THE IMPACT OF LIQUIDITY, PROFITABILITY, SOLVENCY AND FIRM SIZE ON CAPITAL STRUCTURE OF COMPANY LISTED IN LQ45 PERIOD THESIS

Transcription

1 THE IMPACT OF LIQUIDITY, PROFITABILITY, SOLVENCY AND FIRM SIZE ON CAPITAL STRUCTURE OF COMPANY LISTED IN LQ45 PERIOD THESIS Submitted to Faculty of Economic and Business as partial requirement to achieve Degree of Economic By: Ali Fayrazi MANAGEMENT INTERNATIONAL CLASS PROGRAM DEPARTEMENT FACULTY OF ECONOMIC AND BUSINESS ISLAMIC STATE UNIVERSITY SYARIF HIDAYATULLAH JAKARTA 2015 i

2 ii

3 iii

4 iv

5 v

6 CURRICULUM VITAE Personal Identities Name : Ali Fayrazi Gender : Male Place of Birth : Situbondo Date of Birth : August 15 th 1991 Address : Jln. Niaga Hijau Raya No 77, Pondok Indah, Jakarta Selatan, Indonesia. Phone/Mobile : Address : fayruzyaly@gmail.com Formal Education College : UIN Syarif Hidayatullah Jakarta Senior High School : MAN 2 Situbondo Junior High School : SMPN 3 Situbondo Elementary School : MI Ihyaul Ulum Kindergarten : TK Al Hidayah 4 vi

7 ABSTRAK Tujuan penelitian ini adalah untuk menganalisis pengaruh likuiditas, profitabilitas, solvabilitas dan ukuran perusahaan terhadap struktur modal perusahaan. Untuk memperoleh data variabel tersebut, diambil dari laporan keuangan perusahaan yang terdaftar di LQ-45 periode Dari hasil pengumpulan data kemudian data-data tersebut diolah sehingga lebih mudah untuk di interprestasikan dan di analisis. Metode analisis data yang dilakukan dalam penelitian ini menggunakan program Statistical Package for Social Science (SPSS). Penelitian ini menggunakan metode kuantitatif dan metode analisis linier berganda. Hasil penelitian menunjukkan bahwa variabel likuiditas memiliki pengaruh positif terhadap struktur modal, profitabilitas memiliki pengaruh negatif terhadap struktur modal, solvabilitas memiliki pengaruh positif terhadap struktur modal dan ukuran perusahaan memiliki pengaruh positif terhadap struktur modal. Nilai koefisien determinasi menunjukkan hasil perhitungan di atas di mana R square sebesar atau 70,5%. Hal ini menunjukkan besarnya kontribusi dari likuiditas, profitabilitas, solvabilitas dan ukuran perusahaan terhadap struktur modal sebesar 70,5% sedangkan sisanya 29,5% merupakan kontribusi faktor lain yang tidak diteliti dalam penelitian ini, seperti stabilitas penjualan, leverage operasi, tingkat pertumbuhan dan pajak. Kata kunci : Likuiditas, Profitabilitas, Solvabilitas, Ukuran Perusahaan, Struktur Modal, LQ-45. vii

8 ABSTRACT The purpose of this study was to analyze the effect of liquidity, profitability, solvency and size of the company to the company's capital structure. To obtain data on these variables, taken from the financial statements of companies listed on LQ-45 during the periods. From the results of data collection and then the data is processed so that the information that occurs is easier to be interpreted and analyzed. Methods of data analysis performed in this study using the program Statistical Package for Social Science (SPSS). The research uses quantitative method and multiple linear regression analysis. The results showed that the variables of liquidity has a positive and significant impact on the capital structure, profitability has negative effect but significantly on capital structure, solvency has a positive and significant impact on the capital structure and the size of the company has a positive and significant impact on the capital structure. The coefficient of determination shows the calculation above where R square of or 70.5%. This shows the magnitude of the contribution of liquidity, profitability, solvency and size of the firm on the capital structure of 70.5% while the remaining 29.5% is contributed by other factors not examined in this study, such as the stability of sales, operating leverage, growth rates and taxation. Keywords: Liquidity, Profitability, Solvency, Firm Size, Capital Structure, the LQ-45. viii

9 PREFACE Assalammu alaikum Wr.Wb. Firstly Thanks to Allah SWT, because of His blessing the writer can finished this thesis. Shalawat and Salam also give to the guidance prophet Muhammad SAW also to His Best friends. Thesis entitled The Impact of Liquidity, Profitability, Solvency and Firm Size on Capital Structure of Company Listed in LQ45 Period This is the final author in completing the undergraduate program at the Faculty of Economics and Business, Management Department of the State Islamic University Syarif Hidayatullah Jakarta. In this chance, the writer wants to say thanks for supporting and helping from every party. So, thankful would be for: 1. Author parents and author brother who always give love, compassion motivation and support on completing this thesis. Accompaniment of uncessing prayer in each of these step. 2. Dr. Arief Mufraini, Lc., M.Si as Dean of Faculty of Economics and Business Syarif Hidayatullah Jakarta. 3. Dr. Indo Yama Nasarudin, SE,. MBA as first supervisor always motivate and provide the best guidance to the author. So that author can finish this thesis. 4. Titi Dewi Warninda, SE., M.Si as the thesis supervisor II and also as Lead of Management Department who always give guidance for the creation of my thesis with good result. 5. Ms. Ela Patriana, MM as Secretary of Management Department who always give help and solutions when author still study in Faculty of Economic and Business, State of Islamic University Syarif Hidayatullah Jakarta. ix

