The Thesis of Optimal Capital Structure:A Case Study of tsmc
Date Issued
2008
Date
2008
Author(s)
Fu, Chiang
Abstract
In financial theories, the focus of Optimal Capital Structure is to examine whether the corporate management, subject to the existing growth rate, market share, and profitability, can identify the most appropriate financial indicators to adjust company’s capital structure so as to maximize the company’s future growth and the wealth of its shareholders. In practice, however, it is not an easy task for any organization to make out the most appropriate capital structure. Lately, high technology industries experienced a slowdown in growth rate. Take TSMC for example. The profit growth rate for the past 3 years has been lesser than 15%; its major shareholder, Philip, also cleared all the TSMC’s shares it held. Along with the implementation of employees’ bonus recognized as costs in 2008 and the cancellation of Statute for Upgrading Industries in 2009, all these factors will result in the increase of the operating cost and income tax of TSMC. To bolster business performance and maintain the return rate of common shareholders’ equity, TSMC is facing with the challenges of capital replacement and structuring. This has inspired me to probe into the problems of related studies.ased upon traditional capital structure theory, I use Rwacc, Market to book value ratio, and PVGO as the company’s value indexes to obtain the PVGO model of the capital structure. I also prove that when PVGO is maximized, a company should have a capital structure to fit itself the most, and the most appropriate Asset to Liability ratio is correlated with the decision variables such as market risk-free ratio, company’s risk premium, capital cost of leverage, unlevered Beta value, and the ratio of retained capital for investment. In practice, this research applies PVGO capital structure model and Monte Carlo Method to simulate the most appropriate capital structure for TSMC, and at the same time to explore the relation between the capital structure and the company value.ccording to the result of this study, I found TSMC’s existing Optimal Financial Leverage is consistent with the result of Monte Carlo Simulation, which testifies the feasibility of this model describing the present status. With the implementation of employees’ bonus recognized as costs in 2008 and the cancellation of Statute for Upgrading Industries in 2009, TSMC will have to face the impacts of increased operating costs and income tax. This study also speculates the financial model of TSMC in upcoming 3 years. Based upon Monte Carlo Simulation of this model, the conclusion of this study is as follows: In the future, TSMC should increase Asset to Liability Ratio so as to upgrade the company’s value. It is also proposed that in addition to retained earnings, TSMC should also finance funds to purchase treasury stocks. By reducing the company’s total asset, TSMC would come to the most appropriate capital structure.inally, I hope this paper would serve as a reference for the management when adjusting capital structure and equity policy.
Subjects
Rwacc
Market to book value ratio
Present Value Growth Opportunity
Type
thesis
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