Calculations of Myer Holdings Limited

Calculations for Myer Holdings Limited

The cost of equity and debt calculations are based on the fiscal period ending 30 June 2016.

Cost of Equity

In 2016, Myer Holdings Limited (MYRequity )'s was made up of ordinary shares. The corporation owned no preference shares throughout the fiscal year (""Annual Reports 2016"", 2016). The equity cost is as follows;

Capital Asset Pricing Model Cost of Equity (CAPM)

Myer's CAPM cost of equity is as follows;

re = rf + [E(rm) - rf] (1) where re = cost of equity capital and rf = 2.58% = return on risk-free asset (Figure 1) (2017, "Australian Rates & Bonds")

β = systematic risk of the equity. The company beta is 1.438609 (Figure 2) ("MYR.AX: Summary for Myer Holdings Ltd - Yahoo Finance", 2017) . It is similar to 1.92 as per Reuters (Editorial, 2017) and 1.9216 ("Myer Holdings Ltd, MYR:ASX summary - FT.com", 2017).

[E(rm) –rf] = 5% the risk premium, expected for the market as a whole (Fenebris.com, 2017).

re = 2.58% + 1.438609 (5%) = 9.77%

Cost of Equity using Dividend Discount Model (DDM)

Myer’s cost of equity using the DDM model is calculated as below;

Ke = D1/P0 + g (2)

Where

Ke represents cost of equity

D1 = 0.05 represents the dividend one year from now ("Annual Reports 2016", 2016)

P0 = 1.34 is the price of equity at the moment ("MYR.AX: Summary for Myer Holdings Ltd - Yahoo Finance", 2017).

g is the projected dividend growth rate. The dividends have been on a decline from 22.5 in 2011 to 5 in 2016 ("Annual Reports 2016", 2016).

The decline in dividends = {(5/22.5)^(1/5)}-1 = -0.2598

Ke = 0.05/1.34 – 0.2598 = -0.2225

The cost of equity based on DDM approach is not realistic. The continued decline in the dividend makes the cost of equity negative. The approach can thus not be used as the company dividends will decline to zero and thus not be paying any dividends. The DDM approach has not considered risk in the equity emanating from additional shared being issued.

In arriving at the cost of equity, using CAPM is preffered as the DDM approach leads to an erroneous cost of equity. The error is due to the reducing leevl of dividends which in the future will lead to no dividends being paid.

Cost of Debt

Myer’s debt is not traded. The book value of the debt is approximately equal to its fair value. In calculating the cost of debt, we consider the interest payments and the average level of debt in the year. Interest payments are tax deductible at 30% ("Annual Reports 2016", 2016).

Table 1

Summary of Borrowings and Related Costs

Nature

2015

2016

Average

Borrowings

441,179

147,273

294,226

Interest Expense

21,808

13,146

Note. The data in the table is extracted from Myer FY16 annual reports ("Annual Reports 2016", 2016).

Kd = Interest/Average borrowings (1- tax rate) (3)

Kd = 13,146/294,226 * (1 – 30%) = 3.13%

The cost of debt could be influenced by the time of its repayment. If the repayment was done at the beginning of the year, the price of debt could be highly undervalued.

Weighted Average Cost of Capital (WACC)

Myer’s WACC is composed of equity and debt as there is no preference equity. WACC depends in the weight of debt and equity in the books of the company.

Table 2

Weighted Average Calculations

Nature

Amount

Weight

Borrowings

147,273

11.63%

Equity

1,118,821

88.37%

1,266,094

100.00%

Note. The data in the table is extracted from Myer FY16 annual reports ("Annual Reports 2016", 2016).

Equity is composed of shareholders contribution and the retained earnings. The WACC is as below;

Kc = (E/D+E)Ke +(D/D+E) * Kd * (1-T) (4)

Kc = (88.37% * 9.77%) + (11.63% * 3.13%) = 8.9978%

The WACC is lower than the cost of equity due to the debt being cheaper than equity. Myer excessive use of equity is risky as the company can obtain financing through low cost debt.

