Optimal Capital Structure for Indonesian State-Owned Electricity
Company
Marita Putri Nirbaya and Ahmad Danu Prasetyo
Master Business Administration, Institut Teknologi Bandung, Jl. Gelap Nyawang No.1, Bandung, Indonesia
Keywords: Public Finance, Capital Structure, Maximizing Company Value, Weighted Average Cost of Capital.
Abstract: Electricity is important in our lives since it is crucial for our basic needs. Along with the inclining population
numbers each year, the demand for the electricity also inclining. However, electricity business needs huge
amount of investments since the plant and the operational cost are not cheap. There are several funding sources
that are possible, it could be inside or outside Indonesia. included as capital-intensive business, business in
electricity sector needs massive investments. The source of the funding may vary, it could be from outside or
inside Indonesia. In Indonesia, the company that appointed by the government to generate, transmit and
distribute electricity is PT PLN Persero. The company itself needs to know their combination of the debt and
equity that could generate maximum value of the company or it is known as its optimal capital structure. The
theory that is based in this research is the theory from Gitman and Zutter (2015) that said that to maximize
firm value we need to maximize the firm’s weighted average cost of capital (WACC). From the calculation
of the model used in this research, it is obtained weight combination of 20% domestic cost of equity, 39.66%
domestic cost of debt and 40.34% global cost of debt.
1 INTRODUCTION
Indonesia is known as one of the most populated
country in the world. The population growth in
Indonesia is stable and projected it is increasing every
year. Electricity is becoming one of our basic needs.
However, population doesn’t play direct part in
electricity demands but it can’t be denied that the two
things is correlated. Along with the growth of the
population, the electricity demands are increasing
every year. In that matter, Indonesian government
tried to fulfill the demand to provide electricity in the
country. PT PLN Persero is a state-own company that
has been appointed by the government of Indonesia
to generate, transmit and distribute electricity in the
country. To do so, the company needs huge amount
of investment therefore it is categorized as capital-
intensive business. Thus, it is important for the
company to find its optimal capital structure. By
determining the company optimal capital structure,
the company could achieve their maximum value.
There are several methods to determine a
company’s optimal capital structure, according to
Gitman and Zutter (2015), the capital structure at
which the weighted average cost of capital is
minimized will maximize the firm’s value. In that
matter, we can determine the maximum firm value by
minimizing its weighted average cost of capital. In
order to do so, in this research will be used the help
of SOLVER tools in Excel. The weighted average
cost of capital will be minimized and then the
combination of weights will be obtained and those
weights will be the optimal capital structure of the
company.
The source of the fund may vary, it could be from
inside Indonesia or even outside the country.
Therefore, there are 3 variables that will be included
in the research which are Domestic Cost of Debt (Kd
D), Domestic Cost of Equity (Ke D) and Global Cost
of Debt (Kd G). Since, the government is trying to
maintain control of the company, the equity that may
come from outside thenam country is excluded from
the calculation. However, there are some limitations
on this research, which are the project is limited to the
risk of the IDR/USD exchange rate and inflation rate
of Indonesia and United States and will assume that
the global debt will be from United States and will be
using USD currency. Other limitation is that the time
period of the research will be only 2 years which is
Nirbaya, M. and Prasetyo, A.
Optimal Capital Structure for Indonesian State-Owned Electricity Company.
DOI: 10.5220/0008436007290737
In Proceedings of the 2nd Inter national Conference on Inclusive Business in the Changing World (ICIB 2019), pages 729-737
ISBN: 978-989-758-408-4
Copyright
c
2020 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
729
from 2017-2018. On those two years period then the
author divides each year quarterly, which means due
to the consistency, all of the data will be presented in
8 period of data which are 2018.Q4; 2018.Q3;
2018.Q2; 2018.Q1; 2017.Q4; 2017.Q3; 2017.Q2; and
2017.Q1.
Based on the calculation it is obtained weight
combination is 20% domestic cost of equity, 39.66%
domestic cost of debt, and 40.34% global cost of debt.
The structure means that majority of the funding
source should be obtained from global debt or debt
that comes from outside the country which is 40.34%
and other than that 20% of the funding should be
funded from domestic equity or equity that comes
from the country and 39.6% should be funded from
global debt or debt that acquired from inside the
country.
