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Debt or equity? Optimal capital structure in Indonesia's construction sector companies listed in Indonesia stock exchange (IDX)

Author

Listed:
  • Mautia Kusuma Wardani
  • Sylviana Maya Damayanti

Abstract

Government's plan of more focus on infrastructure is an opportunity for construction sector. With the increase of opportunities in the construction sector, companies in the construction sector will attempt to achieve an optimal capital structure in order to continue the company's operations and to develop their business. Optimal capital structure can be used to find out composition of debt and equity in order to maximise firm value. To see the composition of optimal debt, the simulation is done by using 0 until 90% debt composition. Earnings before interest and tax (EBIT) as simulation calculations basic obtained from each company's 2014 Annual Report. Optimal debt composition resulted from simulation are Acset 30%, Adhi 20%, Nusa 20%, Pembangunan 30%, Surya 50%, Total 30%, Waskita 20% and Wijaya 50%. On average, construction sector companies should have 30% composition of debt, but it depends on EBIT, interest coverage ratio and cost of debt.

Suggested Citation

  • Mautia Kusuma Wardani & Sylviana Maya Damayanti, 2017. "Debt or equity? Optimal capital structure in Indonesia's construction sector companies listed in Indonesia stock exchange (IDX)," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 10(3/4), pages 235-249.
    • Handle: RePEc:ids:ijmefi:v:10:y:2017:i:3/4:p:235-249
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