital signature:
PT INDOCEMENT TUNGGAL PRAKARSA TBK PROBLEM 1
Question:
Make a financial analysis on a listed company that provided in the appendix (based on NIM) and conclude the soundness of the company! Based on determinants of the return on equity, if you are investor, would you invest in the company?
Answer:
In determining whether the company is having a healthy financial condition, I choose several indicators and calculate the ratio of each indicators. And then, I calculate the CAGR (Compound Annual Growth Rate) for each parameters to measure the annual growth rate over time. The parameters I choose are the following:
1. Profitability ratio
- Return on Equity (ROE)
Is the measure of a company’s net income divided by its shareholders’ equity. It shows how well a company is managing the capital that shareholders have invested in it. Here are the result:
- Gross profit margin
Gross profit margin shows how much profit a company makes after paying off its ost of Sales. The ratio indicates the percentage of each rupiah of revenue that the company retains as gross profit. So the higher the ratio, the better for investment.
Here are the results:
- Operating profit margin
This ratio shows how profitable is the company. The larger the ratio, the more money the company will make.
- Net profit margin
This shows the percentage of sales a company keep after covering all of its costs. The higher the ratio, the more money company could give to its shareholders.
- Return on Asset (ROA)
This shows how much profit a company could make from its total assets. If the ratio of ROA is 5% or lower, it considered to be low. And if the ROA is over 20% it considered to be high.
2. Liquidity Ratio - Current ratio
Current ratio shows the company’s ability to pay its short-term debts with its current assets. A good current ratio value is 1,5-2.
- Quick (acid-test) ratio
It is a calculation to determine whether the company is capable of pay its bills within a year. It shows the financial health of a company.
3. Debt on Equity Ratio
It shows whether the company’s fundings are depend heavily on the debt because it will affect the financial condition of the company.
4. Market Ratio
- Earnings per share
This shows how much money a company could give to each share of stock. A higher value of the ratio shows greater value.
- Book value per share
The calculation of book value per share shows a company’s total assets minus its total liabilities.
a. According to the tabels above, PT Indocement Tunggal Prakarsa Tbk considered to be in a healthy state financial position. This because several paramaters are increasing throughout the year and they managed to maintain their ratio through 2020-2021 when Covid happened. The ROE and ROA are increasing, and their value of debt to equity ratio is below 50% which means their fundings are not depend on the debts. This align with the company’s current ratio which reach the value above 1,5-2 means they are capable to pay off their debt within short-term period so they don’t retained the debt. But their net profit margin ratio are in an average because the value is abov1 10% but below 20%, so the money that the company will pay to the shareholders are in average position, not in a good position. But, there is still opportunity to grow because the company’s operating profit margin ratio is increasing through the years meaning the company’s is productive and growing.
b. In choosing whether to invest or not to invest, we need to compare the company’s ROE to other similar companies running in the same business line. Here are the results:
If
compare to other companies, PT Indocement has the highest ROE ratio which indicates that PT Indocement financial management is better than other companies to utilize the equity provided by shareholders. Also, to emphasized the statement, PT Indocement considered to be having a sustain and healthy financial condition.
PROBLEM 2B Question:
Calculate the cost of capital of the company with all available approaches and conclude what is the cost of capital. Elaborate your analysis.
Answer:
In order to calculate the Weighted Average Cost of Capital (WACC), we need to calculate the cost of debt and cost of equity. In order to calculate the cost of equity, we have 3 approaches: CAPM, Dividen Discount Model, and Earning Capitalization Model.
1. First we determine the enterprise value, current liabilities and equity value:
Where equity value = Enterprise value – Current liabilities.
Company ROE
PT Indocement Tunggal Prakarsa Tbk 9%
PT Semen Baturaja Persero Tbk 1,67%
PT Solusi Bangun Indonesia Tbk 1,68%
PT Waskita Beton Precast Tbk -39%
PT Semen Indonesia 5,34%
2. Calculate the capital structure (weighting)
Debt = (current liabilities/enterprise value) x100 Equity= (equity value/enterprise value) x 100 3. Calculate the cost of debt
After tax cost= risk free rate x (1 – tax rate)
Risk-free rate are determined by the indonesian government and tax rate given by the company.
4. Try several approaches to find the best formula (CAPM, Dividen Discount Model, Earning Capitalization Model)
The CAPM Model
CAPM = (Interest expense+beta) x risk premium
Dividen Discount Model
DDM = Dividen x (1+ growth)/ (share price+growth)
Earning Capitalization Model
Earning capitalization model = EPS/share price
5. Choose the most suitable formula. In this case I use the dividen discount model because in the calculation, it has lower value than the CAPM, which means the risk is lower. I don’t use the earning capitalization model because it only consider about the eps and the share price. After we choose the model to calculate the cost of equity, we can eventually calculate the WACC:
WACC = ( Debt x After tax cost of debt) + (Equity x Cost of Equity)
