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http://dx.doi.org/10.5762/KAIS.2018.19.3.301

The Study on the Estimation of Optimal Debt Ratio in Korean Automobile Industry  

Seo, Beom (Dept. of Business Administration, Chonbuk National University)
Kim, Il-Gon (Dept. of Business Administration, Chonbuk National University)
Park, Ji-Hun (Dept. of Business Administration, Chonbuk National University)
Im, In-Seob (Dept. of Business Administration, Chonbuk National University)
Publication Information
Journal of the Korea Academia-Industrial cooperation Society / v.19, no.3, 2018 , pp. 301-308 More about this Journal
Abstract
This study explores an analytical mathematical model designed to estimate the optimal debt ratio of the Korean automobile industry, which has a more significant effect on the national economy than that of other industries, and attempts to estimate the optimal debt ratio based on objective data. The analytical model is based on ROA and ROE which uses the debt ratio as an independent variable and employs ROS, TAT, and NFCL as the related parameters. Regarding the NFCL, the optimal debt ratio is usually defined as the debt ratio that maximizes the ROA and ROE and is calculated using analytical procedures, such as by adding an equation that considers the debt ratio and the linearity relationship to the analytical model. This is because the optimal debt ratio can be calculated reliably by making use of an estimated value within a certain range, which is derived from more than two calculations rather than a single estimation starting from one calculation formula. In this study, for the estimation of the optimal debt ratio, the ROA and ROE are expressed as a quadratic equation with the debt ratio as the independent variable. Using this analysis procedure, the optimal debt ratio obtained using the data from the Korean automobile industry over a sixteen year period, which would optimize the profitability of the Korean automobile industry, was found to be 188% of the debt ratio in the ROA and 213% of the debt ratio in the ROE. This result was obtained by overcoming the problem of the reliability of the estimation value in spite of the limitations of the logical theory of this study, and can be interpreted as meaning that maintaining a debt ratio of 188% to 213% can enhance the profitability and reduce the risks in the Korean automobile industry. Furthermore, this indicates that the existing debt ratio of the Korean automobile industry is lower than the optimal value within the estimated range. Consequently, it is necessary for corporations to change their future debt ratio policies, given that the purpose of debt ratio management is to maintain safety and increase profitability, and to take into account the characteristics of the specific industry.
Keywords
NFCL(net finance cost to liabilities); Optimal Debt Ratio; ROA(return of net operating income on asset); ROE(return of net operating income on equity); ROS(return of operating income on sales); TAT(total assets turnover);
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