In trying to learn about the calculation methods of WACC I...

In trying to learn about the calculation methods of WACC I appreciate the detail Grant Thornton gave - and their assumptions. And I disagree vehemently with the first of them. And the others I will give my comment.

1) They used a risk free rate of return as 3.5% over period of time they valued Zenith's future. If GT can promise me TODAY 3.5% over the next 5 years, I will sell every Zenith share I have and invest the money with THEM. Let THEM put THEIR MONEY where THEIR MOUTH is.

Can anyone find any other GT publications that state they REALLY think the risk free rate of return is 3.5%?





2) They also assume the risk premium needed for ASX shares to be 6% (because historically over 20-80 years that is about right). I think that is a bit high over the next 1-5 years, but it seems not far off. I guess that means that investors in Zenith 'theoretically' are looking for 9.5% return (at fair value). That is, the 3.5% risk free plus the 6% risk premium. Plus a random 'specific risk premium' of 2%. So the $1.01 is a good price if you are after 11.5% return. I can see why the Cabal want to 'have' Zenith. They can supply debt at 4 to 5%... AND make 11.5% out the other end.


3) The BETA is interesting. GT just said it is subjective and cannot find any comparable ASX shares. They went with 1 to 1.10. I am not sure what I think here. One could argue that Zenith has (will have) a BETA under 1, but let us not be too pragmatic.


All, in all, you can see their big flaw is they consider the market risk free rate of return as 3.5%. (perhaps they should let ScoMo in on that and raise the pensioner deeming rate and we can pay off the Commonwealth debt in a couple of years). Honestly, most calculation of WACC use the 10 year treasury bonds (as they are NOW) as the risk free rate of return. Those are 1% or under currently. Why would GT go against that. The CURRENT 10 year bonds are reflective of the markets definition of the risk free rate of return. It is not some 'average' of 'what is used to be'.

This flaw in valuation is similar to the 'average share price' cross check they used (from earlier this year BEFORE the EBITA upgrade). That is, GT used some historical metric that is not applicable right now.

Also, the EBITDA multiple that the offer to minorities was first based on (9.3) is now forgotten. The 'offer' was on 2019 CY. That is 8 to 20 months AGO. That is what 'used to be'.

So the entire valuation of Zenith being offered to minorities is based on an EBITDA that 'was is the past', and verified using a share price that 'was in the past', and now we see the main flaw, using a risk free rate of return that 'was in the past'.

So, if this was 2015, the $1.01 is fair. But this is NIL INTEREST RATE 2020.




I would contend a risk free rate of return of 2% would be more fair. (even that is high, but let us be over fair to the Cabal) So that tells me the valuation using the WACC 1.5% under the 8-8.5 is most accurate.