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những lý thuyết về THỰC TRẠNG và GIẢI PHÁP sử DỤNG đòn bẩy tài CHÍNH để NÂNG CAO GIÁ TRỊ DOANH NGHIỆP, thực trạng phân tích về THỰC TRẠNG và GIẢI PHÁP sử DỤNG đòn bẩy tài CHÍNH để NÂNG CAO GIÁ TRỊ DOANH NGHIỆP, giải pháp về THỰC TRẠNG và GIẢI PHÁP sử DỤNG đòn bẩy tài CHÍNH để NÂNG CAO GIÁ TRỊ DOANH NGHIỆP
Bachelor of Finance & Banking Thesis Situation and solution for using financial leverage to improve enterprise value of Da Nang Housing Investment Development Joint Stock Company Page |i P a g e | ii ABSTRACT The study aimed to investigate the effect of financial leverage on real estate enterprise’s value as an annual strategic analysis that helps the analyst in predicting future company’s value on the factors of the mentioned Da Nang Housing Investment Development JointStock Company is a sample selected from Vietnamese real estate companies listed in Vietnamese Stock Market The study used the brochures issued by NDN for five years during the period of 2010 – 2014 The study used a set of statistical methods to determine the effect of study variables that reflect the operational, financing and investment aspects on company’s value of the as an ultimate goal of increasing shareholder wealth The study concluded that there is statistically significant direct relationship between two variables: debt / total assets ratio and weight average cost of capital The correlation was changed follow the increase of debt ratios The optimal capital structure was found when debt / total assets ratio equal 62.5 percent The research begins with providing rationale of research which depicts the importance of financial leverage in capital structure; especially, with respect to real estate companies Besides that, the research question and research objectives are proposed After that, the situations, features and optimal capital structure of NDN capital structure are figured out by using financial statement analysis methodology At last, the authors clarify issues NDN facing with its capital structure and draw experience lesson for other firms After processing the data, the result reveals that it can be concluded that the structure of NDN which is funded mainly by liabilities In particular, short-term liabilities consist of shortterm payables and short-term loans accounted for a large proportion P a g e | iii ACKNOWLEDGEMENT During the period of doing this research, the researchers received so much enthusiastic help as well as the support which are the motivation to overcome the difficulties Thanks to the encouragement and enthusiastic guidance that the researchers have completed this study Firstly, the researchers would like to thank to the lectures that are teaching as well as used to teach at FPT of Business University in Ho Chi Minh Campus, gave us necessary base of knowledge about principles of economic and Finance and Banking Secondly, the researchers would like to deepest thank to Ms Nguyen Thi Thanh Van who is our supervisor during time we research in Da Nang Due to her carefully and enthusiasm instruction, the researchers had official raw materials, theories and econometric knowledge at the beginning In addition, she has supported the researchers with her professional experiences and leading in the best way for fulfilling this study Finally, the researchers would like to thank FPT University in Da Nang Campus; they have helped the researchers by making the best condition during time the researchers stay in Da Nang from arrived to now Including the cleaning staff and security, for doing what they It’s been a pleasure and a privilege due to their efforts P a g e | iv Contents ABSTRACT .iii ACKNOWLEDGEMENT iv Contents .v LIST OF FIGURE viii LIST OF TABLE viii LIST OF ABBREVIATION .ix CHAPTER 1: INTRODUCTION .1 1.1 Research background 1.2 Overview about Vietnamese real estate .1 1.3 Research questions 1.4 Research object .2 1.5 Research objectives .3 1.6 Research scope 1.7 Methodology 1.8 Data overview 1.9 Research limitation 1.10 Thesis structure 1.11 Conclusion CHAPTER 2: LITERATURE REVIEW 2.1 Capital structure 2.1.1 Definition of capital structure 2.1.2 Ratio to define capital structure .7 2.1.3 Theories of capital structure 2.1.4 Optimal capital structure with financial leverage 12 2.2 Profitability 12 2.2.1 Definition of profitability 12 2.2.2 Ratio to define profitability 13 2.3 Financial Leverage .15 2.4 Firm value 19 2.4.1 Definition 19 2.4.2 The role of firm valuation: 19 2.4.3 Valuation model 20 Page |v 2.4.4 Role of using financial leverage to maximize firm value .23 2.5 Gaps in the literature review .24 2.6 