10 6. All lecturers and Staff Management Department International Faculty of Economic and Business, State of Islamic University Syarif Hidayatullah Jakarta, especially to Mr. Bonik. 7. Author Brother Arif Alawiy, thank you always support author. 8. All author best friends in Management International class program and friends in The Kostan Warna-Warni also thank you for help and support. The author realizes there are still many short comings in the writing of this thesis. Therefore, the author begs criticism and suggestions that are built from the readers. Jakarta, November 26 th 2015 Author Ali Fayrazi x

11 TABLE OF CONTENTS Cover... Certification from Supervisor... Certification of Comprehensive Exam Sheet... Certification of Thesis Exam Sheet... Sheet Statement Authenticity Scientific Work... Curriculum Vitae... Abstrak... Abstract... Foreword... Table of Content... List of Table... List of Figure... i ii iii iv v vi vii viii ix xi xiv xv CHAPTER I CHAPTER II INTRODUCTION A. Background B. Problem Formulation... 7 C. Objectives and Benefits Research... 8 LITERATURE REVIEW A. Theoretical Basis Financial Management.. 9 a. Understanding Financial Management 9 b. Scope of Financial Management. 11 c. Financial Management Function. 13 d. The purpose of Financial Management Financial Statement Analysis The Capital Structure 19 a. Definition of Capital Structure 19 b. Theories of Capital Structure.. 20 c. The Modigliani-Miller Model. 26 d. Pecking Order Theory. 27 e. The Trade off Model.. 29 f. Agency Theory Factors Affecting Capital Structure. 31 a. Liquidity. 31 b. Profitability. 37 c. Solvency. 41 d. Company Size xi

12 5. The Effect of Independent Variables to Dependent Variables a. Effect of Liquidity on Capital Structure.. 46 b. Effect of Profitability on Capital Structure c. Effect of Solvency on Capital Structure.. 47 d. Effect of Firm Size on Capital Structure. 47 B. Previous Research. 48 C. Framework. 51 D. Hypothesis. 52 CHAPTER III CHAPTER IV RESEARCH METHODOLOGY A. Scope of Research B. Sampling Methods Population Sample...53 C. Data Collections Method...55 D. Data Analysis Method Testing Assumption Classical Regression Analysis Coefficient Determination Hypothesis Testing...59 E. Operational Variable Dependent Variable Independent Variable FINDING AND ANALYSIS A. General Description of Research Object Company Listed On LQ Data Measurement of Capital Structure through Long term Debt to asset (LDAR) in period of 2010 through 2014 at the Company's Registered in LQ Data Measurement Liquidity through Current Ratio (CR) in period of 2010 through 2014 at the Company's Registered In LQ Data Measurement Profitability through Return on Assets (ROA) in period of 2010 through 2014 the company listed on LQ Data Measurement Solvency through Debt Ratio (DR) in period of 2010 through 2014 the Company Listed On LQ Data Measurement Company Size through the value of the natural logarithm Total Assets (In Total Assets) in period of 2010 through 2014 at the Company's Registered In LQ xii

13 B. Descriptive Data 70 C. Classical Assumption Test Normality Test Multinolinearity Test Auto Correlation Test Heteroskidastity Test. 77 D. Multiple Linear Regression Analysis.. 78 E. Testing Hypothesis The Impact of Liquidity, Profitability, Solvency and Company Size on Capital Structure Simultaneously The Impact of Liquidity, Profitability, Solvency and Company Size on Capital Structure Partially 81 a. The Effect of Liquidity on Capital Structure b. The Effect of Profitability on Capital Structure c. The Effect of Solvency on Capital Structure d. The Effect of Firm Size on Capital Structure F. Coefficient of Determination. 83 G. Discussion of Result The Effect of Liquidity on Capital Structure The Effect of Profitability on Capital structure The Effect of Solvency on Capital Structure The Effect of Firm Size on Capital Structure. 87 CHAPTER V CONCLUSIONS AND SUGGESTIONS A. Conclusions. 89 B. Suggestions. 90 REFERENCES 92 APPENDIX.. 95 xiii

14 LIST OF TABLES 2.1 Previous Research List of Research Sample Company Listed on LQ Company Listed On LQ45 Long-term Debt To Asset Ratio (LDAR) Period Company Listed On LQ45 Current Ratio (CR) Period Company Listed On LQ45 Return on Assets (ROA) Period Company Listed On LQ45 Debt Ratio (DR) Period Company Listed On LQ45 Total Assets (Ln Total Asset) Period Descriptive Statistic Normality Test data One-Sample Kolmogorov Smirnov Test Test Multicolinearity Coefficient Auto Correlation Test Result of Multiple Linear Regression Analysis Simultan Test Partial Test Test Result Coefficient Determination Regression Model xiv