2 LITERATURE REVIEW
2.1 Optimal Capital Structure
Optimal capital structure is a financial measurement
that firms use to determine the best mix of debt and
equity financing to use for operations and expansions.
This structure seeks to lower the cost of capital in
order the firm is less dependent on creditors and more
able to finance its core operations through equity. It
is stated on Gitman and Zutter (2015) that when the
company aims to decide its value centered on capital
structure then the manager must be concerned about
risk and return. If the owner already knows the risk
then the company could determine the level of return
that can pay off the risk. The company can arrange
the optimum level of debt to reach the optimal capital
structure. According to Gitman and Zutter (2015), the
capital structure at which the weighted average cost
of capital is minimized, thereby maximizing the
firm’s value. In that matter, we can determine the
maximum firm value by minimizing its weighted
average cost of capital.
2.2 Markowitz Portfolio Theory
In the early 1960s, the investment community talked
about risk, but there was no specific measure for the
term. To build a portfolio model, however investors
had to quantify their risk variable. The basic portfolio
model was developed by Harry Markowitz (1959),
who derived the expected rate of return for a portfolio
of assets and an expected risk measure. Markowitz
said that the variance of the rate of return was a
meaningful measure of portfolio risk under a
reasonable set of assumptions. Stated in Brown and
Reilly (2009), the Markowitz model is based on
several assumptions regarding investor behaviour:
1. Investors consider each investment alternative
as being represented by a probability
distribution of expected returns over some
holding period.
2. Investors maximize one-period expected utility
and their utility curves demonstrate diminishing
marginal utility of health.
3. Investors estimate the risk of the portfolio on the
basis of the variability of expected returns.
4. Investors base decisions solely on expected
return and risk, so their utility curves are a
function of expected return and the expected
variance (or standard deviation) of returns only.
5. For a given risk level, investors prefer higher
returns to lower returns. Similarly, for given
level of expected return, investors prefer less
risk to more risk.
3 METHODS
The main idea of this research is to find out optimal
capital structure of the company. The researcher
wants to know the optimal capital structure by
analyzing from several factors. The first step is to
analyze the company’s condition by analyzing
internal and external factors in order to find the
optimal capital structure for the electricity companies
in Indonesia. The purpose of the analysis of internal
financial condition of the company is to observe the
company’s current financial condition because it will
affect policy decision making and also the company
strategy in the future. The analysis of macro
conditions using Porter’s Five Forces to get the
understanding of industry’s characteristics. The next
step is to calculate the optimal capital structure which
is the combination of debt and equity whether from
domestic or global, to get the maximum value of the
company and also to get the minimum cost of capital.
4 RESULTS AND DISCUSSION
4.1 Financial Analysis
4.1.1 Debt Ratio
The debt ratio is a financial ratio that measures the
extent of a company’s leverage. The debt ratio is
defined as the ratio of total debt to total assets,
expressed as a decimal or percentage.
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730
Figure 1: Research Framework.
According to Gitman and Zutter (2015), the debt
position of a company indicates the amount of other’s
people money being used to generate profits. The
higher debt a company uses in relation to its total
assets, the greater its financial leverage. Financial
leverage refers as the magnification of risk and return
through the use of fixed-cost financing, such as debt
and preferred stock. On that matter, the more the debt
use, the higher risk the company owned as well as
higher potential returns. Debt ratios vary widely, PT
PLN Persero as capital intensive business, having
much higher debt ratios than other company at other
industries. The debt ratio measures the proportion of
total asset that financed by the company.
Figure 2; Pecking Order Theory.
Source: Myers and Majluf, 1984
In a sense, the debt ratio shows a company’s ability to pay
off its liabilities with its assets. Based on the formula
above, the calculation of PT PLN Persero debt ratio is
shown in the figure below
.
Figure 4: Debt Ratio of PT PLN Persero.
