Wacc Project Smrt Sbs
Introduction We focus on SMRT Corporation Ltd (SMRT) and SBS Transit Ltd (SBS). The market for their common equity (E), debt (D) and preferred stock (PS) are summarized here:
| |E (SGD$) |D (SGD$) |PS (SGD$) |D/(D+E+PS) |E/(D+E+PS) |PS/(D+E+PS) |
|SMRT |309.8M[1] |472.3M |0 |60.39% |39.61% |0 |
|SBS |649.7 M[2] |212.2M |0 |24.62% |75.38% |0 |
Debt was derived by adding short term borrowings to total long term liabilities as reported in the balance sheets (Exhibits 1 and 2). In addition, we added $100M to SBS’s long term debt as their latest financial statements were released before their 5 year notes were issued in Oct 10[3]. Both companies have not issued preferred stock.
Cost of Equity We use the yield on 20 year Singapore Government bonds, 3.36%[4], as the long term risk-free rate. To obtain the market premium, we refer to a report[5] that polled individuals on what they used as risk premiums. In particular, the Singapore market had responses from 5 analysts. As these individuals are considered industry experts, we deem it reasonable to use the average of their responses, 6.3%, as the appropriate risk premium. Beta is estimated by taking the slope of the companies’ stock against market returns regressions. The estimated period is 5 years at monthly intervals. The data is found in Exhibit 3, while the Beta results for SMRT and SBS are 0.31 and 0.48 respectively. Their cost of equity is now calculated in accordance to CAPM:
Cost of Equity (Ke,SBS) = Rf + βSBS * (E(Rm) – Rf) = 3.36% + 0.48 * 6.3% = 6.38%
Cost of Equity (Ke,SMRT) = Rf + βSMRT * (E(Rm) – Rf) = 3.36% + 0.31 * 6.3% = 5.31%
SBS has a higher cost of equity resulting directly from a higher Beta (though both
| |E (SGD$) |D (SGD$) |PS (SGD$) |D/(D+E+PS) |E/(D+E+PS) |PS/(D+E+PS) |
|SMRT |309.8M[1] |472.3M |0 |60.39% |39.61% |0 |
|SBS |649.7 M[2] |212.2M |0 |24.62% |75.38% |0 |
Debt was derived by adding short term borrowings to total long term liabilities as reported in the balance sheets (Exhibits 1 and 2). In addition, we added $100M to SBS’s long term debt as their latest financial statements were released before their 5 year notes were issued in Oct 10[3]. Both companies have not issued preferred stock.
Cost of Equity We use the yield on 20 year Singapore Government bonds, 3.36%[4], as the long term risk-free rate. To obtain the market premium, we refer to a report[5] that polled individuals on what they used as risk premiums. In particular, the Singapore market had responses from 5 analysts. As these individuals are considered industry experts, we deem it reasonable to use the average of their responses, 6.3%, as the appropriate risk premium. Beta is estimated by taking the slope of the companies’ stock against market returns regressions. The estimated period is 5 years at monthly intervals. The data is found in Exhibit 3, while the Beta results for SMRT and SBS are 0.31 and 0.48 respectively. Their cost of equity is now calculated in accordance to CAPM:
Cost of Equity (Ke,SBS) = Rf + βSBS * (E(Rm) – Rf) = 3.36% + 0.48 * 6.3% = 6.38%
Cost of Equity (Ke,SMRT) = Rf + βSMRT * (E(Rm) – Rf) = 3.36% + 0.31 * 6.3% = 5.31%
SBS has a higher cost of equity resulting directly from a higher Beta (though both