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with higher risk level will also have a higher cost of debt. Figure 1: Digi's Loans and Borrowings Data to take the proportion of debt31“Cost of Debt,” Investopedia, accessed May 2, 2019,
A table below will show and estimate how the proportion of debt is calculated fromDigi’s Annual ReportAmountInterest Rate(%)InterestExpenseProportion ofDebtNON - CURRENTFloating RateTerm Loans1,180,6745%59033.70.05Floating RateFinancing4309455%21547.250.05Medium TermNotes8989835%44949.150.05Finance LeaseObligation20819%187.290.09CURRENTFloating RateTerm Loans1125005%56250.05Floating RateFinancing625005%31250.05Finance Lease63719%573.390.09
ObligationTOTAL2694054135040.780.0501The total cost of debt is equivalent to 0.0501 (or 5.01), where this can already beapplied in the Cost of Debt formula and where the Appendix 3c) can simply showhow the Malaysian Government tax rate has a standard tax rate of 24%. Therefore, thecost of Debt can now be calculated in the formula expressed below;Rd×(1−Tax Rate)5.01×(1−24%)¿3.80763.5 WACC (Weighted Average Cost of Capital)32The weighted average cost of capital is a tool used by financial managers when itcomes to capital budgeting and analysis of business valuation, moreover this tool isbasically the highlight in financial management courses. The formula of WACC isexpressed in the following below; WACC=weRe+wdRd(1−tc)Wherein; We = The Equity’s WeightWd = The Debt’s WeightTc = Tax RateAs a conclusion based on the CAPM vs DGM model comparison and analysis, DGMwill be used to determine the cost of equity. 33The formula would include thefollowing variables, number of outstanding shares (7,775,000,000 units), closingshare price as at 31 December 2018 (RM 4.50), Debt Value (RM2,512,683,000). Todetermine WACC completely, elements of weand wdneeds to be estimated.Digi’s annual report has shown that.32Sam G. Berry, Iordanis Karagiannidis, Carl Betterton, “Understanding Weighted Average Cost of Capital: A Pedagogical Application,” Journal of Financial Education, ication33“Share Development and Analysis,” Digi Annual Report 2018, accessed May 3, 2019,
we=RM4.50×7,775,000,000(RM4.50X7,775,000,000)+RM2,512,683,000=0.9329 or 93.3%wd=2,512,683,000(RM4.50×7,775,000,000)+2,512,683,000= 0.0669 or 6.70%The value of WACC is to be determined according the cost of equity through DGM,where re=6.27%WACC=0.933×6.27%+0.067×5.01(1−24 %)¿6.11%Using the DGM approach to calculate the WACC would have the above-mentionedresults of 6.11%3.6 Discussion of WACC34The WACC is defined as the overall cost of capital of all funding sources of acompany. A company can raise its funds from either Equity, Debt, or preferred stock.Total cost of the equity is calculated by the weighted average of these costs.34“Weighted Average Cost of Capital – WACC Definition,” Investopedia, accessed on May 3, 2019,
WACC can be analyzed from 2 perspectives, the investor and the company. From acompany’s perspective, it is defined as the blended cost of capital a company mustpay for using the capital of both owners and debt holders.