Bm 0053 - Capital Market & Financial Instruments

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= $65,113,477

NTA per share =Net tangible assets/number of share on issue

= $65,113,477/ 32,800,000

= $1.99

- Alternatives to IPO

iFAST Corporation Ltd. Issued 32,800,000 new shares, raising S$49.2 million from the IPO with an issuance cost of S$4.6 million (9.2% - equity financing). UFC has identified two alternatives to IPO namely (i) Bonds and; (ii) Bank loans to compare and analyse.

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Debt Financing

Debt financing refers to financing through issuance of bonds and bills to external investors, who would be repaid on their principal and interest as promised by the company. There are two key benefits namely (i) Ownership retention and; (ii) Reduced tax liability. Unlike private equity, debt financing ensures that the company maintains its ownership without external intervention by the financing creditors, as long as payments are made on time. Furthermore, payments are usually classified as business expenses. This means that payments can be deducted from the company’s taxable income. However, in the event of default, the company will still have to pay back their debt in full before any equity investors.

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Bank Loan

A corporate bank loan is an alternative to an IPO. Different corporate loans have different securities to transfer risk in the event of default. The loan tenure for a corporate loan is dependent on the company’s risk profile and prior relationship with the bank. A company which has stable financial statements and a clean relationship with the bank is likely to receive the maximum loan tenure of 10 years as compared to a company which does not have stable cash flows.

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Bonds

Bonds can act as another alternative to IPO. Bonds are usually more stable as compared to shares pricing. Bonds offer a steady stream of income to its holders and are less volatile in its price movement. However, the prices are affected by interest rates and when there is a rise in interest rate, it will lead to the fall in bond prices as they have an inverse relationship. One of iFAST’s main competitor, Convergys Corporation utlilized a bond issuance to raise funds. Their bond maturity was 16 Years, with 5.75% semi-annual coupon rate at PAR value 1,000. Assuming, a similar issuance, the costs of borrowing annually would amount to 11.5% (Morningstar). However, Convergys Corporation has a stable credit rating of Ba1 corporate family (CFR) and Ba1-PD probability of default (PDR) rated by Moody’s. (Moody's, 2014) Convergy also, has a market cap of $3.42B compared to iFAST’s $381.181M [Refer to diagram 4] Thus, expectations for the costs of borrowing would be above 11.5%. Thence, it will be more expensive to issue bonds compared to an IPO.

Verdict: iFAST has made the most suitable decision to launch an as, the costs for raising the funds is lower for an IPO compared to other alternatives.

[Refer to Diagram 5]

- Required Rate of Return (RRR)

In our analysis for the RRR, we utilised the Capital Asset Pricing Model (CAPM) as it takes into consideration the investor’s time value of money and risks. We did not use the dividend growth approach, as iFAST does not have a fixed dividend policy. The dividend growth model approach also fails to deal with risk directly. In contrast, the CAPM has a wider application. Also, all variables in the CAPM are market determined.

We also, calculated the 5 years adjusted Beta as it has the highest level of precision and the adjusted beta value stands at 0.52497. This beta shows that the fund has performed 52.50% worse than its benchmark index in up markets and 52.50% better in down markets (Ceteris Paribus).

For the RFR, we used the 10 years Singapore (SG) bond rate as it provides an accurate figure due to reduction of short-term volatility and long-term outliers.

E(R) = the required rate of return, or expected return

RFR= SGX 10 years bond- [Refer to diagram 6]

βstock = beta of the stock (Adjusted beta) [Refer to diagram 7]

E (Rmarket) = Expected return of the market as a whole [Refer to diagram 8]

(Rmarket – RFR) = Market Risk Premium

CAPM Calculation

βstock (Adjusted)

Adjusted beta= (.67) * Raw beta + (.33) * 1.0

= (.67) * 0.291+ (0.33) * 1.0

= 0.52497

RFR

= 2.54%

Expected return of market => E(Rmarket)

= 9.927%

Risk Premium => [E(Rmarket – RFR]

= 9.927% – 2.54%

= 7.387%

E(R) = RFR + βstock [E(Rmarket – RFR)]

E(R) = 3.04 + 0.52497(9.927% – 2.54%)

= 6.91795339%

- Capital Structure

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iFAST’s Weighted Average Cost of Capital

Weighted Average Cost of Capital (WACC) consists of cost of equity, cost of preferred stock and cost of debt. According to IFAST corporation balance sheet as of 2014, there are no preferred stock and debt. Hence, the WACC only consists of the component of cost of equity. Dividend growth model will not be used as there is no constant dividend pay out. Therefore, CAPM will be used to determine the cost of equity. [Refer to diagram 9 & 10] (Yahoo Finance)

WACC = (E/V) * Re + (P/V) X Rp + (D/V) X Rd X ( 1 – Tc)

= 100% X Re

= 100% X [ E(R) = RFR + βstock (Rmarket – RFR) ]

= 100% X 6.91795339 %

=

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