Theoretical Model .27 2.6.1 Stable Growth Firm: 27 2.6.2 The General Version of the FCFF Model: 27 CHAPTER 3: METHODOLOGY 30 3.1 Introduction 30 3.1.1 Philosophy .30 3.1.2 Approaches 31 3.1.3 Methods .31 3.2 Data collection method .32 3.2.1 Sampling techniques .32 3.2.2 Secondary data collection method .32 3.3 Data analysis methods 33 3.3.1 Financial analysis 33 3.3.2 Using Free Cash flow to Firm model to figure out firm value maximization 34 3.3.3 Sensitivity data .34 3.4 Ethical considerations 35 3.5 Limitations of research project 36 3.6 Summary 36 CHAPTER 4: ANALYSES AND FINDING 37 4.1 Overview about construction in Viet Nam and NDN Company 37 4.1.1 Real Estate industry 37 4.1.2 The economic potential of the real estate industry 39 4.1.3 Achievement 40 4.1.4 Organizational Structure .41 4.2 The situation of Da Nang Housing Investment Development Joint Stock Company 41 4.2.1 Capital Structure ratio 41 4.2.2 Profitability ratio 45 4.2.3 Financial leverage ratio 51 4.3 Impact of financial leverage on Enterprise Value 52 4.3.1 Weight Average Cost of Capital (WACC) .52 4.3.2 Free Cash Flow .62 4.3.3 Impact of financial leverage on enterprise value 65 P a g e | vi 4.4 Summary .68 CHAPTER – CONCLUSION AND RECOMMENDATION 69 5.1 Key finding 69 5.2 Conclusion 72 5.3 Recommendation 73 5.3.1 Recommends for using the optimal capital structure: 73 5.3.2 Constructing a reasonable debt structure 74 5.3.3 Recommends for improving firm value 75 5.4 Limitation 76 REFENCES .77 APPENDIX a APPENDIX 1: FINANCIAL STATEMENTS OF DA NANG HOUSING INVESTMENT DEVELOPMENT JOINT STOCK COMPANY (NDN) FROM 2010 TO 2014 (Unit: thousand VND) .a APENDIX 2: INCOME STATEMENT OF DA NANG HOUSING INVESTMENT DEVELOPMENT JOINT STOCK COMPANY (NDN) FROM 2010 TO 2014 (Unit: thousand VND) e P a g e | vii LIST OF FIGURE Figure 1: Theoretical model (Tharshiga Murugesu, 2013) Figure 2: Theoretical model (Mapayo, C, 2011) Figure 3: Theoretical model (Prof (Dr) T Velnampy & J AloyNiresh, 2012 Figure 4: Research process Figure 5: Real Estate industry level Figure 6: Urbanization rate Figure 7: GDP growth and real estate sector Figure 8: Organizational Structure Figure 9: Total debt ratio Figure 10: Total Equity ratio Figure 11: Equity multiplier Figure 12: Gross profit margin Figure 13: Operating profit margin Figure 14: Net profit margin Figure 15: Return of Asset (ROA) Figure 16: Return on Equity (ROE) Figure 17: Degree of Financial leverage (DFL) Figure 18: Impact of financial leverage on WACC Figure 19: Impact of financial leverage on enterprise value 24 25 26 30 37 39 40 41 42 43 44 45 46 47 49 51 52 64 65 LIST OF TABLE Table 1: Valuation model 21 Table 2: Total debt ratio 41 Table 3: Total Equity ratio 43 P a g e | viii Table 4: Equity multiplier 44 Table 5: Gross profit margin 45 Table 6: Operating profit margin 46 Table 7: Net profit margin 47 Table 8: Return of Asset (ROA) 49 Table 9: Return on Equity (ROE) 50 Table 10: Degree of financial leverage 52 Table 11: Impact of financial leverage on enterprise value 64 Table 12: target revenue and net income 69 Table 13: Lending rates in VND month 6/2015 72 Table 14: Government's policy 73 LIST OF ABBREVIATION ROA: Return on asset ROE: Return on equity WACC: Weight average cost of capital P a g e | ix EPS: Earning per share DFL: Degree of financial leverage EBIT: Earnings before interest and tax FCFF: Free cash flow to firm NDN: Da Nang Housing Investment Development Joint Stock Company VIC: Vingroup Joint Stock Company Page |x 64.0% 64.5% 65.0% 65.5% 66.0% 66.5% 67.0% 67.5% 308,657,222 311,068,607 313,479,991 315,891,376 318,302,760 320,714,145 323,125,529 325,536,914 173,619,687 171,208,303 168,796,918 166,385,534 163,974,149 161,562,765 159,151,380 156,739,996 5.80% 5.75% 5.70% 5.65% 5.59% 5.54% 5.49% 5.43% 12.13% 12.13% 12.13% 12.13% 12.13% 12.13% 12.13% 12.13% 8.14% 8.14% 8.14% 8.15% 8.15% 8.15% 8.15% 8.15% 2,106,822,443 2,106,344,885 2,105,711,366 2,104,918,422 2,103,962,548 2,102,840,198 2,101,547,786 2,100,081,689 Table 11: Impact of financial leverage on enterprise value Figure 18: Impact of financial leverage on WACC Figure 19: Impact of financial leverage on enterprise value P a g e | 67 177.78% 181.69% 185.71% 189.86% 194.12% 198.51% 203.03% 207.69% After we calculate WACC and firm value of NDN Company, different lever of debt to total asset ratio and debt to equity ratio, we found that financial leverage have both negative and positive affect on WACC and firm value We found that: • With debt to total asset ratio form 0% to 62.5%, financial leverage have negative • effect on WACC that lead to firm value increase (positive effect) However