As for stakeholders this concept helps to recognize if the asset is worth the

# As for stakeholders this concept helps to recognize

• 31

This preview shows page 12 - 15 out of 31 pages.

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. Cost of Capital signifies a barrier rate where firms must solve before it initiates value. It is also used to deduce how well the project is before undertaking it. 3.1 Cost of Equity The return a firm need to resolve if an asset meets the capital return’s requirements is known as cost of equity. Furthermore, it reimburses the market request by trading the remaining asset and tolerating the ownership risk. Shareholders will accommodate the principal to firms and in return, shareholders will obtain payment from the firm through principal gain. Two approaches to analyze cost of equity for Maybank Group will 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 expected return and systematic risk. In addition, exercising the risk of certain resources, CAPM helps to create the expected return for those resources. CAPM presumes the expected return is same to the required return. Besides that, the expected return must meet the required return. r e = R f + β ( R m R f ) The guideline above signifies the formula for cost of equity ( r e ). R f is the risk- free rate, β is identified as beta or as the systematic risk which is undiversifiable and ( R m R f ) is the risk premium of a market. To identify the value of cost of equity, first we need to find R f . According to The Wall Street Journal, R f is 3.470% which can be witnessed in Appendix 2. Next, β . Beta was found in Appendix 3. Lastly, the value of R m was taken from the Market Return above. r e = R f + β ( R m R f ) r e = 3.470% + 0.87 ( 4.7% 3.470% ) r e = 4.54% Variable As at Period of R f 3.470% 31 st December 2018 R m 4.7% 2017 -2018 βeta 0.87 26 th September 2019 Table 2 3.1.2 Method 2 - Dividend Growth Model (DGM) The second method to calculate the cost of equity is by using DGM. DGM Model is applied to seek the intrinsic amount of a stock according to the future successions of divided that grows at a continuous rate. The formula for DGM can be seen below. r e = D 1 P 0 + g The guideline above signifies the cost of equity which indicates the dividend of the following years ( D 1 ) divided by current price of stock ( P 0 ) and add the continuous growth rate ( g ). Constant Growth can be derived by the following formula below g = Plowback Ratio x Return on Equity ( ROE )
g =( 1 Dividend Earnings Per Share ( EPS ) ) X Net Income Shareholder ' s Equity The constant growth can be solved by inserting the values from the Annual Report which can be seen in Appendix 4, Appendix 5, Appendix 6, Appendix 7 and placing it into the formula above. Variable As at Period of Dividend RM0.25 (Interim) + RM0.32 (Final) 31 st December 2018 EPS 7.42 Sen (Basic) 31 st December 2018 Net Income RM8,113,260 31 st December 2018 Shareholder’s Equity RM35,869,486 (Total Asset) – RM29,703,053 (Total Liabilities) 31 st December 2018 P 0 9.50 31 st December 2018 Table 3 g =( 1 RM 0.25 + RM 0.32 0.742 ) X RM 8,113,260 RM 806,991,681 RM 729,254,421 ¿ g = 0.0242 g = 2.42% Thus, by having the g , we can calculate the r e .