Cory Diary : Weighted Average Cost of Capital ( WACC)

"Low-interest rates may also lead to NLT’s regulatory weighted average cost of capital (WACC) for the next review period (Jan 2023-Dec 2027) to be revised down from 7% currently, adversely impacting distributions potentially. In addition, there is no visibility on any acquisition by NLT which could be positive catalyst in the long term."

Bumped today on how people is concern with WACC. So I started to do some research into it. Basically this can helps to determine how regulator managed regulated companies.

" A high weighted average cost of capital, or WACC, is typically a signal of the higher risk associated with a firm's operations. Investors tend to require an additional return to neutralize the additional risk. ... In theory, WACC represents the expense of raising one additional dollar of money. "

The WACC formula is as such

Basically is the weighted amount of Equity Cost and Debt Cost.

Cost of Debt

2.87% of 509,120k and 1.2% 155,587k

= Weighted will be (14,612k + 1,867k ) /664707k

= 2.48%

Cost of Debt Variables

Gross debt 666M

Market Cap 3683M

Tax rate 17%

CAPM

CAPM model to estimate cost of equity.

Cost of Equity

Let's say Risk free rate 1.53% per Singapore Saving Bond

Expected Rate of return say 8.3%. ( 5.34% yield + 3% growth )

Cost of Equity = 1.53% + 0.3 x ( 8.34% - 1.53% ) = 3.573% ( 8.34% for Beta = 1 )

The calculation of Beta is tricky. Who should we use as reference for NLT ? Should we use STI Index ? Since NLT listed in Year 2017, their stock price has raised more than 21% compared to STI -1.3%. Yahoo put NLT beta as 0.3. Some other put 0.5. This one need another article to think about and compute !

If we assume Beta = 0.3,  plug in all this data into the model, we have

WACC = Weighted ( Cost of Equity + Cost of Debt )

= 3683M x 3.573%/(666M+3683M) + 666M x 2.48% x (1 - 17%) / (666M + 3683M)

= 131.59M/4349M + 16.52M x 0.83/4349M

= 0.03 + 0.00315

= 0.03315 or 3.315% ( or 7.3% for Beta = 1 )

Below is NLT model. There are other moving wheels such as Depreciation and Opex for Rev determination.

Interesting Exercise. However this is my First pass. Please DYODD.

Cory

2021-0606

Articles in this Blog is personal take and educational purposes only. Reader should seek their own professional help when making financial decision and be responsible for their decision.

Cory Diary : Net Worth Updates

Seems a long time that I last did my Net Worth report. Some time ago I do some revamp on my Chart to make it even more easier to manage with lesser time. During this period I learned how to use macro in Excel to do VBA. Quite excited about it as this add a layer of automation to my learning. It is much simpler than I thought it would be. Maybe I can start to learn to do some tool for my colleagues as automation is sorely lacking even though we have some power tools using VBA, BI and Power BI.

I added a trend line in my chart just for fun. Though it might gives the impression of exponential type of feel into my net worth growth, seriously I doubt it can last. I am going 52 and looking forward to age 55 as a milestone which I could ask for retirement. Frankly I am not sure I would when time arrives. Nevertheless is something I look forward to in the aging process as an option which is favorable by then.

Back of my mind is I could be "retired" before 55 but this seems less likely for now as the company business is doing well. They even give a special bonus to boost Work-From-Home Morale. When you are at my age, we are earning a much higher salary that is near the peak of our career. The cost of retirement would be costly. So there is always the motivation or to some fear factor in play.

I am thinking should I do a comparison against my previous net worth report but is quite a hassle when I want to go sleep asap. I am nodding off.... . Instead I would focus on a particular highlight in the chart and talk about it which is the securities + MMF line in the chart. Is getting more steeper which basically is the result of my action to optimize wealth generation. Therefore channeling idle fund to more active use. There is still some gap to fill except that sizeable amounts allocated for War Chest needs. So the easy picking is reduced.

Cory

2021-0603

Articles in this Blog is personal take and educational purposes only. Reader should seek their own professional help when making financial decision and be responsible for their decision.

Cory Diary : Investment Evolutions

Coming from below average income family of sandwiched class, foraying into investments is an evolution process. Basically I can't see it till it happens naturally "A common sense approach". It may not be the best but is suitable for me so far for a self learning investor who basic core believes is we must understand investment ourselves.

Started with years of education like all locals, and then started saving and basic life insurance. Thanks to my parents I am able to study in local University. When we save enough, start to play in stock markets. After a few years as the investment grow into sizeable amount, our bets get bigger and bigger. This after, we have our first HDB apartment.

As career progress, we have more saving for investment and it becomes a portfolio. To build up a sustainable second income stream, Dividend Investment becomes the plan of the day.  After few years, the amount is enough to sustain a reasonable annual income. This is when we explore property investment into Condo.

Money continues to roll in with continue salary income, dividend income and property income. By then I am already in my 50. Retirement clock starts clicking and started exploring funding sufficiency to support lifestyle retirement and this is when CPF kicks in as basic net investment returns while bonds are slowly kicked out.

This CPF investment phase is pretty quick because we will be at our peak earning capability phase. And then we can do the next leapt into growth stocks to maximize returns in a way after having the experience in investment knowledge, building sustainable earning and achieving asset net worth.

I stop here. This is where I am now.

So far, what I could do better ? Some people say I could do much better while others think I am lucky. Other than roll of luck jumbling up on which to go first, I am grateful of what I have so far. Life is not Bed and Roses, let's not make it Tougher. 

Ah Yes. I have two toddlers. God Grace to manage to have them in my 50s. What's my priority, them lah other than Health. Be Safe. I wish those who want to be wished.

Cory

2021-0530

Articles in this Blog is personal take and educational purposes only. Reader should seek their own professional help when making financial decision and be responsible for their decision.