100%(3)3 out of 3 people found this document helpful
This preview shows page 13 - 15 out of 30 pages.
The second method is Dividend Growth Model (DGM). DGM is an annual percentagerate of growth that represents a certain share’s dividend undertakes over a period of time.41However, DGM is only applicable to dividend paying firms and it is very sensitive to estimateddividend growth rate. For example, an increase of 1% in gwill cause to increase 1% inRE.42Before calculating the cost of equity by using DGM, we have to find out the dividendgrowth rate. The growth rate formula is g=(1−payout ratio)×ROE. Calculation ofpayout ratio is dividend per share divided by earnings per share. According to the annualreport, the payout ratio of Maxis is 86.4% (Appendix 3.4),43In order to find out ROE, netincome value and total equity value in 2014 & 2015 are required. The figure shown in theannual report has been computed that Maxis ROE is 39% (Appendix 3.5).44Therefore, the39 “Malaysia Government Securities (MGS)”, Central Bank of Malaysia, accessed 28th March, 2016, 40 Reuters. “Maxis Berhad (MXSC.KL).” Reuters. accessed 28thMarch, 2016, 41 “Dividend Growth Rate”, Investopedia, assessed 29thMarch, 2016, 42 Elson Goh, “Cost of Capital” (lecture, Curtin University of Technology, March 28, 2016).43 Ibid., 18.44 Ibid., 78.13
growth rate of Maxis share is 5% (Appendix 3.6). The DGM formula is D1P0+g, whichmeans the sum of dividend yield and growth rate. The dividend yield and growth rate are2.9% (Appendix 3.4) and 5% respectively hence the cost of equity is 7.9% (Appendix 3.7).As a result, DGM is more accurate and appropriate compare to CAPM in this case. Ascalculation shown above, DGM get a positive REwhile CAPM get a negative. Moreover,market risk premium and beta of Maxis do change over time that will affect on the requirerate of return. CAPM normally uses government zero coupon bonds as a proxy for risk-freerate which is not actually risk-free. On the other hand, DGM is highly depends on dividendgrowth rate which is growing constantly. According to the information, the dividend growthrate of Maxis is expanding regularly therefore DGM is more suitable for Maxis. Apart from CAPM and DGM, there is another method which is called Three-factorMethod to determine cost of equity. It is required to classify some macroeconomic factorsthat could influence stock returns then develop estimation based on the expected riskpremium on each factor (rfactor1− rf ). Furthermore, we have to evaluate whether each stock issensitive to factors (b1). This model is presented as an outperform markets on a regular basiswhich is a better way for assessing manager performance.453.2 Cost of DebtCost of debt refers to the effective rate that a firm repay on its current debt and it ispart of the capital structure. It can be determined in before or after tax approaches, andsince interest tax expense is deductible in the financial statements so most of the firms areusing after-tax approach.46According to the annual report, Maxis has a total loan andborrowings of Maxis is RM17,110,000 where comprises RM7,980,000 of finance lease47and