Question

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.

Answer 1

Required a

i) Risk free rate (R_f) = 3%

Return from global portfolio (R_m) = 11%

Beta from the global portfolio ()= 1.05

Cost of Equity (k_e) = R_f + (R_m - R_f) *

= 3% + (11% - 3%) * 1.05

= 11.4%

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

Weight of Equity (W_e) = 30%

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

= 4.98%

Weight of Equity (W_d) = 70%

WACC = W_e * k_e + W_d * k_d

= 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) (k_d) = 5.88% (1-0.17)

= 4.88%

WACC (Revise) = W_e * k_e + W_d * k_d

= 0.30 * 0.114 + 0.70 * 0.0488

= 6.836%

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