An Assessment of an Optimal Capital Structure under Current Circumstances for Elkem AS

Details

Supervisors

Gregoire, Philippe

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

This study concerns Elkem AS. The problem to be addressed and solved is what should be the optimal capital structure under current circumstances, hence under the information available as of end 2014/beginning 2015. The optimal capital structure means the mix of debt and equity that yields the lowest cost of capital. Chapter 1 and 2 introduce the case, the goals, and the rationale behind the study. Chapter 3 describes Elkem AS and its divisions. Chapter 4 and 5 concern the theoretical foundation upon which the application builds. Application of the theoretical foundation constitute chapter 7, while chapter 6 is an intermediary chapter on methodology. Chapter 8 constitute conclusions. Three theoretical pillars about capital structure, international cost of capital, and internal capital markets compose the foundation of the study. The application part starts by determining and discussing the components of the cost of capital. The cost of debt section is more elaborate because a synthetic rating is estimated to find a likely credit spread. Therefore, a full credit analysis is done using a base rating structure. Further, the cost of capital components are aggregated to division and group level. This approach leads to an optimal capital structure that is composed by approx. 15% debt-to-value. The subsequent sections further refine the base approach by simulating the probability of default and addresses international and personal taxation. By considering these aspects, the resulting optimal capital structure is composed by 0% debt to value, meaning that Elkem AS should operate “as is” going forward. By calibrating to alternative CAPMs with sensitivity analysis, a debt-to-value between 0–20% is the most optimal range under current interest rate environment. The last section addresses the internal capital markets and additional elements that affect the capital structure choice. These are investigated, before chapter 8 concludes and provide further concluding implications.