with debt to total asset ratio from 63.5% to 100%, financial leverage cause positive impact on WACC therefor firm value of NDN decrease (negative effect) So in conclusion NDN can reach maximize firm value equal 2,107,353,354,000 VND and WACC equal 8.14% at the point debt to equity ratio is 166.67% and debt to total asset ratio is 62.5% 4.4 Summary In this chapter, the financial situation of the company NDN was presented In recent two years, the financial situation of the company is very positive change to control spending helped improve profitability Comparison with industry leaders such as VIC, indicators in 2014 were rated equivalent, compared with the sector index was also evaluated similarly We also predicted that the company's cash flow in the next few years based on historical data of the company The connection between financial leverage and the value of the company was set up, with the debt ratio of 62.5% in the total assets; the company will achieve the greatest value So, the company should control their debt levels in about 62% of total assets Besides, the control of expenditure to increase the profit margin to attract investors is essential The P a g e | 68 next chapter, we will take a number of measures and proposals in order to maintain the stability of the company CHAPTER – CONCLUSION AND RECOMMENDATION 5.1 Key finding Finding 1: Current situation between equity and debt As we have analyzed and assessed in Chapter 4, the company NDN in 2014 has made changes in its capital structure more reasonable compared to the previous year Total debt of NDN 2014 is 248 billion, accounting for 52 percent proportion of total assets With equity amounts 228 billion, slightly less than the debt (total debt to total equity is about 108%) The company NDN is showing a reasonable capital structure compared to other companies in the real estate sector However, the ratio of debt and equity is not really optimal capital structure to get the smallest WACC and the highest firm value P a g e | 69 Finding 2: Current Enterprise value of NDN According to model calculations of company value, based on indicators such as the cost of debt, cost of equity We have presented in chapter and give the value for the current company is VND 2,079,728,728,000 compared with the book value, our company values calculated is higher Model calculations based on firm growth stable forever, thus making the value of the company has higher value than its book value Moreover, with this current value NDN have not get highest firm value that they can get Their current firm value still less than about 30 billion VND compare with the highest firm value when they archive the optimal capital structure Finding 3: Financial leverage effect NDN’s firm value As we have seen in the data analysis outcome, it clearly show that financial leverage have both negative and positive effect to value of the firm but the question is how financial leverage cause those impact to firm value In this case, value of the firm is calculated through free cash flow to firm valuation model it mean that we will discount free cash flow in the future of the firm to find the present value of firm, discount rate was weight average cost of capital (WACC) So with assumption that free cash flow will not be effect by the financial leverage, therefore the most important factor that financial leverage effected was WACC By the affect to WACC financial leverage will of course caused the affect to firm value To identify clearly the way that financial leverage change WACC we have to analysis formula to calculate WACC With V= D+E or E = V-D this formula we can rewrite as: P a g e | 70 In this research we measure the financial leverage through debt to total asset ratio (D/V) so with the formula above we clearly to see that when the financial leverage change that mean capital structure change WACC will also change Moreover depend to proportion of Debt to total asset financial leverage can causes negative or positive effect to WACC as we seen from the outcome in chapter One more factor in WACC that financial leverage can effect that is cost of equity ( When financial leverage change it mean that capital structure of the firm will change therefore debt to equity of leverage firm surely will also change So it was clearly to see that when the financial leverage change it will make cost of equity will so change through that it cause affect to WACC So in conclusion we found that financial leverage can cause the impact to value of the firm through effect to weight average cost of capital of the firm (WACC) Because firm value and WACC have negative