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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance TABLE OF CONTEND ENGAGEMENT.i LIST OF ABBREVIATED WORDS.1 CHAPTER 1: OVERVIEW OF CAPITAL STRUCTURE AND TARGET CAPITAL STRUCTURE.2 The theories of capital structure. Modigliani and Miller approach.
Capital Structure theory – Traditional approach.5 CHAPTER 2: SITUATION OF CAPITAL STRUCTURE OF COMPANY THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK COMPANY.1 Overview of company Thang Long mechanical four and construction joint stock company.1 The basic information about company Thang Long mechanical four and construction joint stock company. The basic information. The organization chart of Thang Long mechanical four and construction joint stock company. The system of accounting of the company.2: SYSTEM OF ACCOUNTING OF THE COMPANY.2 The business characteristics of company Thang Long mechanical four and construction joint stock company.
Material and technical facilities. Situation of material supply.23 Tran Thi Minh Nguyet ii CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance 2. The capability of skilled workmanship of Thang Long mechanical four and construction joint stock company. Output market and the ability to compete of the company.3 Overview of financial situation and performance of company Thang Long mechanical four and construction joint stock company .2 Situation of capital structure of Thang Long mechanical four and construction joint stock company.
Situations of capital structure. The situation of financial leverage. Evaluating the effect of capital structure to the firm. The effect of financial leverage to ROE.3 Assessment of the company’s capital structure decisions.2 The shortcomings and reasons.43 CHAPTER 3: SOLUTIONS FOR ESTABLISHING THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK COMPANY ’ TARGET CAPITAL STRUCTURE.
The development strategies of Thang Long mechanical four and construction joint stock company.1 Social and economic background. Objectives of business operation. The orientation of business. Solutions for establishing Thang Long mechanical four and construction joint stock company ’ target capital structure.Improving capital structure by decreasing gearing.47 Tran Thi Minh Nguyet iii CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance 3.Strengthening the management of recievable account to recover capital in short term.
The solutions to improve the situation of net working capital of the company. The company should have solutions to improve the performance in next fiscal year to increase the benefit for shareholders. The petitions for the government.56 Tran Thi Minh Nguyet iv CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance LIST OF ABBREVIATED WORDS DFL : Degree financial leverage EBIT : Earning before interest and tax EPS : Earning per share NWC : Networking capital ROA : Return on assets ROE : Return on equity ROS : Return on sale WAC : C Weight average cost of capital Tran Thi Minh Nguyet v CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance LIST OF TABLE AND PICTURE PICTURE 2.1: THE ORGANIZATION CHART OF THE COMPANY TABLE 2.1: THE CAPABILITY OF SKILLED WORKMANSHIP THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK COMPANY TABLE 2.2: SOME FINANCIAL RATIOS OF THE COMPANY IN RECENT YEARS.3: SIZE, STRUCTURE AND FLUCTUATION OF CAPITAL STRUCTURE FROM FISCAL 2013 TO 2015.4: GEARING AND DEBT/EQUITY OF THE COMPANY FROM FISCAL 2013 TO FISCAL 2015 TABLE 2.5: DEGREE OF FINANCIAL LEVERAGE FROM FISCAL 2013 TO FISCAL 2015 TABLE 2.6: THE EFFECT OF FINANCIAL LEVERAGE TO ROE TABLE 2.7: THE RATIOS OF THE ABILITY TO PAY FOR CREDITORS OF THE COMPANY TABLE 2.8: THE SITUATION OF NET WORKING CAPITAL OF THE COMPANY Tran Thi Minh Nguyet vi CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 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”.
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. 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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance construction joint stock company.
- About time: the figures provided by financial statements of the company in 2014 and 2015. Methodology The thesis uses the methodologies: analytical method, statistical method, experimental method…to clear the topic of the thesis. 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 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance CHAPTER 1 OVERVIEW OF CAPITAL STRUCTURE AND TARGET CAPITAL STRUCTURE 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: Debt Gearing= Total assets∨source of capital This ratio shows the percentages of debt in capital structure of the company. Tran Thi Minh Nguyet 3 CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance Debt Debt/ Equity¿ Shareholder s ' equity The company can have various capital structure, but all of them are to maximize the value of the company.2 The theories of capital structure 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.
Tran Thi Minh Nguyet 4 CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance Proposition 2: It says that financial leverage is in direct proportion to the 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.
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. Tran Thi Minh Nguyet 5 CQ50/11.18 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Final thesis Academy of finance Assumptions under Traditional Approach: 1.
The rate of interest on debt is constant for a certain period and thereafter with increase in leverage, it increases. 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. 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. COST OF CAPITAL AND TRADITIONAL APPROACH 1.