Snoops ....do you ever consider “equity risk premium”?
PWC in a recent report (to be updated) had Turners WACC at 9.4%, one analyst had it at 10.1% and Turners appear to use a higher number than those internally.
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Winner that is how my DCF model works (haven't done one for TRA as I don't know how to value finance and insurance parts of business).
The more debt the higher the cost of equity. Although I feel like that for finance companies the debt probably needs to be netted out against whatever secures it with some judgement about the risk to the value of whatever secures it.
Snoops ....do you ever consider “equity risk premium”?
PWC in a recent report (to be updated) had Turners WACC at 9.4%, one analyst had it at 10.1% and Turners appear to use a higher number than those internally.
I would be interested in finding out where you saw that "Turners appear to use a higher (WACC) number (9.4% and 10.1%) than those internally."
In the meantime here is what your favourite website Investopedia says on the topic.
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Equity Component of WACC Formula
It is a common misconception that equity capital has no concrete cost that the company must pay after it has listed its shares on the exchange. In reality, there is a cost of equity.
Since shareholders remain invested in expectations of certain returns on their investments in a company, the shareholders' expected rate of return is a cost from the company's perspective. It is because if the company fails to deliver this expected return, shareholders will simply sell off their shares which will lead to a decrease in share price and in the company’s overall valuation. The cost of equity is essentially the amount that a company must spend in order to maintain a share price that will keep its investors satisfied and invested.
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What the above explanation doesn't say is that unless the company concerned needs to raise capital by issuing new shares, the quoted share price has no effect on the day to day running of the company at all. This is the situation with Turners Automotive Group today.
To answer the question "What do Turners need to Spend?" (to support the share price) the answer is "All the big spending is already done." They have the retail sales footprint already. They have the ability to finance their retail sales already. They have the insurance add business to clip that ticket. And they have the debt collection agency to pick up any accounts seriously in arrears. There is work to do to optimise the integration of all the above.
At the corporate level, TRA can decrease their interest costs by securitising their loans. They can pocket a development margin on any new property they develop. Both are works in progress.
The question I ask then is this. If all of this spending is done and only incremental spending is to come, what is the 'hidden spending needed' to justify a WACC of 9.4% to 10.1% going forwards? Furthermore if there are no plans to raise more capital why does the value of the WACC matter at all?
SNOOPY
Last edited by Snoopy; 23-11-2018 at 02:04 PM.
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What bit of their treatise on the Cost of Equity do you disagree with?
SNOOPY
Ok ...I’ve read it a bit more carefully ...but even though they say that equity has a cost I think they confuse the issue with that bit about the amount needed to be spent to maintain the share price so that shareholders are happy.
Maybe that last bit confused you as well. I don’t know but your added comments although sort of make sense they don’t address the ‘cost of equity’ per se.
To me that cost of equity is the risk adjusted return that a shareholder needs (to remain happy as investopedia says). Let’s say in Turners case thats 10% (for ease of calculating) then Turners essentially have a ‘cost’ of $21.4m.
To save others getting bored I’ll PM you how I see Turners ROIC
“ At the top of every bubble, everyone is convinced it's not yet a bubble.”
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lol
Originally Posted by winner69
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