relationship therefore when financial leverage cause negative effect to WACC it will make firm value increase and opposite Finding 4: Planning for sustainable development with major projects Unit P a g e | 71 2014 2015 % change Revenue billions VND 235.1 353 50.20% Net Income billions VND 51.1 53.8 5.40% Table 12: target revenue and net income of NDN in 2015 Da Nang now is leader in of national urban development program therefor the land bank is rather large With supply growing in size and quality, diversified products, to meet the needs of buyers to stay as well as secondary investors; nowadays, the real estate market in the active phase with a large quantity transaction Some real estate projects despite deployment but product already sold out, a number of projects dealt only sold in each period With the current development, future real estate market Da Nang will be one of the strongest growth markets in the nation According to chairman of the board of the company as medium enterprises in Da Nang, the Board has a clear development plan and always be cautious The investment project is invested swift and definite with stable margins Ground and their apartments are always fully legal; customers always receive certificates sovereignty as quickly as possible NDN’s main current project: Green Lake, Son Tra Ocean View, Lapaz Tower,Danang Plaza, The Monarchy Block A With their current projects and strategy maybe NDN cannot have a breakthrough development but they can reduce risk when they always focus on effective investment in local projects, looking for projects with a total investment consistent with the size and capacity of the company 5.2 Conclusion From the evaluation and analysis, it can be concluded that financial leverage may affect the value of the company through loan modifications and WACC In other words, the debts and the interest rate it will affect the financial health of the company as well as the value of the company According to the authors, the use of leverage or otherwise make use of debt to equity is essential measures in the field of real estate of the NDN However, it should be calculated accordingly to leverage effective for companies that not threaten the financial health Finally, based on the business results in 2014 and predictions for 2015, the authors predict P a g e | 72 NDN will continue to achieve higher revenues and improve the use of financial leverage in their business 5.3 Recommendation 5.3.1 Recommends for using the optimal capital structure: The company should build policies of funding sources usage appropriately NDN’s capital structure is primarily financed by debts; it is a specific characteristic of real estate industry Although, its debt ratios are higher than other companies, its income statement shows that NDN could maintains business efficiency even in the most difficult stage of the real estate market in the domestic market In the period 2010 - 2013, the most difficult period of the enterprises operating in the real estate market froze, while higher interest rates, lower credit growth, higher operating expenses led multi Some of the real estate business losses and dissolution batch In that context, Da Nang Housing Company is one of the few businesses still maintain profitable operations with performance increased significantly, namely: 2011 - 2013 NDN maintains sales from 100-139 billion and profit after tax respectively 16-29 billion, maintaining an annual dividend payment of 12% - 16% 2014, business activity of NDN strong growth reaching more than 235 billion revenue, profit after tax more than 51 billion, up times revenue and 2.5 times increase in profits compared to 2013 Thus, reviewing a rational debt structure a necessary issue In order to achieve this, managers has to consider carefully about benefits and drawback of the current capital structures so that they can recovery and create the best plans in the following years Besides, the firm should utilize their own capital sources such retained earnings, investment and development fund The company can use them as long-term capital sources to invest on a part of fixed assets since they not have to pay the cost of rising Reality in quarter 2/2015 NDN was successful capital increase, raised capital to more than 323 billion, with the good financial situation NDN continue to repay bank loans and decline in payables and by the end of quarter second has no debt NDN In other way, some businesses take popularly now is using commercial credit It means that the company can delay payment for suppliers as a temporary measure in the short-term period This will help the firm