15 LIST OF FIGURES 2.1 Theoretical Framework Normality Test Curve Heteroscedasticity Test xv

16 CHAPTER I INTRODUCTION A. Background In situations such as the current global state boundaries in the field of economy and trade has been almost no limit to the level of competition is so tight, so we need a policy that is appropriate to maintain the viability of the company that still exist and thrive in the future. Problems of capital is one thing that is very important in view of the company will be able to run and develop properly when supported by adequate funding required according to the needs of the company. A good company in the field of capital if a majority of the capital used for investment and operation come from internal funds. But with the limited internal funding sources are owned by the company in expanding to be more developed should seek alternative funding from external companies. One of the factors that caused the decline of the company's condition was due to too much use of loans for business expansion and have ignored the company's capital structure as a result, there will be a mismatch between funding sources and users. (Supeno, 2009: 93). According to Mahmud (2014: 22) Liquidity is the ability of companies to pay immediately (liquid) to the immediate obligations. Kemarnpuan pay immediately, means used in current assets (liquid assets), to pay immediate obligations / current (current liabilities). 1

17 The theories of capital structure is the issue of the most interesting and complicated in the field of finance. Related to the capital structure of the two sides are often focused on the financial sector which is the impact of the capital structure to firm value associated with the optimal capital structure and the determinants of the capital structure of the company. Decision-making in the capital structure is very much a problem susceptible to all companies because of the effects of internal and external to the company. One of the many goals of financial managers is to maximize the wealth of the company, more specifically shareholder wealth maximization. To maximize the value of the company as well as minimizing funding cost, the manager must establish an optimal capital structure (Hossain, 2012). Hossain (2012) declared a fundamental component in the capital structure is debt and equity. A firm should attempted to determine the optimal capital structure which caused the maximization of firm value. The positive relationship between leverage and firm value has been identified in several studies (Champion, 1999; Ghosh et al, 2000; Chowdhury Chowdhury S. & A., 2010). Capital structure can be defined as a balance or ratio between long-term debt and own capital. The size of the number of capital structure shows a lot of the small number of long-term loans than own capital. Viewed from the tax side, the use of debt to minimize taxes. This is due to the nature of the tax "tax deductibility of interest payments". The decision taken regarding the company's capital structure, the company must consider the company's 2

18 financial balance. The company's financial balance can be obtained if a company for perform its functions do not face financial disruptions (Hadinugroho, 2012). A critical factor in determining the capital structure includes several factors such as liquidity, profitability, solvency and size of the company. Capital structure can be measured from the comparison between total debt to assets ratio is usually measured through Longterm Debt To Asset Ratio (LDAR). Van Horne and Wachowicz argued its capital structure was mix (proportion) of long-term permanent financing represented by debt, equity preferred shares and common stock (Yovin & Suryantini, 2012). There are several factors affecting the capital structure, as disclosed by Sartono namely: the level of sales, asset structure, the level of growth, profitability, company size, variable earnings and tax shelters, the company scale, the conditions internal companies and macroeconomic (Yovin & Suryantini, 2012) According to Ramlall its capital structure, measured by leverage. Where there are factors that affect leverage such growth, size, tangibility of assets, profitability, liquidity, non-debt tax shield, age and investment. Additionally, Bhaduri declared the factors affecting capital structure was structure assets, non-debt tax shield, size, financial distress, growth, profitability, age, signaling, and uniqueness. Meanwhile, according to Indrawati and Suhendro factors affecting capital structure was size, growth, profitability and ownership. Teker et al. declared the factors affecting capital structure was 3

19 tangibility of assets, size, profitability, growth opportunities and non-debt tax shield (Farah & Aditya, 2010). Liquidity management is essential for companies, where most of the assets consist of current assets. Directly affect the profitability of the company. Too trade off Liquidity is important because if the profitability of working capital management is not given consideration, the company is likely to fail and go bankrupt (Kajananthan, 2013). In this context, known as the working capital gives the power for each unit of economic life and management is considered as one of the most important functions of the management company. Therefore, any organization whether, profit oriented or not, regardless of the size and nature of the business, requiring the amount of working capital required for the smooth functioning of the organization. Working capital is the most important factor to maintain liquidity, viability, solvency, and profitability of the business (Kajananthan, 2013). The high profitability of the company resulted in more companies using funding from within the company, as if profitability is higher, then the company can provide the retained earnings in larger quantities, so that the use of debt can be reduced (Yovin & Suryantini, 2012). According Tsuji (2013) when the company has a high solvency, these companies financial difficulties from the standpoint of cost tax shield effects and cost distress Low, theoretically high solvency company can borrow more and has a high debt ratio. From the viewpoint agency cost Jensen argued, companies that have high solvency, have a tendency to confront problems free 4

