New World Development Company Limited: Diversify Or Focus? Harvard Case Solution & Analysis

New World Development Company Limited: Diversify Or Focus? Case Solution 

Book Value and Market Value Based Capital Structure:

The book value of the capital structure of the company consists of liabilities of HK$ 34774 that comprise of the Convertible bonds and Long term liabilities, which include interest bearing bank loans, secured & unsecured loans, finance leases, convertible bonds and debentures. The book value of equity is HK$ 75507 million, which includes the minority interest, share capital and the reserves of the company.
The property developers with the large land bank normally trade above the book values and NWD traded at 0.35 times of the book value. The market value of the capital structure of the company is HK$ 103444 of equity and HK$ 47661 of debt.

WACC of NWDC:

WACC for the NWDC is 6.08%. In order to find the cost of equity, the risk free rate used is the rate of rate of Treasury bonds of Hong Kong which have the rate of 1.51%. However, the risk premium used in the calculation of the cost of equity through Capital Asset Pricing Model is the rate of expected market return in the Hong Kong exchange minus the risk-free rate.
Risk Free Rate HK-Bonds Rate 1.52%
Market Premium (assumed) 5% Ke 8%
Beta 1.311

Kd 6.64%
Tax Rate 16% WACC 6.08%
After Tax Ke 5.58%

WACC for Different Divisions of NWDC:

Property:

The WACC for the property is 5.64%. The cost of debt is taken as average if competitors’ debt to equity ratio is taken as 80% and the beta is geared and re-geared with the company’s debt ratio.

Construction:

The WACC for the property is 5.62%. The cost of debt is taken as average if competitors’ debt to equity ratio is taken as 80% and the beta is geared and re-geared with the company’s debt ratio.

Hotel:

The WACC for the property is 9.26%. The cost of debt is taken as the average if competitors’ debt to equity ratio is taken as 80% and the beta is geared and re-geared with the company’s debt ratio.

Infrastructure:

The WACC for the property is 5.70%. The cost of debt is taken as the average if competitors’ debt to equity ratio is taken as 80% and the asset beta is the average of the competitors’ beta asset.

Telecom:

The WACC for the property is 4.20%. The cost of debt is taken as average if competitors’ debt to equity ratio is taken as 80% and the asset beta is the average of the competitors’ beta asset.
Property Construction Hotel Infrastructure Telecom
5.08% 5.12% 8.53% 5.70% 4.20%...................

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