to increase the amount of significant capital and can develop the relationship between businesses P a g e | 73 5.3.2 Constructing a reasonable debt structure Effectiveness of using debts reflects level of exploitation, usage and management of debts sources to maximize the enterprise’s value NDN recent years tended to decrease the use of financial leverage as how other companies use to maximize profits and reduce risks However as a result of our finding, with the aim of improving value of business, companies need the opposite direction First, debt management is an important issue in using debts effectively To manage debts well, the first problem is the firm should exploit them on the right purposes Then, managers will build a strict plan for this usage in order to avoid the leakage of capital Moreover, they have to monitor, examine and collect debts from account receivables regularly to prevent bad debts Particularly, managers can build a limit of credit for customers For example, the firm will stipulate the number of days and the amount of loan which each customer can own Besides, they will often send notices for creditors or meet directly to remind and withdraw capital If the firm implements well this, it can ensure capital sources for investment and development other issues Second, management of interest expenses is very important in using debt When interest expenses are low, the company can use more debt to support its business operations Thus, financial leverage of the company will increase significantly On the contrary, when interest expenses are high, it will increase the cost of account payable then decrease the profit in business activities At that time, the higher financial leverage will get the higher risk So it should be considered by followed alternatives: • Computing and forecasting interest expense fully and exactly before decide using • debt for the business and production projects Hedging instruments for interest expenses through the exploitation and the use of • derivatives to insure the risks of fluctuations in market interest rates Strengthening financial autonomy regularly, diversifying capital mobilization channels and avoiding heavy dependence on bank loans In fact, the interest expense is remaining stable at a low level for a long time Table 13: Lending rates in VND month 6/2015 Time Priority Area Conventional fields P a g e | 74 business Short term 6% – 7% per year 7% - 9% per year Long term 9% - 10%/year 9,3% -11%/year 5.3.3 Recommends for improving firm value The recessionary hangover of the past three and a half years has made it difficult for many businesses to boost sales to meet shareholder expectations and increase private company valuations Maximizing a company’s value in a period of slow demand growth or declining sales is a difficult task In this section, to maximize corporate value will be addressed through the capital structure changes Name the use of financial leverage In recent years, the company has continuously reduced the debt ratio to fit better with the conditions of the economy However compared with the optimal ratio to maximize the value of the business, it has gone backwards The reason explained by the market has had a positive impact back help warm the real estate market Besides the positive impact from the government's policy support the market Policy Content Time 32/2014/TTNHNN Loosen conditional loans 30.000 billion support 25/11/2014 package; increased the loan term to 15 years; Commercial banks are lending more 36/2014/TTNHN Reduce the risk of real estate loans from 250 % to 150 1/2/2015 N % and increases the utilization rate of capital banks for long-term loans more than doubled, from 30 % to 60 % Changed of Land Ministry of Construction agreed with Da Nang City 1/7/2015 Law People's Committee on the sale of houses to foreigners, however, to limit the duration homeownership and land use rights not exceed 50 years to conform with the provisions of the Land Law in 2013 and amending the Housing Law Table 14: Government's policy P a g e | 75 Those impacts on businesses have created an impressive business results Revenue from the first two quarters of the year 2015 reached 154.9 billion equivalents to 43.9 % of the yearly plan, an increase of 100 % over the same period in 2014; Net income reached 28.7 billion, equivalent of 53.3 % of the plan, up 151 % over the same period 2014 The bank borrowings fell sharply in 2014 and no bank debt by the end of second quarter 2015 Enterprise used of proceeds from the sale of the project to pay down debt By the end of 2014, bank lending was down 51% to 85.7 billion