principal project is valuable to the disbursement of properties. As for stakeholders,this concept helps to recognize if the asset is worth the risk compared to return. Costof Capital signifies a barrier rate where firms must solve before it initiates value. It isalso used to deduce how well the project is before undertaking it.3.1 Cost of EquityThe return a firm need to resolve if an asset meets the capital return’s requirements isknown as cost of equity. Furthermore, it reimburses the market request by trading theremaining asset and tolerating the ownership risk. Shareholders will accommodate theprincipal to firms and in return, shareholders will obtain payment from the firmthrough principal gain. Two approaches to analyze cost of equity for Maybank Groupwill be provided in this report. The approaches are Capital Asset Pricing Model(CAPM) and Dividend Growth Model (DGM).
3.1.1 Method 1 - Capital Asset Pricing Model (CAPM)CAPM is a framework used by firms to undertake the interrelation allying expectedreturn and systematic risk. In addition, exercising the risk of certain resources, CAPMhelps to create the expected return for those resources. CAPM presumes the expectedreturn is same to the required return. Besides that, the expected return must meet therequired return. re=Rf+β(Rm−Rf)The guideline above signifies the formula for cost of equity (re). Rfis the risk-free rate, βis identified as beta or as the systematic risk which is undiversifiableand (Rm−Rf)is the risk premium of a market. To identify the value of cost of equity, first we need to find Rf. According to TheWall Street Journal, Rfis 3.470% which can be witnessed in Appendix 2. Next,β. Beta was found in Appendix 3. Lastly, the value of Rmwas taken from theMarket Return above. re=Rf+β(Rm−Rf)re=3.470%+0.87(4.7%−3.470%)re=4.54%VariableAs atPeriod ofRf3.470%31stDecember 2018Rm4.7%2017 -2018βeta0.8726thSeptember 2019Table 23.1.2 Method 2 - Dividend Growth Model (DGM)The second method to calculate the cost of equity is by using DGM. DGM Model isapplied to seek the intrinsic amount of a stock according to the futuresuccessions of divided that grows at a continuous rate. The formula for DGM canbe seen below.re=D1P0+gThe guideline above signifies the cost of equity which indicates the dividend of thefollowing years (D1) divided by current price of stock (P0) and add thecontinuous growth rate (g).Constant Growth can be derived by the following formula belowg=Plowback Ratio x Return on Equity(ROE)
g=(1−DividendEarnings Per Share(EPS))XNet IncomeShareholder's EquityThe constant growth can be solved by inserting the values from the Annual Reportwhich can be seen in Appendix 4, Appendix 5, Appendix 6, Appendix 7 and placing itinto the formula above.VariableAs atPeriod ofDividendRM0.25 (Interim) + RM0.32(Final)31stDecember 2018EPS7.42 Sen (Basic)31stDecember 2018Net IncomeRM8,113,26031stDecember 2018Shareholder’sEquityRM35,869,486 (Total Asset) –RM29,703,053 (Total Liabilities)31stDecember 2018P09.5031stDecember 2018Table 3g=(1−RM0.25+RM0.320.742)XRM8,113,260RM806,991,681−RM729,254,421¿g=0.0242g=2.42%Thus, by having the g, we can calculate the re.