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construction of a 554-megawatt oil shale fired power generating project in Jordan anda 2 × 660 MW coal-fired power project in Java, Indonesia. The total capitalexpenditure for these projects is 4.8 billion USD, 2.7 billion USD for oil shale firedpower project in Jordan and 2.1 billion USD for power project in Indonesia.23Investment in these projects will strengthen the company’s ability to generate morerevenue and able to diversify its business into several countries. However, the huge amount of capital expenditure may affect the company’s ability inpaying dividends to the shareholders.24The share of YTL Power has a low beta, andits share price has remains stagnant around RM1.40 for the past few years, thereforeinvestors will not aim for a capital gain in this share but to receive dividend as acompensation for their investment. By referring to the capital gain and dividend yield,the dividend yield is 7.30% while the capital gain is only 3.65%. The attractiveness ofYTL Power shares will decrease if the heavy capital expenditure affects the ability topay dividend to the shareholders and investor may want to find a new target for ahigher return. In addition, the company expect that these two projects will only be able to startcontributing to the company revenue after the second half of financial year 2021.23.“YTL Power AGM Summary 2016,” YTL Power International Berhad. accessed April 23, 2018, %20Power-AGM_Summary2016.pdf.24 Kana, Ganeshwaran, “YTL Power Seen Delivering Lower Dividend Payout,” The Star Online, August 1, 2017, -seen-delivering-lower-dividend-payout/.
These are all long-term projects, but shareholders will not have the patience to holdthe share for several years. This again decrease the attractiveness of YTL Powershares, as this results in the share price only move up 5 sen from RM1.37 to RM1.42during the whole financial year. This can be interpreted that there is lack of demandfor YTL Power shares as the potential return is not high because it lacks growthcatalyst in a short and medium term. However, there is also no drop in the share price,because some investors may hope that the management will declare a RM0.10dividend payment in the next financial year which is approximately to a 7.04%dividend yield based on the final closing price. A 7.04% dividend yield is considereda good return as it is better than the fixed deposit rate in banks.
3.0 Cost of Capital3.1 Cost of Equity3.1.1 Capital Asset Pricing ModelThe formula for the capital asset pricing model is:r=rf+β(rm−rf)The return on equity is determined by the risk premium (rm−rf), beta of the stock(β), and the risk-free rate (rf). Beta is the measure of systematic risk andvolatility of a stock compared to the overall stock market.