Based on the figure above, we can see that PT
PLN Persero tends to decrease each year. A lower
debt ratio usually implies a more stable business with
the potential of longevity because a company with
lower ratio also has lower overall debt. We can see
that the company performance based on the debt ratio
is getting better each year shown by it decreasing
number of the ratio. A debt ratio 0,35 in the last 2017
means that the company has only 35% liabilities of its
total assets. It means that PT PLN Persero only
financed 35% of its assets with debt, which is good
compared in 2014, when the company debt ratio is
0,75 which means that in that year, the company
financed 75% of its asset with debt. The debt ratio is
a one of a fundamental solvency ratio because
creditors are always concerned about being repaid.
Companies with higher debt ratios are better off
looking to equity financing to grow their operations.
The other ratio is debt to equity ratio. The debt to
equity ratio is a financial liquidity ratio that compares
a company’s total debt to total equity. The debt to
equity ratio shows the percentage of company
financing that comes from creditors and investors.
Based in the formula above, the debt to equity ratio of
PT PLN Persero from the period 2012-2017 are
shown on the figure below:
Figure 3: Debt to Equity Ratio of PT PLN Persero.
Based on the figure above we can see that the debt
to equity ratio in 2017 is 0,5 and in 2016 0,4. The
trend on the ratio is declining. Debt to equity ratio of
0,5 in 2017 means that there are half as many
0,68
0,75
0,75
0,39
0,31
0,35
0,00
0,20
0,40
0,60
0,80
1,00
2012 2013 2014 2015 2016 2017
Debt Ratio
Total Debt
to Total
Assets Ratio
2,2
2,9
3,0
0,6
0,4
0,5
-
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2012 2013 2014 2015 2016 2017
Debt to Equity Ratio
Debt to Equity
Ratio
Linear (Debt
to Equity
Ratio)
Risk
Increases
So
Cost of
Finance
Increases
Internal
Financing
External
Financing:
Debt
External
Financing:
Equity
Optimal Capital Structure for Indonesian State-Owned Electricity Company
731
liabilities than there is equity. A lower debt to equity
implies a more financially stable condition. Creditors
view a higher debt to equity ratio as risky because it
shows that the investors have not funded the
operations as much as creditors have. In 2016 the
company has better debt to equity ratio which is 0,4
means that only 40% of its assets is financed by debt
but generally speaking, the trend of the ratio itself is
decreasing.
4.2 Porter’s 5 Forces
a. Threat of new entrants
The first one is threat of new entrants. It
refers to the threat new competitors to
existing businesses. Porter believed that the
possibility of new entrants had a significant
part to play in developing and changing the
competitive dynamics of any industry. The
threat may change the competitive
environment and directly impacts the
profitability of an existing firm. Electricity
sub sector is Indonesia is still primarily
owned by the government through PT PLN
Persero, by that matter the threat of new
entrance is low. Even it is possible for
private sector to penetrate electricity
industry in Indonesia but the control of the
sector is still owned by PT PLN Persero.
Private sector is only allowed to become a
generator provider and then PT PLN Persero
buy the electricity supplies that has been
generated by the generator to fulfill
electricity demands through an agreement
called PPA (Power Purchase Agreement).
So, private sector is not allowed to distribute
and transmit the electricity. The impact is
the market share of the electricity is fully
owned by PT PLN Persero and it is really
hard for the new entrance to penetrate
Indonesia unless there is a change in
regulation. Even the private sector is able to
penetrate, their ability to generate profit
through this sector is limited because the
government has full control of the sector.
b. Threat of substitution
Porter’s threat of substitutes definition is
the availability of a product that the
consumer can purchase instead of the
industry’s product. A substitute product can
be from other industry that offers similar
benefits to the consumer as the product
produced by the firms within the industry.
Electricity does not have substitute but it can
be generated from different sources of
energy but the cost of switching into that
substitutes such as solar panel, gas etc. is
high. Currently, majority of the electricity
production is generated from coal. In this
matter, the threat of substitution is low.
c. Bargaining power of buyer
Bargaining power of buyer refers to the
pressure consumers can exert on businesses
to get them to provide higher quality
products, better customer service and lower
prices. The presence of strong power of
buyer may reduce the profit potential in the
industry. Buyers could increase competition
among the industry by forcing down prices
and bargaining for improved quality and
those acts could result diminished industry
profitability. There are several groups of
buyers for electricity sector, which are
households, business, industrial and others.
