7/21/2019 Village Roadshows Ltd Cost of Capital

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Village Roadshows Ltd Cost of Capital  = 0.873 

 = 2.404% 

= 4.393% 

 = 6.241% 

   = 3.794% 

= 5.067% 

Beta

The Raw Beta for Village Roadshows Ltd (VRL) was estimated by obtaining the slope of the

regression of returns on the stock against returns on ASX300 between 05-Mar-2000 and 05-

Feb-2015. Among the financial industry is very common to adjust Raw Betas because there

are empirical evidence that suggests that betas for most companies, over time, tend to move

towards the average beta. Bloomberg’s approach was used  = 0.811 + 1− 0.811 ∗0.33 = 0.873.

Risk Free Rate

Risk Free Rate (2.404%) was taken from the latest data of the Australian Commonwealth

Government 10 year bond (05-Feb-2015).

Market Risk Premium (MRP)

The Market Risk Premium (MRP) was calculated using the difference between arithmetic

average of the annualized monthly returns of ASX300 and 10 year bond yield in the period

between 5-Mar-2000 and 05-Feb-2015 where = 9.522% − 5.129% = 4.393%.

Cost of Equity

The Cost of Equity was calculated using the CAPM model using the value of the parameter

showed before where  = 2.404% + 0.8734.393% = 6.241% .

 After-Tax Cost of Debt

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The Cost of Debt was obtained by using Interest Expense to Debt ratio as the ratio estimates

the interest rate a company is paying on its debt. Based on the information from VRL 2014

annual report, total Debt (interest bearing loans and borrowings) was 480.87M while Net

Interest Expense was 26.06M. Using the book value of Debt, pre-tax  =   .. = 5.42%.

Then we considered the marginal tax rate for the country that we found on Damodarans'

webpage (30%). Finally the Cost of Debt was  = 5.42% ∗ 1 − 30% = 3.794%.

The Value of Equity (521.31M) and Value of Debt (480.87M) were obtained from VRL 2014

annual report.

Weighted Average Cost of Capital

The Weighted Average Cost of Capital (WACC) was calculated with the figures above

= 6.241%( 521.311,002.18) + 3.794% ( 480.87

1,002.18) = 5.067%