Question 2

The unusual structure of capital of Samsung Electronics

Samsung Electronics
million won Assets Liabilities Shareholders Equity Debt to Equity Ratio Equity Ratio Debt Ratio 1997 32035 27386 4649 589,1% 14,5% 85,5% 1998 24105 19016 5089 373,7% 21,1% 78,9% 1999 29178 16004 13174 121,5% 45,2% 54,8%

Just before the 1997 crisis Samsung is highly leverage with a debt representing 85.5% of its assets:
The Equity remains at a low level : Samsung financed itself more by borrowing than by increasing shareholders Equity In 1997, there are 600% more debt than equity

After 1997 & the crisis Samsung attempted to change its capital structure
The proportion of debt decreased as the proportion of equity increased: in 1999 the amount of debt was almost equal to the amount of equity (Debt = 121.5 % of Equity) Assets remained at a constant level.

Comparison with the capital structure of its major competitor Intel

Capital Structure of Samsung Electronics
100% 80% 60% 40% 20% 0% 1997 Liabilities 1998 1999 Shareholders Equity

Capital Structure of Intel

100% 80% 60% 40% 20% 0% 1997 Liabilities 1998 1999 Shareholders Equity

Intel is a firm financed by its Equity whereas Samsung Electronics, as most of Chaebols is financed by debt.

Comparison of the evolution of Capital Structure Ratios

Comparison D/E ratio
700.0% 600.0% 500.0% 400.0% 300.0% 200.0% 100.0% 0.0% 1997 Samsung 1998 Intel 1999

Comparison Equit Ratio & Debt Ratio

100.0% 80.0% 60.0% 40.0% 20.0% 0.0%

1997
E/A - Samsung D/A - Samsung

1998

1999
E/A - Intel D/A - Intel

By reducing dramatically its proportion of debt, Samsung is reaching the debt to equity value of Intel.

The comparison of Equity Ration & Debt Ratio shows that the Equity ratio of Samsung equals the Debt Ratio of Intel and vice versa.
They are competitors but have an opposite capital structure: Samsung is financed by debt whereas Intel is financed by Equity. Samsung has the capital structure specific to Korean Chaebols.