20 cash flow bad and should have more debt, and should be disciplined by debt. Thus according to the agency theory, the ideal relationship between the company's solvency and debt ratios must be positive (Tsuji, 2013). Solvency demonstrated the ability to pay for the long term, this complements for liquidity. Preferably of course, the company in a liquid state and solvable (Mahmud, 2014: 23). The larger the size of the company, the more easily obtain external capital in large numbers, especially in the form of debt. In other words, the size of the size of a company directly affect the company's capital structure policy (Yovin & Suryantini, 2012). In this study, we will use four factors are interrelated and affect the structure liquidity, profitability, solvency and size of company. Some empirical evidence that has done some research include the study conducted Kajananthan (2013) with the title of research Liquidity and Capital Structure: Special reference to Sri Lanka Telecom Plc show that liquidity has a significant impact on the debt to equity in the capital structure. Furthermore, the research conducted by Chikashi Tsuji (2013) with the title of research Corporate Solvency and Capital Structure: The Case of the Electric Appliances Industry Firms of the Tokyo Stock Exchange shows that there is a negative relationship between the company's solvency capital structure of Electric Appliances Industry Firms of the Tokyo Stock Exchange. 5

21 In the study conducted by Yovin & Suryantini (2012) with the title of Factors Influencing Capital Structure Of Foods And Beverages At Company Listed on the Indonesian Stock Exchange indicates that the variable asset structure and size of the company and significant positive effect on the capital structure, while profitability has negative and significant effect on the capital structure with the value t count> t table. Hadinugroho & Delisandri (2012) with the title of research Analysis of Internal Factors Affecting the Company's Capital Structure At the Consumer Goods sector, the results showed a partial, profitability, asset structure, and solvency significant positive effect on the capital structure except profitability has negative relationship. As for sales growth partially no significant effect on the capital structure and have a positive relationship. The shares which included in the category of index LQ-45 is a collection of preferred shares that meet certain criteria, which belong to the criteria of stock LQ-45 Index are stocks which meet the criteria for high rankings on the total transaction, the transaction value, and frequency of transactions. Group of stocks included in the index LQ-45 is not fixed, every six months there is re-establishment of stocks that meet criteria of and eliminate stocks that no longer meet the criteria that have been defined. Stock positions which eliminated will be filled by the stock in the next rankings, and every three months there is evaluation (Febriana, 2013). To simplify and clarify the scope of the discussion of this research will be devoted in stocks of companies included in the category of index LQ-45, 6

22 because these stocks tend to be stable and active and have high liquidity, making it easier traded good condition the market is weak or strong. Based on the description it is clear that the depiction terlihatlah with the company's financial condition is very influential on decision making and the formulation of policies carried out in a company. Therefore, the authors are keen to lift into scientific writing with the title " The Impact of Liquidity, Profitability, Solvency and Firm Size on Capital Structure of Company Listed in LQ45 Period ". B. Problem Formulation Based on the background described above, formulated research problems are: 1. Does the liquidity, profitability, solvency and firm size partially effect on its capital structure. 2. Does the liquidity, profitability, solvency and firm size simultaneously effect on its capital structure 3. How big is the influence independent variable (liquidity, profitability, solvency and size of the company) is able to influence or explain the capital structure. 7

23 C. Objectives and Benefits Research 1. Objectives In accordance with the formulation of the problems mentioned above, the purpose of this study was to: a. Analyze the effect of liquidity, profitability, solvency and size of the company to the company's capital structure partially. b. Analyze the effect of liquidity, profitability, solvency and size of the company to the company's capital structure simultaneously. c. Analyzing the magnitude of the independent variable (liquidity, profitability, solvency and company size) influence or explain the company's capital structure. 2. Benefit While this research is expected to provide benefits for: a. Issuers, the research results can be used by management companies to determine matters relating to the use of their own capital or loan capital and know the company's ability to meet its obligations, after the financial manager can adopt policies that may be necessary to balance the use of capital. b. Investors, the results of this study can be used as an overview and consideration to take decisions in investing in a company. c. The academic community, can be used as reference material in making research related to the company's capital structure. 8

24 CHAPTER II LITERATURE REVIEW A. Theoretical Basis 1. Financial Management a. Understanding Financial Management The development of financial management science today is so dynamic. This is in line with the high business activity and order of human life in today's era of globalization. This condition led to discussions about financial management science become so attractive for managers, bureaucrats, and not the exception academics and researchers in general (Fahmi, 2014: 1). According to Riyanto (2013:4) understanding of financial management are: "Financial Management is the whole activity is concerned with efforts to get funding and using or allocating resources." Financial management is a study of planning, inspection, budgeting, management, search, control and storage of funds owned by a company with the overarching goal. Overall financial management science has emerged from a study which is descriptive of the company's operational management approach towards corporate theoretical conception in a dynamic environment and under conditions of uncertainty. Assessment of current financial management science increasingly comprehensive is characterized by a variety of cases that hit and rocked the financial structure of each company. Such as the economic crisis of the 1930s, until after the Second World War conditions even after the 1997 financial crisis 9

