DETERMINING THE OPTIMAL CAPITAL STRUCTURE OF PT MEDCO ENERGI INTERNASIONAL TBK

• Main Author: Dhianaufal
• Format: Theses
• Language: Indonesia
• Subjects: Manajemen umum
• Online Access: https://digilib.itb.ac.id/gdl/view/71911
• Institution: Institut Teknologi Bandung

The problem raised in this study concerns Medco Energi’s current performance where in the last five years the debt-to-equity ratio has continued to increase but the profitability has decreased. Hence, resulting in reduced shareholder value. Finding the lowest weighted average cost of capital (WACC) can help to establish the best capital structure for Medco Energi. To determine the actual capital structure, the actual cost of debt and equity must be calculated using the current debt to equity ratio. To calculate the cost of debt, the synthetic rating table from Damodaran that utilizes the interest coverage ratio to determine the Medco Energi default spread value was used. The Capital Asset Pricing Model (CAPM) is an approach used to calculate the cost of equity. It determines the expected return on an investment based on its level of risk. In order to identify the optimal capital structure for Medco Energi, simulations of the cost of debt and equity must be conducted by varying the debt ratio from 1-100%. According to the simulation results, the optimal capital structure will be achieved when the debt ratio is 31% and the equity ratio is 69%, whereas the current debt ratio is 72% and equity ratio is 28%. From the simulation results, it is known that Medco Energi is in an overleverage condition and needs to reduce its debt-to-equity ratio. The Changing Debt Ratios Framework will be used to find the best way for Medco Energi to reduce the debt ratio. As of 2021, the Altman Z-Score value is 2.22, this indication suggests that Medco Energi is not facing the threat of bankruptcy and can consider a gradual reduction in its debt-toequity ratio. As of 2021, Medco Energi growth potential is 0.95% if it solely relies on internal financing. However, if it maintains its debt-to-equity ratio without external equity financing, the growth potential increases to 4.38%. This indicates that if Medco Energi aims for a growth rate greater than 0.95% per year, it cannot only rely on retained earnings. The last thing to consider is that Medco Energi must choose between funding projects or paying off debt. If Medco Energi has a project and the projected return is larger than the cost of debt, investing in the project may be a good alternative. Otherwise, if the cost of debt is higher than the projected return on investment, Medco Energi can pay down debt.