Can someone please comment on the following two issues:
1. Thoguhts on the 10% discount rate used to derive an NPV of $2.2b..
Given that the capital structure comprises 100% equity, and no debt, how would one derive at a Discount Rate of 10%? The cost of debt for such a project would be close to 10%, but there is no debt on this balance sheet! We all know (according to Pecking Order Theory and general cost of capital) that debt is ALWAYS cheaper than equity- particularly as it is tax deductible! So, you'd expect the cost of equity to be much higher than 10% for FMS.
To me, this is no where near conservative enough and does not account for much risk into the cost of equity or the RRR for investors. 10% is just way too low. In fact, miners such as RIO and BHP may use 10% because of their capital structures incorporating a high degree of debt to derive a lower WACC such as 10%, along with the fact that these firms present less risk to shareholders. FMS, however, should not be using 10%! IMO, the $2.2b NPV is therefore overstated/overvalued!
I'm not saying that this isn't a great company with amaizng prospects, I'm just saying that the NPV calc is too high!
2. On another topic, FMS needs around another $400m in capital (given there is only $44m cash at bank) to move to the next phase. Do you think there will be another capital raising, and if so, will this amount will have a significant dilution effect upon existing shareholders?
Maybe this will be offset by bonus options, which would matinain existing shareholders' proportion of ownership to offset any dilution effect.
I'm just wondering about the $400m and if there's to be another capital raising, what effect will this have upon existing shareholders' value?
FMS Price at posting:
20.5¢ Sentiment: Hold Disclosure: Held