25 that hit many countries in the world, especially in Asia has really put the study and knowledge of financial management really enthused with the inside. In this book we will provide a discussion of the importance of studying financial management at various intricacies (Fahmi, 2014: 1). Financial sense itself according to Gitman (2012: 4) is "finance can be defined as the science and art of managing money". The financial means can be defined as the art and science of managing money. From these definitions, it can be developed that involves finances as a means of art expertise and experience, while as a science means involving the principles, concepts, theories, and the proportion of existing models in the science of finance. While understanding the financial management According to Horne and Wachowicz Jr. (2012: 2) is a "financial management related to the acquisition of assets, financing and asset management with based on some common goals". Financial management is the combination of science and art that discuss, examine and analyze how the financial manager by using all the resources of the company to raise funds, manage funds, and funds with the aim of dividing able to provide profit or wealth for shareholders and sustainability (sustainability) of business for the company (Fahmi, 2014: 1-2). Meanwhile, according to Tampubolon (2013: 1) overall knowledge of Financial Management has emerged from a study which is descriptive of the company's operational management approach towards corporate theoretical conception in a dynamic environment and in conditions that are full of uncertainty. This study will be described in this book that describes the science of 10

26 financial management continue to grow up to become a science that cannot be removed from the decision-making process by nearly all of corporation or company. Growth of Financial Management science continues with the emergence of new innovations in financing such as leasing, and growth of the company externally through conglomeration, Mergers and Acquisitions (Tampubolon, 2013: 2). From the above definition can be concluded that the Financial Management is one of the functions of management for all activities related to the activities of the company to obtain the source of funds, use of funds, and asset management to create wealth for shareholders by maximizing the value of the company. b. Scope of Financial Management Tampubolon (2013: 1) put forward the demands of technological developments encourage every organization, particularly business organizations to change in order to create the effectiveness and efficiency of all activities of the organization. In the era before the sixties we in Indonesia know the science company with a focus spending is highly concentrated in the functioning of the internal financial management course, while external factors that are a source of funding (source founding) less attention. Since the era of the sixties to the present development of study science change and evolve into a company focused on the concentration of external funding sources, which are then managed effectively and efficiently in order to generate profits. 11

27 According to (Fahmi, 2014: 2) The field of financial management has three spheres that should be seen by a financial manager, namely: 1) How to find funds. At this stage it is an early stage of the duties of a financial manager, where he is responsible for finding funding sources that can be used or utilized to serve as the capital of the company. In general, the company's capital comes from its own capital and foreign capital. Own capital in the form of paid-up capital of the owners and was used as capital companies such stock (shares), and foreign capital in the form of loan proceeds to the bank, the sale of shares, including accounts payable and bonds are also others. 2) How to manage funds At this stage the financial management company's duty to manage the funds and then invest those funds to the places that are considered productive or profitable. For a financial manager will constantly monitor and analyze well on every action and decision that will be taken into account aspects of financial and non-financial, especially the conditions enabling profit and continuities companies at a later date. In the concept of investing a financial manager will always avoid investment decisions that will only cause harm or even have a lower profit, or in other words, a financial manager generally is a risk-averse. 12

28 3) How to divide the funds At this stage the financial management will make a decision to split the profits to the owners according to the amount of capital paid or placed. This is usually discussed in the GMS (General Meeting of Shareholders). Distribution of profits to the share ownership is usually called the distribution of dividends. There are issues that often occur in the case of corporate management. That is a difference of opinion on the part of company management and its commissioners. Management of the company is that live the company, and the commissioner is a company that has the capital or major shareholders of the company. c. Financial Management Functions Fahmi (2014: 3) argues financial management science serves as a guideline for the company's managers in every decision that is made. That is a financial manager must make a breakthrough and creativity of thinking, but it still does not rule out the rules that apply in the science of financial management. Such as obeying the rules contained in SAK (Financial Accounting Standards), GAAP (General Accepted Accounting Principle), Laws and regulations on the financial management of the company, and so forth. According to Horne and Wachowicz Jr. (2012: 3), there are three functions of financial management, namely: 13

29 1. Investment Decision The investment decision is an important financial management functions in support of decision making to invest because of concerns about obtaining efficient investment funds, the composition of assets that must be maintained or reduced. 2. Funding decisions (Dividend Payment) The dividend policy of the company should also be seen as integral to corporate financing decisions. In principle financial management functions as the funding decision concerning the decision whether the profit earned by the company to be distributed to shareholders or detained in order to finance an investment in the future. 3. Asset Management Decisions Asset Management's decision is a function of financial management decisions concerning the allocation of funds or assets, the composition of funding sources should be maintained and the use of capital both from within the company or outside the company is good for the company. Financial management has vast employment opportunities for every company definitely needs a financial manager who handles financial functions. The function of financial management is one of the main functions is very important within the company. By understanding the science of good financial management expected a variety of both parties who are in the position of marketing, production, personnel, and finances are expected to be able to put any decisions are much wiser. Many other issues related to financial management. Like the marketing 14

