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07-05-2015, 08:34 AM
Hi,
They are adjusting their capital structure to reduce the weighted average cost of capital by taking on debt to buyback shares.
The bonds are convertible at rather high strike prices, so Osim got a deal where they either substituted equity capital with low cost debt, or ended up buying cheap shares and issuing expensive ones if the conversion option is exercised.
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Yes, I agree with your reasoning. Equity cost of capital is typically 10% whereas debt cost of capital can be as low as 2 - 3%. Taking on some debt financing means that the Weighted Average Cost of Capital (WACC) will be lower. For those of us that use WACC to compute Intrinsic Value (IV), the resulting IV will be higher.
The argument that taking on debt after holding so much cash appears "suspicious" should apply more to S-chips. If even a Singaporean company like OSIM engages in "hanky pinky", I would be deeply disappointed, but that is my personal view.
They are adjusting their capital structure to reduce the weighted average cost of capital by taking on debt to buyback shares.
The bonds are convertible at rather high strike prices, so Osim got a deal where they either substituted equity capital with low cost debt, or ended up buying cheap shares and issuing expensive ones if the conversion option is exercised.
[/quote]
Yes, I agree with your reasoning. Equity cost of capital is typically 10% whereas debt cost of capital can be as low as 2 - 3%. Taking on some debt financing means that the Weighted Average Cost of Capital (WACC) will be lower. For those of us that use WACC to compute Intrinsic Value (IV), the resulting IV will be higher.
The argument that taking on debt after holding so much cash appears "suspicious" should apply more to S-chips. If even a Singaporean company like OSIM engages in "hanky pinky", I would be deeply disappointed, but that is my personal view.