Question

Edited: To add missing information.

#6 Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. Use your answers in #3, #4, and #5 to calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%.

Needed information for #6

#3 = As a financial analyst, you know that both DGM and the CAPM used in # 1 and # 2 above can be inaccurate, so you decided to calculate the average cost of equity of google. What is the average cost of equity of Google?

Ans: 13.76%

#4 =Google has a preferred stock that pays an annual dividend of 6$ to shareholders. What is the cost of Google’s preferred stocks if it is currently priced at $100?

Ans: 6%

#5 = Google has one bond outstanding that matures in 20 years. This bond has a coupon rate of 8%, paid semiannually. The bond currently sells for $1,124. What is the pre-tax cost of debt of Google?

Ans: 3.43%

End of needed information for #6

And then it builds off this question.

Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC for $12.5b. Google had a plan to keep Motorola mobility for 5 years. Google financial analysis team made the following forecasts:

Year	Cash flow(in billions)	Net income (in billions)
2012	1.5	1
2013	2.5	2
2014	4	3
2015	3	2
2016	6 (includes 3.5b selling price)	1.5

And that the average book value of asset is $8b and Google’s required rate of return is its WACC.

-Calculate net present value (NPV) for the above investment decision. Would you accept or reject this investment decision? Why?

-Calculate payback period. If you know that google accepts projects with 4 years payback period. Would you accept that project?

-Calculate the Motorola project internal rate of return (IRR). Would you accept or reject this project? Why?

Please show work so I can better understand it, preferably in excel. Thanks!

Questions 1 &2 below are just posted as a reference. They don't need to be answered.

1- In the previous 5 years, Google paid an annual dividend as follows:

Year	Dividends
2011	2.7
2010	2.5
2009	2.2
2008	1.8
2007	1.5

Google is expected to pay a dividends of $3 in the next year (2012). What is the cost of equity of Google if its current stock price is $90?

2- As a technology-based firm, Google has a high beta of 1.4. if the risk-free rate of return is 5% and the market risk premium is 3%, calculate the cost of equity of Google using the capital asset pricing model (CAPM)?

Answer 1

Q. 6) WACC = (Weight of debt * After tax cost of debt) + (Weight of preference share * Cost of preference share) + (Weight of common shares * Cost of common shares)

Here,

Total capital = Common share capital + Preference share capital + Debt capital

Total capital = (5 million shares * $100) + (1 million shares * $100) + (1,00,000 Bonds * $1,124)

Total capital = $500 million + $100 million + $112.40 million = $712.40 million

i) Weight of debt = Debt / Total capital

Weight of debt = $112.40 / $712.40 million = 0.16

ii) Weight of preference = Preference / Total capital

Weight of preference=$100/$712.40 million = 0.14

iii) Weight of common shares = Common shares / Total capital

Weight of common shares = $500 / $712.40 million = 0.70

iv) Cost of debt (before tax) = 3.43% or 0.0343

After tax cost of debt = Cost of debt * (1 - Tax rate @ 35% or 0.35)

After tax cost of debt = 0.0343 * (1 - 0.35) = 0.0223 or 2.23%

Cost of preference = 6% or 0.06

Cost of common shares = 13.76% or 0.1376

Now, put the values into formula

WACC = (0.16 * 0.0223) + (0.14 * 0.06) + (0.70 * 0.1376)

WACC = 0.0036 + 0.0084 + 0.0963

WACC = 0.1083 or 10.83%

Q. i) NPV calculations : (in billions)

i (rate) = 0.1083 , n = years

Year	Cash flow	Present value factor (P. V) (1/(1+i)^n)	P. V. Of cash flow (Cash flow * P. V. factor)
2012	1.5	(1/(1+0.1083)^1) = 0.9023	1.35 (0.9023 * 1.5)
2013	2.5	(1/(1+0.1083)^2) = 0.8141	2.04
2014	4	(1/(1+0.1083)^3) = 0.7346	2.94
2015	3	(1/(1+0.1083)^4) = 0.6628	1.99
2016	6	(1/(1+0.1083)^5) = 0.5980	3.59
		Total	11.91

NPV = P. V. Of cash flow - Purchase cost

NPV = 11.91 billion - 12.50 billion

NPV = (- 0.59 billion )

Project should not be accepted due to it's negative NPV.

ii) Payback period calculations : (in billions)

Year	Cash flow	Cumulative cash flow
2012	1.5	1.5
2013	2.5	4
2014	4	8
2015	3	11
2016	6	17

Payback period = Year in which cost is recovered + (Purchase cost - Cash flow of year before the year in which cost is recovered) / Cash flow of year in which cost is recovered

Payback period = 4 years + (12.50 - 11)/6

Payback period = 4 years + 0.25 years

Payback period = 4.25 years

Project should not be accepted as payback period is greater than google's acceptance level.