30 department must look at every decision the field of advertising (advertising) Could affect financial decisions. Ie if the marketing manager sets the benchmark price is too high for advertising costs while at the time of sale are not fit as expected, this would certainly be a problem. Moreover, if the funds were used to finance advertising sourced from borrowed funds. These conditions also included in the personnel department. If the personnel manager proposed that no employee salary increases while the quality of the resulting performance is not appropriate as expected. It means that the personnel manager's decision is only unilateral, without thinking of the other side. Because the concept and philosophy of finance is trying to create a balance in each financial. The amount of income must be equal to the amount of expenditure, if not balanced then it is a problem. This case also occurs in the production. Meanwhile, according to Tampubolon (2013: 3) in carrying out the functions of financial management, corporate objectives are, among others: a) To achieve the welfare of shareholders, maximum. b) Achieve maximum profit in the period penjang. c) Managerial achieve maximum results. d) Achieve social responsibility in the sense; improving the welfare of the employees of the corporation. The maximum increase in the welfare of the shareholders is to increase corporate value that is reflected in an increase in dividend payments and the increase in the stock price of the company stock. Besides, the increase in the welfare of employees should also be carried out in an effort to achieve the goals of 15

31 the corporation, in order to reach what is meant by "Full of comitment " or fully committed between employees and corporations. Financial management functions for the purpose is a process; budget planning (budgeting) starts with forecasting sources of funding (fund source), Organizing activities using funds effectively and efficiently, and to anticipate all risks (risk ability). d. The purpose of Financial Management According Irawati (2006: 4) financial management the purpose is to maximize profits and minimize costs in order to obtain a maximum decisionmaking, in running the company towards development and the company running. The company value means maximizing shareholder wealth, not maximize profit. The sense of maximizing profit, is to ignore social responsibility, ignore the risk, and short-term oriented. While the sense of maximizing shareholder wealth or value of the company as follows: 1. Means to maximize the present value of all future profits to be received by the owner of the company. 2. Means more emphasis on the flow of net income results not just in terms of accounting. So it can be concluded that the financial management carried out by financial managers is planned to obtain and use the funds to maximize the company's value. 16

32 According to Horne and Wachowicz Jr. (2012: 4) regarding the management goal is the same as the company's goal of "Maximizing the welfare of the owner of the company that exists today". So it can be concluded that the purpose of financial management is done by financial managers is planned to obtain and use the funds to maximize the company's value. Further Fahmi (2014: 4) there are several goals of financial management, namely, a) Maximizing the value of the company b) Maintain financial stability in a state that is always under control c) Minimize the risk of companies in the present and future. Of the three is the most important goal is the first one that maximizes the value of the company. Understanding of how to maximize the value of the company is the management company is able to deliver maximum value at the time the company is entering the market. 2. Financial Statement Analysis With the financial statements, financial statement users can analyze financial statements are intended to give an opinion on the company's financial performance. According to (Harahap, 2013: 190) analysis of the financial statements is outlining posts financial statements into units of information that are smaller and look at the relationship that are significant or that have a meaning to each better between the quantitative data as well as data on non-quantitative goals to determine the financial condition of deeper importance in the process of producing the right decision. 17

33 The financial statements is information that describes a company's financial condition, and further information can be used as an overview of the company's financial performance. On the other side of Farid and Siswanto said financial report is information that is expected to provide assistance to users to make economic decisions is financial. Further Munawir21 said "The financial report is a very important tool to obtain information relating to the financial position and the results that have been achieved by the company concerned." By doing so the financial statements are expected to be helpful for users (users) to make the economic decisions that are financial (Fahmi, 2014: 21). According to Harahap (2013:1) "financial report is media information that summarizes all of the activity of the company". Meanwhile, according to Hendra (2010:5) The financial statements can be interpreted as "a summary of a process of recording of financial transactions, which occurred during the financial year in question and the accountability of management to the internal and external parties of the company, which has a relationship with the company", While Tampubolon (2013: 39) argues financial statements of a corporation generally include the Balance Sheet, Income Statement and Statement of Sources and Uses of Funds. The financial statements used for various purposes. Any use different require different information. Bank to basic lending, will require different information to potential investors. Similarly, the Government through the Tax Office or the economy will require different data. Financial analysis provides information about assessment of the state of corporate finance, both of which have past, or the present as well as future expectations. 18

