Thanks Shrivathsa for your reply.

I'm trying to put all the pieces together.

Does this look roughly correct?

1) The formula is:

Nominal Pre-tax WACC =

a) 'Cost of equity' X (1 – gearing)

+

b) 'Cost of debt' X gearing (1 – tax)

From p5 of

https://internetfileserver.phillip.com.s...190327.pdf
2) From NLT's 2020 balance sheet, its 1/4 funded by debt (1 trillion) and 3/4 equity (2.9 trillion). So 'gearing' above is 0.25.

So the WACC is roughly 3 parts of 1a) plus 1 part of 1b). Ignoring the tax.

3) Interest rates have dropped 25% (from 2.44% to 1.85%) from 2018 till now based on your 30 year SGS rate.

You could get up to a 40% drop depending on what tenure you use and how you eyeball the numbers (eg: take average rate over the past 5 years).

https://tradingeconomics.com/singapore/g...bond-yield
4) So cost of debt (1b) , which is roughly 1/4 of the WACC, drops 25% to 40%

5) The Cost of equity (1a) is hard to calculate. I make a blind guess that 2/3rd of it is from the risk free rate. The other 1/3rd is from the market risk premium (compensate holders for risk/volatility of holding these equities).

So a X% drop in risk free rate leads to a 2/3rds drop in 1a).

6) So for 1a) and 1b) together:

- A 25% drop in risk free rate drops the WACC by (0.25 * 1/4) + (0.25 * 2/3 * 3/4) = 0.1875 or 18.75%,make it 19%. The new WACC is the old one (7%), minus this 19%, which gives 5.7%.

- A 40% drop lowers the WACC by 30%. New WACC is 4.9%.

7) In the real world, the old 7% WACC is really high! This is a mandatory utility (like water/electricity) not a discretionary one (like airport). Who gets a 7% return on capital these days?

Even 4.9% to 5.7% is pretty high.

8) Most important:

I think "Nominal Pre-tax WACC" in the formula is earnings *after* depreciation, is that correct? Around 3/4ths of NLT's 2020 dividends are from D&A (ie: a return of capital, not a payout of earnings).

If PBT drops 19%-30%, thats a 14m-21m drop.

Cutting the distribution paid by this amount only cuts dividends by 7%-11%.