Samsung Case Answer

Question 1

a) Benefits

- Capital structure: High debt to equity ratio generates higher tax shield for the chaebol in the whole

- Diversification of investment in unrelated business may reduce the overall risk of the chaebol and so reduce the cost of borrowing.

- With the internal capital market, the chaebol can maximize the capital resource to invest in strategic field for instance R&D

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b) Disadvantages:

- Investment diversifications are not in line with financial rationality. The capital allocations are inefficient and in most of the case it serves the interest of the founding family.

- The founding family has ownership and control

- No external monitor

- The minority shareholders have few rights

- Lack of transparency

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c) Governance issue:

- For minority shareholder: some corporate decisions will serve the interest of the founding family and not their interest.

- Minority shareholders suffer from the agency problem and tunneling

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Question 2

Samsung Electronics

All figures are in Million of US dollar (except the ratio) 1997 1998 1999

Sales 15299 16640 22810

Net income 102 260 2768

EBITDA 3158 2996 6375

Debt 10753 8466 5016

Equity 4830 5775 11644