34 The purpose of this analysis is to identify any weaknesses of the financial situation that may cause problems in the future, and to determine any force that can become a corporate excellence. Besides, the analysis conducted by outsiders corporation can be used to determine the level of credibility or potential for investment. Financial ratio analysis is a major tool in financial analysis, because this analysis can be used to answer a variety of questions about the corporation's financial situation. 3. The capital structure a. Definition of Capital Structure According to Brigham and Houston (2012: 24), the optimal capital structure of a company is a structure that maximizes the price of the shares of the company, and this is usually asked a debt ratio lower than the ratio that maximizes earnings per share which are expected. Meanwhile, according to Pouraghajan (2012: 167), the capital structure is one of the effective parameters of the most important in the assessment and direction of economic activities in the capital market. Meanwhile, according to Gitman & Zutter (2012: 508), the capital structure is a mixture of long-term debt and equity managed by the company. Capital structure can significantly change the value to influence return and risks. More and more companies issue debt, the higher the cost of debt and the payment of those fees must be paid regardless of how the company's products sold. Because leverage can have a huge impact on a company, the financial manager must 19

35 understand how to measure and evaluated leverage, Especially when making capital structure decisions. Brigham and Gapenski states capital structure or capital structure is the proportion or ratio in determining the fulfillment of corporate spending, whether by cars using debt, equity, or by issuing shares. Meanwhile, according to Keown, et al, the capital structure is a guide or a combination of long-term sources of funds used by the company (Rodoni & Ali, 2014: 129). Based on expert opinions above, it can be concluded that the capital structure is the proportion in determining the fulfillment of corporate spending, where funds were obtained using a combination or manual source derived from long-term funds consists of two main sources, namely the originating and the and outside the company. Who became the problem of the capital structure of the company is how to quickly integrate the composition of the permanent funds are used to looking for a blend of funds that can minimize the cost of capital and to maximize the stock price. This is the final destination of the capital structure, the composition of the most optimal source of financing. b. Theories of Capital Structure In the balance sheet of the company consisting of assets that describes the structure of the liabilities side as wealth and financial structure. The capital structure is part of a financial structure that can be defined as fixed expenditures that illustrates a comparison between long-term debt with its own capital. According to Brigham (2014: 12) capital structure (capital structure) Is a 20

36 combination of debt and equity in the company's long-term financial structure. In an empirical study leverage is defined as a measure which indicates the extent of the use of debt to finance the company's assets. Meeting the needs of the fund can be obtained through the company's internal and externally. Form of funding internally (internal financing) Is retained earnings and depreciation. Fulfillment is done externally can be divided into debt financing (debt financing) And equity financing (equity financing). Debt financing can be obtained through loans, whereas equity capital by issuing new shares. Capital structure theory to explain whether there is influence changes in capital structure to the company's value, if investment decisions and dividend policy are held constant. If only partially replace equity firms with debt or debt to replace a company's own capital, then if the stock price will change, if the company does not change other financial decisions. Each company in carrying out its activities have always tried to maintain a financial balance. Capital structure associated with profitability. The company's capital structure is composed of debt to equity. The funds raised from debt have capital costs in the form of interest charges. The funds raised from the equity cost of capital has the form of dividends. The company will choose the source of the lowest cost of funds among the various alternative sources of funds available. 21

37 Composition is not optimal debt and equity will reduce the profitability of the company and vice versa. Determination of capital structure are the measures taken by the management in order to obtain funding sources that can be used for operational activities of the company. The decision taken by Brigham (2014: 66) by the management in the search for the source of these funds is strongly influenced by the owners / shareholders. In accordance with the company's main goal is to increase the prosperity of our shareholders, so any policy to be taken by the management are always influenced by the wishes of the shareholders. After the capital structure is determined, then the next company will use the funds raised for the company's operations. Operational activities of the company is said to be beneficial if return obtained from the results of these operations is greater than the cost of capital (Cost of Capital); where the cost of capital is a weighted average of the cost of funding (cost of funds) Which consists of the cost (interest) loans and the cost of equity capital. The capital cost itself consists of dividends paid to holders of ordinary shares and dividend to preferred shareholders. While borrowing costs are net of interest expense (net of tax rates). The amount of the composition of debt and equity capital as well as costs incurred that are to be considered by management; whether to increase the debt ratio, or reduce the debt ratio. An increase in the debt ratio, if the cost of debt is relatively smaller than the cost of equity capital, and vice versa. 22

38 According Riyanto (2001: 297) suggests there are several factors to consider in the capital structure. These factors include: 1. Interest Rate The interest rate will affect the selection of what kind of capital to be withdrawn, whether the company will issue shares or bonds. 2. Stability of "Earnings" Stability and magnitude of "earnings" obtained by a company will determine whether the company is justified to attract capital with fixed load or not. A company that has "earnings" stable will always be able to meet its financial obligations as a result of the use of foreign capital. Instead the company that has the "earnings" unstable and "unpredictable" will bear the risk of not being able to pay interest expenses or can not pay the debt installments in the years or bad circumstances. 3. Composition of Assets Most companies in the industry where most of the capital embedded in fixed assets (fixed assets), will give priority to meeting the needs of capital permanent capital, ie equity, while foreign capital is complementary in nature. It can be connected with the rule that horizontal conservative financial structure which states that the amount of own capital should at least be able to cover the amount of fixed assets plus other assets that are permanent. 4. Levels of Risk Assets The level or levels of risk of each asset in the company is not the same. The longer the period of use of an asset in the company, the greater the degree of 23