References

Annual Reports 2016. (2016). MYER Investor Centre. Retrieved 10 October 2017, from http://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/Myer_Annual_Report_2016.pdf

Australian Rates & Bonds. (2017). Bloomberg.com. Retrieved 10 October 2017, from https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia

Fenebris.com, F. (2017). AU - Market Risk Premia. Market-risk-premia.com. Retrieved 10 October 2017, from http://www.market-risk-premia.com/au.html

Editorial, R. (2017). Myer Holdings Ltd (MYR.AX). Reuters.com. Retrieved 10 October 2017, from https://www.reuters.com/finance/stocks/overview/MYR.AX

Myer Holdings Ltd, MYR:ASX summary - FT.com. (2017). Markets.ft.com. Retrieved 10 October 2017, from https://markets.ft.com/data/equities/tearsheet/summary?s=MYR:ASX

MYR.AX: Summary for Myer Holdings Ltd - Yahoo Finance. (2017). Au.finance.yahoo.com. Retrieved 10 October 2017, from https://au.finance.yahoo.com/quote/MYR.AX/

Appendix

Table 3

5 Year Historical Data Myer and ASX 200

Date

Myer Price

ASX 200 Price

3 month T bill Rate

Monthly return Myer

Monthly ASX 200 return

Monthly T bIll rate

Excess return Myer

Excess Return ASX 200

30/06/2011

2.16273

4424.6

6.02%

-

-

0.49%

31/07/2011

2.00357

4296.5

1.50%

-7.36%

-2.90%

0.12%

-7.48%

-3.02%

31/08/2011

1.90994

4008.6

1.00%

-4.67%

-6.70%

0.08%

-4.76%

-6.78%

30/09/2011

2.4436

4298.1

0.50%

27.94%

7.22%

0.04%

27.90%

7.18%

31/10/2011

2.22826

4119.8

1.50%

-8.81%

-4.15%

0.12%

-8.94%

-4.27%

30/11/2011

1.81163

4056.6

0.50%

-18.70%

-1.53%

0.04%

-18.74%

-1.58%

31/12/2011

2.00357

4262.7

5.50%

10.59%

5.08%

0.45%

10.15%

4.63%

31/01/2012

2.10655

4298.5

7.50%

5.14%

0.84%

0.60%

4.54%

0.24%

29/02/2012

2.19081

4335.2

6.50%

4.00%

0.85%

0.53%

3.47%

0.33%

31/03/2012

2.20018

4396.6

9.00%

0.43%

1.42%

0.72%

-0.29%

0.70%

30/04/2012

1.80227

4076.3

6.00%

-18.09%

-7.29%

0.49%

-18.57%

-7.77%

31/05/2012

1.51204

4094.6

8.00%

-16.10%

0.45%

0.64%

-16.75%

-0.19%

30/06/2012

1.71333

4269.2

10.00%

13.31%

4.26%

0.80%

12.52%

3.47%

31/07/2012

1.86313

4316.1

8.50%

8.74%

1.10%

0.68%

8.06%

0.42%

31/08/2012

1.63375

4387

9.00%

-12.31%

1.64%

0.72%

-13.03%

0.92%

30/09/2012

1.83036

4517

10.50%

12.03%

2.96%

0.84%

11.20%

2.13%

31/10/2012

2.03165

4506

7.50%

11.00%

-0.24%

0.60%

10.39%

-0.85%

30/11/2012

2.02229

4649

3.50%

-0.46%

3.17%

0.29%

-0.75%

2.89%

31/12/2012

2.33125

4878.8

6.50%

15.28%

4.94%

0.53%

14.75%

4.42%

31/01/2013

2.61212

5104.1

10.00%

12.05%

4.62%

0.80%

11.25%

3.82%

28/02/2013

2.76192

4966.5

6.50%

5.73%

-2.70%

0.53%

5.21%

-3.22%

31/03/2013

3.00535

5191.2

4.50%

8.81%

4.52%

0.37%

8.45%

4.16%

30/04/2013

2.2938

4926.6

3.00%

-23.68%

-5.10%

0.25%

-23.92%

-5.34%

31/05/2013

2.22826

4802.6

3.00%

-2.86%

-2.52%

