PROBLEM 2 (20 POINTS) PT. GDAM has recently established 2 business subsidiaries that refines CPO and further marketing it as cooking oils. This is part of the company's strategy to extend the range and reach of value-added products to its customers. Production from the first subsidiary PT. Arah Asa Hijau (PT. AAH) in Pekanbaru, focuses its sales on the entire island of Sumatra, Kalimantan as well as West Java regions. Production from the second subsidiary PT. Arah Bakti Hijau (PT. ABH) in Sidoarjo, subsequently covers the remaining sales area for Central and East Java as well as entire east Indonesia regions. PT. AAH and PT. ABH operates under similar operating cost structures, both having fixed operating costs of IDR 12.000.000.000 and uniformly maintains variable operating cost of IDR 9.000/litre and able to set a sale price of IDR 15.000/litre for its cooking oil. The firm's tax bracket is 35%. Upon further examination of their financial, there are significant differences on how the two firms arrange the structure of financial composition. On the liability side PT. AAH has capital structure consisting of 30 % debt in the form of IDR 30.000.000.000 10-year Bonds with 10% (annual) coupon rate. Whilst composition of its equity, consist of 10.000 shares of IDR 500 (annual dividend per share) preferred stock outstanding. It also has 500.000 shares of common stock outstanding. Alternately company PT. ABH has an IDR 40.000.000.000 Bonds with 9% (annual) coupon rate of interest, establishing its 40% debt ratio level. Structure of the equity consist of 8.000 shares of IDR 500 (annual dividend per share) preferred stock outstanding. It also has 350.000 shares of common stock outstanding. The latest annual sales figures for PT. AAH are 2.600.000 litres, whilst PT. ABH is 4.000.000 litres, respectively. a. Measure the Firm's Degree of Operating Leverage (DOL) of PT. AAH using the current level of sales in Quantity as a base. Explain in detail the result of your calculation. Show the effect of the 20% increase in sales toward EBIT (5pts). b. Measure the firm's Degree of Financial Leverage (DFL) of PT. AAH at base level EBIT. Based on your result, explain in detail the effect of financial leverage (5pts). c. Measure the firm's Degree of Total Leverage (DTL) of PT. AAH using the current level of sales in Quantity as a base. Explain in detail the combined effect of operating and financial leverage on firm risk, according to your result (5pts). d. The firms are considering 2 alternatives capital structures: 0% debt and the current 30% debt ratio. For 0% debt capital structure, PT. AAH has 800.000 shares of common stock outstanding and no preferred stock. For 0% debt capital structure, PT. ABH has 500.000 shares of common stock outstanding and no preferred stock. Analyse the risk of each capital structure alternative of PT. AAH by performing the EBIT- EPS analysis (you are free to choose any level of EBIT). Decide which capital structure option i.e., with current Debt level of 30%, or with No Debt is better? Explain your result, prove with EBIT simulation (5 pts). PROBLEM 2 (20 POINTS) PT. GDAM has recently established 2 business subsidiaries that refines CPO and further marketing it as cooking oils. This is part of the company's strategy to extend the range and reach of value-added products to its customers. Production from the first subsidiary PT. Arah Asa Hijau (PT. AAH) in Pekanbaru, focuses its sales on the entire island of Sumatra, Kalimantan as well as West Java regions. Production from the second subsidiary PT. Arah Bakti Hijau (PT. ABH) in Sidoarjo, subsequently covers the remaining sales area for Central and East Java as well as entire east Indonesia regions. PT. AAH and PT. ABH operates under similar operating cost structures, both having fixed operating costs of IDR 12.000.000.000 and uniformly maintains variable operating cost of IDR 9.000/litre and able to set a sale price of IDR 15.000/litre for its cooking oil. The firm's tax bracket is 35%. Upon further examination of their financial, there are significant differences on how the two firms arrange the structure of financial composition. On the liability side PT. AAH has capital structure consisting of 30 % debt in the form of IDR 30.000.000.000 10-year Bonds with 10% (annual) coupon rate. Whilst composition of its equity, consist of 10.000 shares of IDR 500 (annual dividend per share) preferred stock outstanding. It also has 500.000 shares of common stock outstanding. Alternately company PT. ABH has an IDR 40.000.000.000 Bonds with 9% (annual) coupon rate of interest, establishing its 40% debt ratio level. Structure of the equity consist of 8.000 shares of IDR 500 (annual dividend per share) preferred stock outstanding. It also has 350.000 shares of common stock outstanding. The latest annual sales figures for PT. AAH are 2.600.000 litres, whilst PT. ABH is 4.000.000 litres, respectively. a. Measure the Firm's Degree of Operating Leverage (DOL) of PT. AAH using the current level of sales in Quantity as a base. Explain in detail the result of your calculation. Show the effect of the 20% increase in sales toward EBIT (5pts). b. Measure the firm's Degree of Financial Leverage (DFL) of PT. AAH at base level EBIT. Based on your result, explain in detail the effect of financial leverage (5pts). c. Measure the firm's Degree of Total Leverage (DTL) of PT. AAH using the current level of sales in Quantity as a base. Explain in detail the combined effect of operating and financial leverage on firm risk, according to your result (5pts). d. The firms are considering 2 alternatives capital structures: 0% debt and the current 30% debt ratio. For 0% debt capital structure, PT. AAH has 800.000 shares of common stock outstanding and no preferred stock. For 0% debt capital structure, PT. ABH has 500.000 shares of common stock outstanding and no preferred stock. Analyse the risk of each capital structure alternative of PT. AAH by performing the EBIT- EPS analysis (you are free to choose any level of EBIT). Decide which capital structure option i.e., with current Debt level of 30%, or with No Debt is better? Explain your result, prove with EBIT simulation (5 pts)
