THE EFFECT OF CAPITAL STRUCTURE TO THE FIRM’S PROFITABILITY AND THE VALUE OF THE FIRM: A STUDY IN PROPERTY AND REAL ESTATE SECTOR LISTED IN INDONESIAN STOCK EXCHANGE

• Main Author: Afiah, Nisrina
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/81025
• Institution: Institut Teknologi Bandung

It is very important to a firm finding the proper capital structure decision since it will affect the firm’s ability to finance its activities. The capital structure itself is defined as the mix of debt (shortterm debt and long-term debt), equity (preferred stock and common stock), and also hybrid securities that a firm used to finance its assets. To keep the business alive, the firm needs to increase its profitability that will make the firm sustain. Therefore, this is one of reason why firms need to decide their source of financing properly. As the Modigliani and Miller Theory (1958) stated that the capital structure is irrelevant with the value of the firm under few circumstances such as no bankruptcy cost, no agency cost, no taxes, no asymmetric information, and in efficient market. However, until now, the capital structure impact toward profitability and value of firm still being debated. In this study, the property and real estate sector will be the objective of the research since this sector is one of important sector and has contributed on the economy of Indonesia. As the matter of fact, population of Indonesian people is keep growing and the demand of living place is also increasing. This is one of the reason why investors also think that property and real estate sector as interesting investment. The purpose of the research reveals the impact of capital structure of a firm to its profitability that consists of several indicators such as GPM (Gross Profit Margin), OPM (Operating Profit Margin), ROA (Return on Asset), ROE (Return on Equity) and capital structure effect to the value of firms with independent variable, Debt Ratio. This study also includes the control variables such as firm’s size and sales growth. The value of firm is determined by multiplying the number of shares outstanding with share price. Regard to the value of firm, the firm goal is not only to earn profit but also to maximize the shareholder’s wealth. As shareholders has decided to invest to the firm, they expect for return in future. For investors, to decide whether they want to invest or not, they need to make sure that the firm where they invest will give them return and will be sustained. Therefore, value of firm is one of consideration for investors. In this study, the author examines the impact of the effect of capital structure to profitability and the value of the firm. There are 29 out of 45 property and real estate firms that listed in Indonesian Stock Exchange that observed by author in this study. To make this study more significant than previous studies, the author uses the data for 8 years from 2009 until 2016. The methodology that used in this study is panel data regression analysis. The result of this study is debt ratio has negative impact to ROA and Value of firm. So, this study recommends the property and real estate business to concern of their debt level since it increases the investor’s doubt when they want to invest and suggest that they should use their retained earnings when funding is necessary.