All of which has medium bargaining power
since the generation, distribution and the
transmission of the electricity still owned by
PT PLN Persero but the basic electricity
tariff is an important concern for the citizen
because it is considered as one of their basic
needs and the government as the protector of
the citizen can not be increasing the tariff as
they want to. The tariffs are charged in such
a way as to not create problems for the
citizen as the customers as well as for the
companies in the business and industrial
group.
d. Bargaining power of supplier
Bargaining power of supplier is the
mirror image of the bargaining power of
buyers and it refers to the suppliers could
pressure the companies by raising the prices,
lowering their quality or reducing the
availability of their products. However, a
strong supplier can make an industry more
competitive and decrease profit potential for
the buyer. There are several sources to
generate electricity such as coal, natural gas,
geothermal and water. Coal generated
101.244 GWh from 164.366 GWh total non-
fuel generated electricity. As stated above,
currently coal is the major fuel to generate
electricity. Coal is one of limited resources
so the coal suppliers are in dominant
position. But because electricity sector is
hold by the government, the government
itself have their own intervention to make
the coal supply meet its demand to generate
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732
national electricity demands. So, in this
matter, bargaining power of supplier is
medium.
e. Rivalry among existing competitors
The intensity of rivalry among competitors
in an industry/sector refers to the extent to
which firms within an industry put pressure
on one another and limit each other’s profit
potential. Again, in this sector, because the
sector is fully owned by the government by
regulation, the rivalry among existing
competitors is low. The rivals against PT
PLN Persero are the IPP (Independent
Power Producers), but the existence of the
IPP itself is not fully into the game since
they are only allowed to produce the
electricity and sell it to PT PLN Persero. But
it doesn’t close the opportunity in the future,
the government could change the regulation
so the rivalry could intensify.
4.3 Root Cause Analysis
To help understanding problem in this research, we
use Root Cause Analysis. Root cause analysis could
help us tracing a problem back to its origin and help
us to get to the true underlying cause of the issue.
There are several types of RCA and in this research
fishbone diagram tool is used. Fishbone diagram, also
called cause and effect diagram is a visualization tool
for categorizing the potential causes of a problem in
order too identify its root causes (Rouse, 2015).
On the fishbone diagram below, we can see that
the problem that might occur is that low value of the
company. It might occur because of several root
causes. Defining the root causes can be seen on the
fishbone diagram shown below.
As we previously mentioned that the company
needs huge amount of investment and it may lead to
wrong decision in determining source of investment
whether it is from domestically or globally outside the
country. Other than that is the capital structure, we
need to find the optimum capital structure to find the
combination of the debt and equity that is the most
optimal to generate maximum value for the company.
Next root cause is that ignorance to the risk that might
occur to each of the cost that might end up in failure
of the cost minimizing and all of the root causes could
effect to the low value or not optimal value of the
company.
4.4 Domestic Cost of Equity (Ke D)
There are several approaches to determine a company
cost of equity. In this section we are going to calculate
the cost of equity that will occur if the funding source
comes from inside of the country. One of the
approaches is using the CAPM formula that is
mentioned on the previous chapter. To calculate using
those formula we need to know the Risk-Free Rate
(Rf), Beta (β) and Risk Premium (Rm-Rf). The risk-
free rate is from Indonesia Government 10 Year Bond
Yield which is 8.07%. For the beta of the company,
because PT PLN Persero is not publicly traded, we
then used comparable public companies as proxy.
From the calculation we found that the beta of the
company of the proxy that we are going to use is 0,36.
The beta is less than 1 which means that the company
market price is theoretically less volatile than the
market. Last variable that we need to know is risk
premium. The Risk Premium is the difference
between the expected return on the market with the
risk-free rate of return. For calculating risk premium,
we need to know the return on the market which we
use the IHSG return to determine the return of the
market. From those data, we could find the Domestic
Cost of Equity (Ke D) but apparently the result of the
Ke D is really low which is 7,95%. (Full calculation
data can be seen on the Appendix). It is against the
Pecking Order Theory which is stated that the
managers follow the hierarchy to choose sources of
finance.
