In this part of report cost of equity cost of debt and WACC of FN will be

In this part of report cost of equity cost of debt

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Company cost of capital is the rate of return on the portfolio of all equity and debt in sum. In this part of report, cost of equity, cost of debt and WACC of F&N will be investigated and probable future projects that will influence WACC are also discussed. 3.1 Cost of equity- Capital Assets Pricing Model (CAPM) The CAPM model is distributed as follow
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R E = R f + β ( R M R f ) Where R E is the cost of equity (return) R f is the risk free rate which normally is the government bond interest rate, β is the beta value of the stock and (R M - R f ) is the market risk premium. By applying this model, to calculate R E , R f value needs to be determined first. To estimate R f , the closest result is using resent 10 year Singapore government bond rate as the risk-free rate of the market. It is the safest bond in Singapore with little likelihood of defaulting. In this report, we assume the R f value is at 2.078% which is the value at 29 th March 2019. (shown in appendix D) Appendix D: 10-year government bond 10 The second step is to find the beta value of F&N, for financial year 2018, the beta value can be estimated by a spread sheet. A beta value of 0.361 is calculated using Beta spread. By plotting the value difference of each day between STI index and F&N share price in the time frame of year 2018. The slop of the best fit trend line is the beta value and it shown in appendix E. In theory, beta is changing with time, but for the purpose of analysing, we assume it is a constant. Appendix E: 11 10“Singapore 10-Year-Bond Yield,” Investing.com, accessed Dec 31, 2019, 11“STI Index,” Yahoo Finance, accessed Dec 24, 2019, %5ESTI%3FP%3D%5ESTI/history? period1=1522512000&period2=1553961600&interval=1d&filter=history&frequency=1d “Fraser and Neave, Limited (F99.SI),” Yahoo Finance, accessed Dec 24, 2019, ? period1=1522512000&period2=1553961600&interval=1d&filter=history&frequency=1d
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Therefore, R E is calculated according to CAPM as: R E = R f + β ( R M R f ) ¿ 2.078 + 0.361 3.89 2.078 ¿ 2.73% 3.2 Cost of Equity – Dividend Growth Model (DGM) F&N limited has paid dividend during financial year 2018, thus can calculated cost of equity via DGM method. DGM is a method that discount back all the future dividend payment to their present value, R E can be computed by: R E = D 1 P 0 + g R E is the cost of return, D 1 is the next dividend payment, P 0 is the share price at period 0, g is the constant growth rate of that dividend. Where g can be further extend into: g = ROE x b where ROE is the return on equity and b is plowback ratio (earning retention ratio)
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g =( Net Income Shareholders Equity ) x ( 1 Dividend Earning Per Share ) Apply with the formula above and statistic from annual report 12 , constant growth rate can be calculated as: g =( 179,057,000 330,774,000 ) x ( 1 0.3 + 0.15 0.84 ) g = 0.25% Therefore, R E is calculated as: R E = 0.3 + 0.15 2.16 + 0.25% R E = 20.58% 3.3 Which of CAPM and DGM is more suitable?
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