Bankovní Institut Vysoká Škola Praha
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Bankovní institut vysoká škola Praha Katedra bankovnictví a pojišťovnictví Optimalizace kapitálové struktury podniku (sdružení) Diplomové práce Autor: Virchenko Galyna Finance Vedoucí práce: Ing. J. Šolta, CSc. Praha Duben 2011 "Bankovni institut vysoka skola" (Prague) Department of Banking and Insurance Optimization of a corporate capital structure (alliances) Diploma Author: Virchenko Galyna Finance Diploma's supervisor: Ing. J. Šolta, CSc. Prague April, 2011 Declaration: I hereby confirm that I have done this graduation work independently using literature references listed below. I confirm that the electronic version of this work coincides with the printed version, and I accept that fact that works will be archived in the library of BIVS and will be accessible to the third parties on internal electronic database of institute. Prague, 4 April 2011 Galyna Virchenko 3 Acknowledgement: I would like to express my sincere gratitude to my consultant and supervisor for academic advising in the course of this graduation work. 4 Annotation: This Graduation Work is dedicated to scientific, theoretic and methodological approach to optimization of capital structure of company (organization). The research is based on corporate materials of Public Joint-Stock Company «Automobile Company «Bogdan Motors». The first chapter of this graduation work represents economic essence of notion of capital, analyses theoretical approaches to optimization of its structure, and provides analysis of regulatory framework of corporate capital formation. The second chapter of the graduation work is dedicated to business activity of the company under consideration as well as to analysis of its shareholders‘ equity and debt capital management efficiency. The final chapter provides capital structure analysis as one of the methods of efficient capital management, and considers methodological approaches to optimization of company‘s debt-to-equity ratio. Based on analysis results, the graduation work suggests ways of optimization of capital of Public Joint-Stock Company «Automobile Company «Bogdan Motors». Anotace: Tato práce je věnována teoretickým a metodologickým přístupům vedoucím k optimalizaci struktury kapitálu v podniku (sdružení). První kapitola představuje ekonomickou podstatu pojmu kapitálu, analyzuje teoretické přístupy k optimalizaci jeho struktury. Ve druhé kapitole je proveden rozbor aktivit a podmínek financování akciové společnosti «Automobile Company Bogdan Motors». V poslední kapitole je analyzována struktura kapitálu a jsou diskutovány možnosti optimalizace podílu vlastního a cizího kapitálu v podniku. V závěru jsou uvedena doporučení pro optimalizaci kapitálu v uváděné automobilové společnosti. Klíčová slova: kapitálová struktura, optimalizace, vlastní a cizí kapitál 5 Table of contents: Introduction ........................................................................................................................... 7 1. Theoretical Approaches to Capital Structure Optimization of Business Entities ............ 10 1.1 The economic essence and nature of capital ................................................................. 10 1.2 Review of capital structure legal and regulatory framework ........................................ 14 1.3 Analysis of modern approaches to capital structure optimization ................................. 19 2. Analysis of Company‘s Business Activity ..................................................................... 27 2.1 Analysis of business activity of the company and its organization structure ................ 27 2.2 Management of the company's equity ........................................................................... 32 2.3 Management of the company‘s debt .............................................................................. 39 3. Ways of capital structure optimization of company (corporation) .................................. 47 3.1 Analysis of capital structure as one of the ways of efficient capital management ........ 47 3.2 Analysis of main coefficients of capital employment efficiency .................................. 53 3.3 Ways to increase the company‘s capital management efficiency ................................. 61 Conclusions ......................................................................................................................... 67 List of references ................................................................................................................. 70 6 Introduction Notion of capital is one of the fundamental notions in economic theory. Nevertheless, despite frequent use of this term and multi-year research of economic nature of this notion, there is no uniform generally accepted definition of this economic category. Thus, one of the most comprehensive modern interpretations of this notion was offered by A.V. Zhukova and A.I. Seniugina. Capital is an economic resource defined as a sum of material, monetary and intellectual resources used for entrepreneurial activities. It characterizes total value of monetary, material and non-material resources invested in order to form assets. Functioning capital serves interests of company owners and staff as well as the state [13]. The value of such approach for the research conducted in the context of this master's thesis work is that it defines capital as a subject to management and defines the objectives of such management. Accordingly capital management efficiency is also defined through attaining these objectives. Efficient capital management, including efficient management of its structure, requires fundamental understanding of economic essence of this category, profound knowledge of legal framework regulating this aspect of business activity, understanding and critical assessment of modern approaches to capital and its structure management, as well as knowledge of basic tools of current capital status analysis and assessment. Corporate capital structure management raises rather complex management problems, as there is no common approach to defining equity and debt optimal structure. There are several approaches to such structure formation. Thus, basic approaches are represented by traditional concept, indifference concept, compromise concept and conflict-of-interest concept. Nevertheless, it should be noted that the majority of financial experts associate search for optimal capital structure with seeking for compromise between profitability and risk, as well as with capital value management. At that, it is necessary to take into account advantages and disadvantages of use of both shareholders' equity and debt capital. Thus, the main advantages of debt capital raising consist in ensuring company‘s financial stability and retaining overall control on the part of founders. Main disadvantages include limited amounts of debt capital and return on equity deceleration. On the other hand, the main advantage of debt capital is ample capital raising opportunities, but at the same time the main disadvantage consists in reduced financial stability. 7 Also, it should be noted that target capital structure formation may differ from optimal structure formation, since target capital structure involves a number of other factors which have an influence upon management decision-making. Such factors may include commercial risk, terms of taxation, company‘s long-term plans, etc. Thus, evaluation of company‘s current financial position, evaluation of company‘s business environment as well as targets defined by the management are of great importance; also it is necessary to give consideration to company‘s business activity life cycle stage. Knowledge and proper application of current capital structure analysis tools are also very important for efficient management decision making. Basic tools used for assessment of company‘s debt-to-equity ratio efficiency include financial leverage (European and American concepts), and financial statements ratio analysis (primarily, capital structure ratio analysis). Also, these tools may be used for assessment of planned capital structure efficiency. They allow company to assess expediency of one or another debt-to-equity ratio. Thus, capital structure management is a complex process that involves consideration of a number of alternative factors. Company‘s business success to a considerable extent depends upon efficiency of such management. Thus, taking into account relevance of the above-mentioned issues, the subject matter of research in the context of this work is optimization of company‘s (corporation) capital structure. The research was performed using corporate data of Public Joint-Stock Company «Automobile Company «Bogdan Motors». The purpose of this research is to work out recommendations on optimization of capital structure of Public Joint-Stock Company «Automobile Company «Bogdan Motors» based on the company‘s current capital structure efficiency analysis and identification of particular issues associated with capital functioning environment. The subject of this work‘s research is capital structure formation efficiency management. In its turn, the object of research is Public Joint-Stock Company «Automobile Company «Bogdan Motors» capital formation. The subjects for the study are combination of scientific methodological and application issues of optimization of capital structure of company (corporation). 8 The purpose of this work is to determine current capital structure efficiency as well as business environment aspects which have an effect on performance of Joint-Stock