The pecking order theory starts from the
asymmetry of information in the company or the
unequal distribution of the information. Generally,
the managers have more information about
company’s performance, prospects and risks
compared with the creditors or investors. It is not
possible for the investors or creditors to know
everything about the company. Thus, there will
always be some amount of information asymmetry in
a company. According the theory, the cost of equity
should be higher than cost of debt. So, in this matter
the author tries to calculate cost of equity with
different approach.
Cost of equity is the return a company requires to
decide if an investment meets capital return
requirements, hence we are going to use the
comparable public company in electricity sector ROE
as the proxy of cost of equity calculation. On the table
below is shown the calculation of the company’s
ROE which we are going to use it as the domestic cost
of equity (Ke D). Based on the table we could
conclude that the domestic cost of equity (Ke D) is
21.34%.
Optimal Capital Structure for Indonesian State-Owned Electricity Company
733
Table 1: Domestic Cost of Equity (Ke D).
Period
Ke D
2017.Q1
21.92%
2017.Q2
24.48%
2017.Q3
21.17%
2017.Q4
26.26%
2018.Q1
18.48%
2018.Q2
16.83%
2018.Q3
20.25%
2018.Q4
21.31%
Average
21.34%
Source: Analysis, 2019
4.5 Domestic Cost of Debt (Kd D)
As stated by Damodaran, to determine cost of debt,
we can use the rating of the company and a typical
default spread on bonds with that rating. In this case,
PT PLN Persero hold AAA rating from Pefindo.
Based on the historical yield of the similar rating,
averagely the yield of the bond with the similar rating
is 7.2%, so we can conclude that cost of debt of the
company is 7.2%.
Table 2: Domestic Cost of Debt (Kd D).
Period
Kd L
2018.Q4
8.25%
2018.Q3
8.00%
2018.Q2
7.15%
2018.Q1
6.47%
2017.Q4
6.52%
2017.Q3
6.77%
2017.Q2
6.99%
2017.Q1
7.45%
Average
7.20%
Source: Analysis, 2019
4.6 Global Cost of Equity (Ke G)
It is previously mentioned above that source of fund
may vary and it could be from equity that obtained
globally (outside Indonesia) but for PT PLN Persero
the equity should be fully funded domestically or
from inside the country because the company is
currently the only company that could distribute,
generate and transmit electricity in Indonesia. The
government of Indonesia wants to keep the ownership
of the company so they could monitor and control the
electricity tariff without intervention from other
parties. Based on that matter, the calculation of the
global cost of equity (Ke G) is excluded from the
formula.
4.7 Global Cost of Debt (Kd G)
Another assumption that we made on this final project
is that, PT PLN Persero acquires fund from debt that
performed outside Indonesia. The company’s cost of
debt is dependent on the interest rate that it pays when
borrowing funds. The interest rate that it pays is equal
to the risk-free rate at the time it borrows funds, along
with a credit risk premium that compensates creditors
for accepting credit (default) risk when extending
credit to the company. As part of the international
money market financing decision, a company need to
consider both the market interest rate that will be
paying on its debt and the likely exchange rate change
during the period its debt is outstanding, (Madura,
2007).
To calculate the cost of debt, the formula is shown
below:
Rf = ((1+iF) * (1+eF)) – 1
Rf = the effective financing rate
iF = the market interest rate
eF = the expected (percentage) change in the
foreign currency against the firm’s home currency.
In this research, we are using the United States of
America as proxy. To determine the market interest
rate, we use the Fed Rate from the US, in November
2018, the US Fed Rate is 2.2%. From the formula we
can obtain the global cost of debt (Kd G) which is
2.17% and the calculation as follow:
Table 3: Global Cost of Debt (Kd G).
Period
Kd G
2018.Q4
4.78%
2018.Q3
3.26%
2018.Q2
3.12%
2018.Q1
1.95%
2017.Q4
1.45%
2017.Q3
1.52%
2017.Q2
0.96%
2017.Q1
0.33%
Average
2.17%
Source: Analysis, 2019
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734
4.8 Risk Measurement (Standar
Deviation and Variance)
One of the best-known measures of risk is the
variance, or standard deviation of expected returns.