39 risk. Principle aspects of the risk of stating that if there is a risk sensitive assets, then the company should be more finance with its own capital, which is resistant risk capital, and where possible reduce the expenditure by foreign capital or capital are afraid of risk. 5. The amount of Total Capital Required If the amount of capital required is very large, it is necessary for the company to issue some classes of securities together, while for the company, which needs capital that is not so big enough to just pull out one class of securities only. 6. The State of Capital Markets Capital market conditions often change due to the conjuncture waves. In general, if the rising wave of investors more interested to invest in stocks. 7. Nature of Management The nature of management will have a direct influence in decisions about how to meet the needs of funds. 8. Company size A large company where the shares are so widespread, every expansion of the share capital will only have little effect on the possibility of the loss or displacement control of the dominant party of the company concerned. Instead a small company in which shares are distributed only in a small neighborhood, increasing the number of shares will have a considerable influence on the possible loss of the dominant party control of the company concerned. 24

40 9. Stability Sales A company whose sales are relatively stable can safely take on more debt and the burden remains higher than companies with sales unstable. 10. Risk Business Business risks or risks inherent to the operation of a risk if the company does not use debt. The higher the company's business risk, the lower the optimal debt ratio. 11. Operating Leverage If other things being equal, companies with fewer operating laverage have better skills and apply financial leverage because the company would have a smaller business risk. 12. Growth Rate If other things being equal, a company that grew rapidly to be more reliant on external capital. 13. Profitability We often observe that companies that have a rate of return on investment is very high use relatively little debt. 14. Tax Flowers are a burden which can be a tax deduction and a tax deduction is very valuable for companies with high tax rates. The higher the tax rate of a company, the greater the benefits derived from debt. 25

41 15. Control The impact of debt on the stock versus the position of management control may affect the capital structure. If the current management has control over the voting but are in a position where they cannot buy stocks again, management might opt for a debt-financing of new funding. On the other hand, management may decide to use the equity if the company's financial situation is so weak that the use of debt may pose a risk of default. c. The Modigliani-Miller Model According to Priscilia (2014:14) Modigliani and Miller found in a state of perfect markets, the use of debt is irrelevant to the value of the company, but with the tax payable will be relevant. However, the study Professor Franco Modigliani and Merton Miller Professor is based on a number of unrealistic assumptions, among others: 1) No brokerage fees (brokerage). 2) No taxes. 3) There is no bankruptcy costs. 4) Investors can borrow at a rate equal to the company. 5) All investors have the same information as the management company of the investment opportunities in the future. 6) EBIT is not affected by the use of debt. Professor Modigliani and Miller prove that because the interest on the debt deducted in the calculation of the tax, then the value of firms increased in line with the large amount of debt and its value will reach the maximum point when 26

42 entirely financed with debt. Results of the study Professor Modigliani and Miller irrelevant also depends on the assumption that there are no bankruptcy costs. However, in practice, the cost of bankruptcy can be very expensive. Bankrupt company has legal and accounting costs are very high, and difficult to retain customers, suppliers and employees. According to Brigham (2014: 71), a bankruptcy-related problems tend to arise when companies use more debt in their capital structure. If the cost of bankruptcy increasingly large, profit levels required by shareholders is also higher. Debt capital costs will also be higher because the lender will charge a higher interest rate to compensate for the increase in the risk of bankruptcy. Therefore, the company will continue to use debt if the benefits payable (tax savings from debt) is still greater than the cost of bankruptcy. If the cost of bankruptcy is greater than the tax savings from debt, the company will reduce its debt level. The level of debt that is optimal, thus the optimal capital, occurred when the additional tax savings equal to the additional cost of bankruptcy. d. Pecking Order Theory This theory is called pecking order because this theory explains why the company will determine the hierarchy of sources of funds are the most preferred. In summary, according to Brigham (2014: 73) The theory states that: Companies like Internal financing (financing of the company's operating result). The company tries to adjust the ratio of the distribution of dividends targeted to try to avoid drastic changes in dividend payments. 27

43 If external funding (external financing) Is required, the company will issue a securities most "safe" first, beginning with the issuance of bonds, followed by securities were characterized options (such as convertible bonds), new end if still insufficient, the new shares issued. Implication pecking order theory is the company does not establish an optimal capital structure, but the company established a policy priority funding sources. Pecking order theory explain why firms profitable (favorable) generally borrow in small amounts. This is not because the company has the target debt ratio Low, but because it requires external financing slightly. While companies lacking profitable tend to have larger debt because not enough internal funds and external debt is the preferred source. The use of external funds in the form of preferred debt than equity capital for two reasons; first, consideration of the cost of emissions where the cost of bond issuance will be cheaper than the cost of new stock issuance. This is due to the issuance of new shares will lower the price of the old shares. Second, managers worry issuance of new shares will be interpreted as bad news by investors, and the stock prices will go down, this is caused partly by the possibility of inequality of information between management and the investors. 28