75%(4)3 out of 4 people found this document helpful
This preview shows page 14 - 17 out of 27 pages.
therefore, CAPM can be use just as guidance for investors but not to ensure asafe investment for investors. For risk free rate, using short-term government bond may not result in accurate figure. This is due to the change of value on daily basis and it depends on the economy day to day performance.12As for beta, the figure
that was calculated might not be accurate as well, there might be uncertainty rises which will affect the beta from time to time. Therefore, the figure of beta was calculated based on estimation. CAPM and DGM is imperfect for calculating cost of equity, however in this case by theory, CAPM is suitable for calculating cost of capital.3.2Cost of DebtCost of debt is how much a company need to pay for using debt to finance thecompany. In other words, it is the effective rate that the company have to pay for its debts. Cost of debt also act as the company tax shield when it comes totaxation. The cost of debt will reduce the taxable income of the company therefore, there will be less tax imposed to the company. To calculate cost of debt, the following formula is used:rd=Pre−tax cost of debts×(1−tax rate)In this case, Berjaya Auto Berhad currently did not have any interest rate bearing debts and long-term loan13as well as year 201514and year 2014.15 Therefore, it is impossible to calculate cost of debt for Berjaya Auto Berhad.3.3Weighted Average Cost of Capital (WACC)To calculate weighted average cost of capital, the following formula is used:WACC=rewe+rdwd(1−Tc)+rpwpFrom the formula above, reis the cost of equity, weis the weight of equity, rdis the cost of debt, wdis the weight of debt, Tcis the corporate tax rate, rpis the cost of preference shares and wpis the weight of preference shares.
However, in this case, Berjaya Auto Berhad did not have cost of debt calculated and Berjaya Auto Berhad did not issue preference shares. To calculate the WACC for Berjaya Auto Berhad, only cost of capital is used. The total equity value is the closing price of the share as at 2015, RM 2.14, multiply by the total outstanding shares, 2,117,400. ____________12“CAPM: Theory, Advantages and Disadvantages” ACCA, assessed 1 September 2016,-studys-resources/f9/technical-articles/CAPM-theory.3.4 Discussion of WACCWACC is the risk profile for future project of Berjaya Auto Berhad if the future project risk is similar with current project risk. If the future project required return is higher than WACC, by theory it should be accepted, vice versa. Using the WACC to evaluate Berjaya Auto Berhad, we can see that, Berjaya Auto Berhad has maintain a good risk portfolio. We also can see that Berjaya Auto Berhad finance the company with equity, however there will be more riskon equity. As for the financial manager of Berjaya Auto Berhad, should increase the portion of debt in finance the company. This is to offset the risk ofcost of equity.