We consider the variance and standard deviation as
one measure of risk because the standard deviation is
the square root of the variance. It is a statistical
measure of the dispersion of returns around the
expected value whereby a larger variance or standard
deviation indicates greater dispersion. The idea is that
the more disperse the expected return, the greater the
uncertainty of future returns.
In this final project, we need to measure all of the
risk of the cost of capital by calculating standard
deviation and variance of domestic cost of capital and
global cost of capital. The result of the calculation is
shown below.
Table 4: Variance and Standard Deviation Calculation.
Period
Kd D
2018.Q4
8.25%
2018.Q3
8.00%
2018.Q2
7.15%
2018.Q1
6.47%
2017.Q4
6.52%
2017.Q3
6.77%
2017.Q2
6.99%
2017.Q1
7.45%
Average Cost
7.20%
Variance
0.004325%
STDV
0.657621%
Source: Analysis, 2019
4.9 Optimal Capital Structure
The objective of this final project is to determine the
optimal capital structure of PT PLN Persero. To
obtain it we are using SOLVER tools in Excel. Based
on the theory that lower WACC means higher firm
value, on the solver we minimize the WACC to obtain
the appropriate weight of the cost of equity and cost
of debt (domestic), with the constraint of the
maximum risk of the company that willing to afford
is the standard deviation or the risk of the global cost
of debt.
The weight of investment both from inside and
outside the country is regulated in Presidential
Regulations Number 44/2016. It is stated that for the
energy sector especially the electricity sub-sector, the
maximum foreign investment is 95%. Other
constraint we are using is Debt Equity Ratio that is
stated in Minister of Finance Regulation No.
169/PMK.010/2015 which regulates the limitation of
debt equity ratio is 4:1. The regulation is becoming
one of the constraints as well. Based on the
constraints mentioned above, below is the formula of
the WACC.
95%(Wd Kd G) + 5% (Wd Kd D + We Ke D)
The result of the calculation with the formula
above is shown below:
Table 5: Calculation Result of WACC.
WACC
7.999%
Variance
0.021%
Standard Deviation
1.451%
Source: Analysis, 2019
On the result of the calculation above, we can see
that from minimizing the WACC using SOLVER in
Excel to obtain maximum value of the firm, we got
7.999% of the WACC, which means that the
minimum WACC that we can obtain is 7.999%.
WACC basically is the rate that a company is
expected to pay on average to all its security holders
to finance its assets so in this final project we can
conclude that PT PLN Persero to obtain the maximum
firm’s value the minimum cost that the firm is need to
pay is 7.999%.
The result of the WACC is a combination of the
weight of each the costs, which is domestic cost of
equity, domestic cost of debt and global cost of debt.
Those weights are later made as the optimal capital
structure of PT PLN Persero. The result of the
calculation of the weight is shown below.
Table 6: Optimal Capital Structure of PT PLN Persero.
Cost of Capital
Weights
Ke D
20.00002%
Kd D
39.66114%
Kd G
40.33894%
Total
100.00%
Source: Analysis, 2019
Based on the data shown above we can conclude
that to obtain the minimum WACC of PT PLN
Persero these weights above are the combination of
the proportioned weight that must be met, these
weights are then concluded as the company’s optimal
capital structure. The optimal capital structure of a
company is defined as the proportion of debt and
equity that result in the lowest weighted average cost
Optimal Capital Structure for Indonesian State-Owned Electricity Company
735
of capital (WACC) of the firm. The result of the
weight combination is 20% domestic cost of equity,
39.66% domestic cost of debt and 40.34% global cost
of debt. The structure means that majority of the
funding source should be obtained from debt whether
it is obtained from inside the country or debt that
comes from outside the country and 20% of the fund
should be obtained from equity that comes from
inside the country.
Based on the calculation, we can obtain the
number for the optimal combination of debt and
equity is 80% debt and 20%% equity. From those
weight proportion, we later could analyze the current
capital structure of the company and how much fund
we should obtain to reach the optimal capital
structure. Before analyzing further to the calculation
of the proposed optimal capital structure, we need to
calculate the amount of capital expenditure needed
for the latest PT PLN Persero program which is
35.000 MW program. The program will be needed
1.127 billion rupiah and the company only obligated
to fund or to build 8.911 MW from the 35.000 MW.
