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

Authors: Mautia Kusuma Wardani; Sylviana Maya Damayanti

Addresses: Business Administration Program, School of Business and Management, Institut Teknologi Bandung, West Java, 40132, Indonesia ' School of Business and Management, Institut Teknologi Bandung, West Java, 40132, Indonesia

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.

Keywords: optimal capital structure; WACC; weighted average cost of capital; cost of debt; cost of equity; maximising firm value.

DOI: 10.1504/IJMEF.2017.087478

International Journal of Monetary Economics and Finance, 2017 Vol.10 No.3/4, pp.235 - 249

Available online: 10 Oct 2017 *

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