0.25%

-3.10%

-2.76%

30/06/2013

2.50914

5052

3.00%

12.61%

5.19%

0.25%

12.36%

4.95%

31/07/2013

2.57467

5135

2.00%

2.61%

1.64%

0.17%

2.45%

1.48%

31/08/2013

2.4436

5218.9

0.50%

-5.09%

1.63%

0.04%

-5.13%

1.59%

30/09/2013

2.34061

5425.5

3.30%

-4.21%

3.96%

0.27%

-4.49%

3.69%

31/10/2013

2.6683

5320.1

5.50%

14.00%

-1.94%

0.45%

13.55%

-2.39%

30/11/2013

2.57467

5352.2

6.30%

-3.51%

0.60%

0.51%

-4.02%

0.09%

31/12/2013

2.3687

5190

1.00%

-8.00%

-3.03%

0.08%

-8.08%

-3.11%

31/01/2014

2.45296

5404.8

4.30%

3.56%

4.14%

0.35%

3.21%

3.79%

28/02/2014

2.08783

5394.8

2.80%

-14.89%

-0.19%

0.23%

-15.12%

-0.42%

31/03/2014

2.07846

5489.1

2.00%

-0.45%

1.75%

0.17%

-0.61%

1.58%

30/04/2014

2.01293

5492.5

3.00%

-3.15%

0.06%

0.25%

-3.40%

-0.18%

31/05/2014

1.98484

5395.7

2.00%

-1.40%

-1.76%

0.17%

-1.56%

-1.93%

30/06/2014

2.13464

5632.9

1.80%

7.55%

4.40%

0.15%

7.40%

4.25%

31/07/2014

2.26571

5625.9

1.80%

6.14%

-0.12%

0.15%

5.99%

-0.27%

31/08/2014

1.83504

5292.8

1.30%

-19.01%

-5.92%

0.11%

-19.12%

-6.03%

30/09/2014

1.81632

5526.6

0.30%

-1.02%

4.42%

0.02%

-1.05%

4.39%

31/10/2014

1.51672

5313

0.50%

-16.49%

-3.86%

0.04%

-16.54%

-3.91%

30/11/2014

1.31074

5411

3.70%

-13.58%

1.84%

0.30%

-13.88%

1.54%

31/12/2014

1.45586

5588.3

0.50%

11.07%

3.28%

0.04%

11.03%

3.24%

31/01/2015

1.73674

5928.8

0.80%

19.29%

6.09%

0.07%

19.23%

6.03%

28/02/2015

1.26861

5891.5

2.50%

-26.95%

-0.63%

0.21%

-27.16%

-0.84%

31/03/2015

1.29202

5790

0.50%

1.85%

-1.72%

0.04%

1.80%

-1.76%

30/04/2015

1.40437

5777.2

0.30%

8.70%

-0.22%

0.02%

8.67%

-0.25%

31/05/2015

1.1469

5459

1.00%

-18.33%

-5.51%

0.08%

-18.42%

-5.59%

30/06/2015

1.17967

5699.2

5.80%

2.86%

4.40%

0.47%

2.39%

3.93%

31/07/2015

1.13286

5207

5.00%

-3.97%

-8.64%

0.41%

-4.38%

-9.04%

31/08/2015

0.88

5021.6

0.50%

-22.32%

-3.56%

0.04%

-22.36%

-3.60%

30/09/2015

0.96

5239.4

6.80%

9.09%

4.34%

0.55%

8.54%

3.79%

31/10/2015

1.11

5166.5

17.00%

15.63%

-1.39%

1.32%

14.31%

-2.71%

30/11/2015

1.195

5295.9

14.80%

7.66%

2.50%

1.16%

6.50%

1.35%

31/12/2015

1.035

5005.5

30.00%

-13.39%

-5.48%

2.21%

-15.60%

-7.69%

31/01/2016

1.155

4880.9

30.80%

11.59%

-2.49%

2.26%

9.33%

-4.75%

29/02/2016

1.175

5082.8

19.30%

1.73%

4.14%

1.48%

0.25%

2.66%

31/03/2016

1.035

5252.2

19.30%

-11.91%

3.33%

1.48%

-13.40%

1.85%

30/04/2016

1.12

5378.6

28.30%

8.21%

2.41%

2.10%

6.11%

0.31%

31/05/2016

1.12

5233.4

24.80%

0.00%

-2.70%

1.86%

-1.86%

-4.56%

Note. The data in the table is extracted from Yahoo Finance ("MYR.AX: Summary for Myer Holdings Ltd - Yahoo Finance", 2017).

Figure 1. Graph of Risk-Free Rate and Market Risk Premium

Figure 2. Graph of Excess Market Returns over Myer's Excess Returns