10-year government bond rate: 6.89%. We choose this rate because we want to date back as long as possible. Meanwhile, since the market benchmark should be in the same period of risk-free rate, we can also ensure that the market premium calculated in this way has the lowest standard error.
However, Hong Kong government is graded as A3 by Moody’s from 1998 to 2001(https://zh.tradingeconomics.com/hong-kong/rating), so we should substract a DRP to the risk-free rate. Whereas, we couldn’t find the DRP data in 2000, so we just stick to the data in lecture notes which shows that default spread should be 115 bp.
Thus, Historical risk free rate = Government bond rate - default spread = 6.89% - 1.15% = 5.47%
We choose the current yield of the ten-year bond as the current risk free rate. Current risk free rate = Current yield - default spread = 6.37% - 1.15% = 5.22%
From exhibit 9, the cost of debt should be 6.64%
From exhibit 9, the beta should be 1.311
\[ k_{e} = k_{RF} + (k_{m} - k_{RF}) * \beta = 5.22 + 1.311 * 8.63 = 16.54 \]
\[ WACC = w_{d} k_{d} (1-T) + w_{e}k_{e} = \frac{0.8}{1+0.8} * 6.64 * (1 - 0.16) + (1 - \frac{0.8}{1+0.8})* 16.54 = 11.47 \]
\[ WACC_{Inf} = \frac{0.8}{1+0.8} * 8.63 *(1-0.16) + (1 - \frac{0.8}{1+0.8}) * (5.22 + 1.078*8.36) = 11.13 \]
\[ WACC_{Tel} = \frac{0.8}{1+0.8} * 7.07 *(1-0.16)+ (1 - \frac{0.8}{1+0.8}) * (5.22 + 1.027*8.36) = 10.31 \]
| Sun Hong Kai properties | Sino Land | Henderson Land | Cheung Kong Holdings | |
|---|---|---|---|---|
| Beta | 1.298 | 1.093 | 1.171 | 1.212 |
| D/E | 23.17% | 31.69% | 20.60% | 11.7% |
| Unleveraged Beta | 1.0865 | 0.8632 | 0.9983 | 1.1035 |
| Average unlevered Beta | 1.0129 | |||
| Levered Beta | 1.6936 | |||
| Cost of debt | 6.4 | 7.9 | 7.4 | 5.6 |
| Average cost of debt | 6.825 |
\[ WACC_{Pro} = \frac{0.8}{1+0.8} * 6.825 * (1-0.16) + (1 - \frac{0.8}{1+0.8})*(5.22 + 1.6936 * 8.36) = 13.32 \]
| ITC Corporation | |
|---|---|
| Beta | 0.922 |
| D/E | 46.97% |
| Unleveraged Beta | 0.6611 |
| Average unlevered Beta | 0.6611 |
| levered Beta | 1.1054 |
| Cost of debt | — |
| Average cost of debt | 7 |
Note that we ignored Chevalier Construction in our computation because the cost of debt of this company is NA. We think that including this company will bias the result of WACC.
\[ WACC_{Con} = \frac{0.8}{1+0.8} * 7 * (1-0.16) + (1 - \frac{0.8}{1+0.8})*(5.22 + 1.1054 * 8.36) = 10.65\]
| HK & Shanghai Hotel | Far East Hotels | |
|---|---|---|
| Beta | 0.83 | 0.978 |
| D/E | 46.61% | 8.06% |
| Unleveraged Beta | 0.5965 | 0.9160 |
| Average unlevered Beta | 0.7562 | |
| levered Beta | 1.2644 | |
| Cost of debt | 11.26 | 12.69 |
| Average cost of debt | 11.975 |
\[ WACC_{Hotel} = \frac{0.8}{1+0.8} * 11.975 * (1-0.16) + (1 - \frac{0.8}{1+0.8})*(5.74 + 1.2644 * 8.36) = 13.24 \]
\[ Operating \quad margin = EBIT / total \quad revenue = 2616 / 20535 = 12.74\% \]
\[ NOPAT = EBIT(1-t) = 2616 \times (1-0.16) = 2197.44 \]
Total capital = Bank$other loan + Finance lease + creditors + shareholder’s fund + minority interest + convertible bond + long-term liability = 4710.4 + 11.5 + 10614.2 + 58208.1 + 17298.7 + 1162.2 + 33611.9 = 125617
Non-operating assets = property held for sale + stocks + other investments = 23688.3 + 348.2 + 9945.3 = 33981.8
TOC = Total capital - Non-operating assets = 125617 - 33981.8 = 91635.2
NOPAT return on capital = 2197.44/91635.2 = 0.02398
\[ EVA_{company} = NOPAT - WACC * TOC = 2197.44 - 0.1147 * 91635.2 = -8313.12 \]
| Property | Construction | Hotel | Infrastructure | Telecommunication | |
|---|---|---|---|---|---|
| TAV | 52250 | 3665 | 8177 | 2801 | 4687 |
| Percentage | 72.16% | 5.06% | 11.29% | 3.87% | 6.47% |
| TOC | 66119.88 | 4637.88 | 10347.60 | 3544.53 | 5931.18 |
\[ EVA_{Pro} = NOPAT_{Pro} - WACC_{Pro} * TOC_{Pro} = 1356 * (1-0.16) - 0.1332 * 66119.88 = -7668.13 \]
\[ EVA_{Con} = NOPAT_{Con} - WACC_{Con} * TOC_{Con} = 411 * (1-0.16) - 0.1065 * 4637.88 = -148.69 \]
\[ EVA_{Hotel} = NOPAT_{Hotel} - WACC_{Hotel} * TOC_{Hotel} = 479 * (1-0.16) - 0.1324 * 10347.60 = -967.66 \]
\[ EVA_{Inf} = NOPAT_{Inf} - WACC_{Inf} * TOC_{Inf} = 312 * (1-0.16) - 0.1113 * 3544.53 = -132.43 \]
\[ EVA_{Tel} = NOPAT_{Tel} - WACC_{Tel} * TOC_{Tel} = -252 * (1-0.16) - 0.1031 * 5931.18 = -823.18 \]