Stock Valuation Essay

8. Stock Valuation

8.1. Weighted Average Cost of Capital (WACC)

The cost of equity (required rate of return of equity) was calculated using the CAPM method by calculating the average beta of the firm over 10 years. The required return rate we calculated was 9.63% (book value).

Cost of Debt was derived by calculating the various percentage weights and interest rates for each individual long-term liability which includes all long-term notes payable, loans and financial lease that we found in the company’s financial statements. The weighted average cost of debt amounted to 2.71% which was used together with the cost of equity 9.63% to calculate a WACC of 6.70%.

8.2. Dividend Discount Model

Under this valuation model, the stock price is estimated

Using the average dividend over 5 years, we calculated a fair value of $4.47 which is 46.13% lower than the current market price. This could be due to the fact investors expect higher dividend pay-outs in the future. Singapore Airlines is expected to rise in revenues for the next 5 years. As the dividend payout ratio for Singapore Airlines stock has a relatively small variation over the last five years with an average of 0.649 (not including 2011), this means that the airlines is paying around the same portion of their income as dividends yearly. Hence with revenues expected to rise, dividends are also likely to

Free Cash Flow to Firm (FCFF) Valuation

Based on the 5 years historical data of Singapore Airlines, we have established a system to forecast data in a table used to calculate the future free cash flows to the firm.

The effective tax rate was used to calculate the FCFF instead of the corporate tax 17% as it more accurately depicts how much the firm pays in taxes for that period taking into account factors such as deferred taxes and other adjustments. The tax rate for the next five years is estimated as an average of the past 5 years.

Capital expenditure has generally been increasing over the last 5 years occupying a larger percentage of the company’s revenue with a jump of 37% in the last year. 97% of capital spending was on aircraft and spares. This shows that the group is looking to expand its capacity to cater for greater number of passengers to meet the growing demand in future years which would translate to higher revenues. Although operational expenses are expected to remain high due to the high fuel costs, revenues are also expected to rise with increased passenger capacity and increased ancillary revenue streams which may see profits recover from its decline since