shields debt / total assets in 2014 was 51.8 % also fell sharply from 72 % in 2013 Out of quarter two 2015, sales the whole industry has to pay the bank debt, liabilities fell from 206 billion to 130 billion Thus, the expected 2015 loan interest of NDN will fall sharply from 10.4 billion in 2014 However, to enhance corporate value by using financial leverage NDN should focus restructure the capital structure after the capital increase in second quarter 2015? Specifically, with the debt ratio to total assets was 62.5 % companies can increase business value by using debt for the next plan In fact, the company is undergoing completion and sale of the project should not have much new term investments But the company expects in the near future plans to buy more land to prepare new projects; NDN could choose to borrow in order to maximize corporate value Especially in periods of low interest rates, there is a way to help attract more investors are interested in the book value of the business 5.4 Limitation In fact, there are many factors that affect firm value such as profit, performance but in all research; we only research financial leverage factors Beside, an enterprise may be valued by many methods such as asset method, PE, free cash flow to equity but all our research use only FCFF also called adjust present value of cash flow… led to a few shortcomings that we will not explain all even the change of firm value And this research only examines the impact of financial leverage to WACC thereby affect firm value However financial leverage also affects firm value through a number of other factors such as bankruptcy cost, distress cost, z score, etc… So this research could not accurately assess the impact of financial leverage to firm value In addition, the result achieved by quantitative analysis, mainly based on the information in the financial statements of company Therefore, observations and conclusions are fairly P a g e | 76 approximate, based on the reflection of the data results, but lack of supportive information of the company, to be able to assess the company as more comprehensive REFENCES Myers, Stewart C (1984) Capital structure puzzle: National Bureau of Economic Research Myers, Stewart C., Brealey, Richard A., & Marcus, Alan J (2009) Fundamentals of corporate finance: McGraw-Hill/Irwin Damodaran, A., 2001, Corporate Finance: Theory and Practice, Second Edition, John Wiley and Sons, New York Welch, Ivo (2011) Two common problems in capital structure research: The financialdebt-to-asset ratio and issuing activity versusleverage changes Rochester, NY: Social Science Research Network Welch, Ivo (2011) Two common problems in capital structure research: The financialdebt-to-asset ratio and issuing activity versusleverage changes Rochester, NY: Social Science Research Network Daniel Kurt (1968) Understanding Leverage Ratios Retrieved from http://www.investopedia.com/articles/investing/080113/understanding-leverage-ratios.asp P a g e | 77 Keown, D.F., Martin, S., John D., Petty J.W (1985) Basic Financial Management Englewood Cliffs, N.J.: Prentice Hall, Inc Robert Parrino David S Kidwell & Thomas W Bates (2009) Fundamentals of Corporate Finance United of America: John Wiley & Sons, Inc Ming-Chang Cheng and Zuwei-Ching Tzeng (2011) The effect of leverage on Firm value and how the firm financial quality’s influence on this effect World Journal of Management (September), pp 30-53 Firer, C., Ross, S.A., Westerfield, R.W and Jordan, B.D (2004) Fundamentals of Corporate Finance 3rd ed Berhshire: McGraw Hill Ehrhardt, M.C., and Brigham, E.F (2003) Corporate Finance – a focused approach Mason: Thomson Myers, S C (1984) The Capital Structure Puzzle The Journal of Finance, 39 (3) 575-592 Sharma, A.K (2006) Financial Leverage and Firm’s Value: A Study of Capital Structure of Selected Manufacturing Sector Firms in India The Business Review, Cambridge, 6(2), 70-76 Ward, M and Price A, (2006) Turning Vision into Value Pretoria: Van Schaik Publishers De Wet, J.H.vH (2006) Determining the optimal capital structure: a practical contemporary approach Meditari Accountancy Research Beattie, V., Goodacre, A and Thomson, S.J (2006) Corporate Financing Decisions: UK Survey Evidence Journal of Business Finance & Accounting, 33 (9 & 10), 1402-1434 Lasher, W.R (2003) Practical Financial Management 3rd edition Mason Thomson Fama, E., and French, K (2002) Testing trade-off and pecking order predictions about dividends and debt The Review of Financial Studies Rajan, R.G and Zingales, L (1995) What we know about capital structure? 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