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)-bond	30%
Optimal Capital Structure (Portion of Debt)-Equity	70%

1. 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.

           

2. 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