From the data we can calculate the approximate fund
needed to fund the program. The calculation of the
proposed optimal capital structure and the current
capital structure of the company can be seen on the
table below.
Table 7: Position of Capital Structure.
Program 35 000 MW
1,127,000.00
1 MW
32.20
PLN (8911 MW)
286,934.20
Total debt and equity
1,621,892.20
From the table above we can see that, PT PLN
Persero current capital structure is consists of 65.13%
of equity and 34.87% of debt. The amount of the
equity is 864,417 billion rupiah and the amount of the
liability is 465,541 billion rupiah. Based on the
calculation of the optimal capital structure, to reach
the optimal capital structure we proposed we need to
obtain 831,975 billion rupiah of debt and we need to
lower the amount of our equity to the amount of
324,374 billion rupiah. Total of the capital with the
proposed optimal capital structure is becoming
1,632,893 billion rupiah and it is acquired from the
number of the previous total capital accumulated with
the capital expenditure needed for 35.000 MW
program. After acquiring those numbers than we
could calculate the gap that the company should
fulfill to comply with the optimal capital structure
that we already calculated.
Table 8: Fund Should be Obtained.
Ke D
20.00%
324,378.76
Kd D
39.66%
643,260.97
Kd G
40.34%
654,254.08
Total
1,621,893.82
Source: Analysis, 2019
From the data we can calculate the amount of debt
that the company should obtain to comply with the
optimal capital structure which is 1,297,516 billion
rupiah and it is consist from 643,260 billion rupiah
debt from inside the country and 654,254 billion
rupiah debt from outside the country. For the equity,
the company should reduce their equity to the amount
of 324,378 billion rupiah.
4.10 Risk Analysis
From the calculation of the optimal capital structure,
we can conclude the majority of the funding sources
should come from debt that obtained globally or
domestically. In that matter, we should consider that
the number might have not be met by the company
since it is relatively harder to obtain debt from outside
the country rather than from inside the country. To
overcome that possibility that may happen, the
company should look for efficient funding scheme
alternatives through foreign and domestic business
partnerships. Indonesia known as not the world’s
most business-friendly country (reflected by the weak
ranking in the World Bank’s Doing Business Index),
therefore the company as the sole provider in the
electricity sector in Indonesia could propose simpler
funding scheme to increase ease in doing business in
Indonesia especially in electricity sector. Other than
that, because based on the optimal capital structure
the company need to obtain debt from outside the
country, it is important for the company to fix PT
PLN Persero’s rating. Currently the company’s 10-
year bond rated Baa3 from Moody’s, BB from S&P
and BBB- from Fitch. Thus, it is important to mend
the rating considering of the funding source should be
obtained from debt outside the country.
5 CONCLUSION
Based on the analysis that performed on the previous
chapter, we could conclude that to maximize firm
Source: Analysis, 2019
ICIB 2019 - The 2nd International Conference on Inclusive Business in the Changing World
736
value, it is important to find the optimal capital
structure. Optimal capital structure indicates the best
debt-to-equity ratio for a firm that maximizes its
value. The optimal capital structure for the firm is
determined as that capital structure for which the
company’s weighted average cost of capital is the
lowest, because when the WACC is minimized, the
value of the company or shareholder wealth is
maximized. Based on Pecking Order Theory, cost of
debt is cheaper than the cost of equity, as debt is less
risky than equity, the required return needed to
compensate the debt investors is less than the required
return needed to compensate the equity investors. In
this project we are inspired with the Markowitz
Portfolio Theory which basically stated that optimal
asset allocation seeks to maximize potential returns
while minimizing risk.
PT PLN Persero as provider of the electricity in
Indonesia seeks for huge investments since it is also
categorized as capital-intensive business. Other than
that, the company needs to maximize the value of the
company to satisfy the shareholder’s wealth. This is
the reason why, PT PLN Persero needs to determine
their optimal capital structure. Since the company
needs massive investments, assuming that the
funding sources is not only from inside the country
but also outside the country. Based the calculation
performed, it is obtained the optimal capital structure
is:
1. 20% from equity acquired inside the
country.
2. 39.66% from debt acquired from inside the
country.
3. 40.34% from debt acquired from outside the
country.
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