The Triangulation of Value and the Cost of Capital 价值与资本成本的三角化.pptVIP

Why is the Cost of Capital so high in South Africa? What is SA Inc. doing about it? Dr Michael Power, Investec Asset Management What is SA Inc’s Cost of Capital? SA Inc: for an ungeared company, 15% (Risk free rate of 9.5% + Equity Risk Premium of 5.5%) Compared to: UK Inc: for an ungeared company, 8% (RFR of 4% + ERP of 4%) US Inc: for an ungeared company, 7.7% (RFR of 3.7% + ERP of 4%) In other words, a South African company needs value added returns that are almost twice as high as British or American company to be profitable. The Proof of the Pudding Press Report covering Anglo American’s first earnings release following their move to London: “Ogilvie Thompson said the group was pleased with its London listing, which had lowered its cost of capital…” The Cost of Capital Defined It is the blend of a corporation’s capital base, debt and equity, defined as the WEIGHTED AVERAGE COST OF CAPITAL or WACC WACC = equity % of capital base (risk free rate + (beta x equity risk premium)) + debt % of capital base ((risk free rate + lending margin) x (1 - tax rate)) The modern multinational will spread itself between the world’s pools of capital so as to create the lowest risk adjusted blend of capital it can Why is the WACC so important? It sets the proper hurdle rate to determine true ‘profit’ A company whose auditors say it is ‘profitable’ and whose ‘profits’ are taxed by the Government may not be truly profitable! Returns to capital less Cost of Capital = Economic Value Added if positive, Economic Value Destroyed if negative My focus here is on ‘more expensive’ equity not ‘less expensive’ debt Why debt is usually cheaper than equity? Because of tax; the debt part of WACC is calculated as follows: → ((risk free rate + lending margin) x (1 - tax rate)) But if a company’s gearing rises too high, the interest rate will almost certainly rise above the cost of equity as lenders’ concerns rise with gearing levels and they demand penal lendi