Question

# Singa Group is a Singaporean multinational companies. Below are the pertaining informations of the company. Estimated...

Singa Group is a Singaporean multinational companies. Below are the pertaining informations
of the company.

 Estimated return of the Singaporean market portfolio 15% Singapore 10-Year Government Bond 3% Singa Group’s beta 1.35 Cost of debt before tax 6% Singapore’s Corporate Tax 17% Optimal Capital Structure (Portion of Debt) 30% Optimal Capital Structure (Portion of Debt) 70%

a. If Singa Group’s beta against the global portfolio is estimated to be 1.05, and the
expected return from the global portfolio is 11%, compute the company’s (i) cost of
equity, and (ii) WACC, from the global perspective.

b. Assume that 40% of Singa Group debt is denominated in foreign currencies, at fixed
average interest rate of 6%. If the foreign currencies, overall, are expected to
depreciate slightly at 5%, against Singapore Dollar, and the international Fisher effect
does not hold, assess how this would affect the company’s WACC, and re-compute
(revise) the WACC.

Required a

i) Risk free rate (Rf) = 3%

Return from global portfolio (Rm) = 11%

Beta from the global portfolio ( )= 1.05

Cost of Equity (ke) = Rf + (Rm - Rf) * = 3% + (11% - 3%) * 1.05

= 11.4%

(ii) Cost of Equity (ke) = 11.4%

Weight of Equity (We) = 30%

Cost of Debt (kd) = 6% ( 1- 0.17)

= 4.98%

Weight of Equity (Wd) = 70%

WACC = We * ke + Wd * kd

= 0.30 * 0.114 + 0.70 * 0.0498

= 6.906%

Required b

Cost of debt before tax = 40% * (6% * 0.95) + 60% * 6%

= 5.88%

Cost of Debt (Revise) (kd) = 5.88% (1-0.17)

= 4.88%

WACC (Revise) = We * ke + Wd * kd

= 0.30 * 0.114 + 0.70 * 0.0488

= 6.836%

For any clarification, please comment. Kindly Up Vote