Calculation of Weighted Average Cost of Capital and Gearing Ratios of SingTel and StarHub

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Financial Report

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Contents
Introduction......................................................................................................................................3
Calculation of Weighted Average cost of capital............................................................................3
Brief Analysis of WACC and Judgments made to calculate the WACC........................................7
Gearing Ratios of SingTel and StarHub..........................................................................................7
Recommendation and Conclusion...................................................................................................9
Reflection.........................................................................................................................................9
References......................................................................................................................................11
Appendix........................................................................................................................................12

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Introduction
Weighted average cost of capital refers to the rate at which the firm cost of capital has
been financed. There is generally three type capital used by company to finance their capital and
these are equity capital, debt capital and preference share capital. Weighted average cost of
capital calculates cost of each capital and each category of capital is proportionately weighted.
The purpose of this report is calculate the weighted average cost of capital of Singapore
Telecommunication Limited (Singtel) through providing detailed judgment and calculations in
arriving the answer. In order to make comparison for having better understanding of WACC, it
has been decided to compare value of WACC of Singtel with Star Hub. In addition to WACC,
gearing ratios of both companies are also calculated to provide the brief overview of capital
structure of the Singtel. Recommendations have been given to the board of directors of Singtel to
improve their capital structure. It is followed by the reflection of overall work processed in this
report.
Singtel is the famous telecommunication based in Singapore and it has largest mobile
network operator in Singapore. Some of the important services of telecommunication provided
by Singtel are ISP (SingNet), mobile phone network known as Singtel Mobile and IPTV known
as Singtel TV. As per the information Singtel also owns market share outside its home country
through investing in the second largest Australia telecommunication company Optus and many
other telecommunication company. In Singapore, Singtel owned maximum market share as
compare any other telecommunication in Singapore (About US, 2019).
Starhub Limited is one of the three major telecommunication companies that are based in
Singapore. Starhub has received the license to operate in Singapore in year 1998 and it has
gained significant market in Singapore after its establishment. This company provides mobile
services, IPTV services, internet services and fixed landline services (StarHub: About Us, 2019).
This report is processed to calculate the WACC of SingNet and StarHub for last three
years so that comparison can be made. In addition to this gearing ratios of both the companies
have been calculated to review the capital structure of the company through analyzing it with
capital structure theory.
Calculation of Weighted Average cost of capital
In this section of this report weighted average of cost of capital has been calculated of
SingTel and StarHub for last three years. WACC is the rate of return or cost of total capital
employed by the company during the year. Companies mainly use three types of capitals to
finance their business. While making the calculation of weighted average cost capital all three
capital employed by the company are weighted proportionally and cost of each capital multiplied
by the weight of each capital to arrive at the weighted average cost of capital. Some of the major
sources of capital are common stock (equity capital), bonds, debentures, preference capital and

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other long term debt. Weighted average cost of capital critically depends upon number of factors
such as risk free rate, market return, beta, interest rate tec. The WACC of the company increases
as the beta and required rate of return on equity capital increases. The increases in WACC
reflects increases overall risk and decrease in valuation of capital.
Formula of Weighted Cost of capital:
WACC = E
V * Re + D
V * Rd * (1-Tc) (Brigham & Michael, 2013)
Where:
 E: Value of Equity capital (Market Value)
 D: Market value or book value of debt capital
 V: (E+D) Sum of equity and debt capital employed by the company in the respective year
 E/V: Proportion of equity capital in the capital structure of company
 D/V: Proportion of Debt capital in the capital structure of the company
 Re: Rate of cost of Equity capital
 Rd: Rate of cost of Debt capital
 Tc: Tax rate
Following is the information of available from the Bloomberg regarding Singtel and
StarHub in relation to determine the weighted average cost of capital.
Year 2015: Information required for estimating the WACC of SingTel
Year 2016: Information required for estimating the WACC of SingTel