Question

Consider two companies: United States steel (X) and Facebook (FB). Look at the profiles (financial statements for 2016) of each on yahoo finance and discuss the followings (you need to calculate these values yourself and show details of your calculations): How many outstanding shares the company has? What is the market value of the company? What is the book value of the company? What is the beta for the company? How do you find the risk free rate? (consider the market risk premium to be 8%) Using CAPM calculate the expected return on the equity for the company. (To get the required rate of return on debt, divide the interest expense by total debt) (To get the total debt, add the short term debt to long term debt) What is the Weighted average cost of capital (WACC) for the company? What is the leverage (total debt/equity ratio) for the company?

Answer 1

Solutions

( All these figures are considered and taken as on 31/12/2018 )

1. Outstanding shares of United States Steel = 177386430

Outstanding shares of Facebook = 2890000000

2. Market value of the company = Market price as on 31/12/2018 multiplied by Number of shares outstanding

Market value of United States Steel = 18.24 * 177386430 = $3235 million

Market value of Facebook = 131.09*2890000000 = $378850 million

3. Book value of a company is nothing but shareholder’s equity.

Book Value of United States Steel = $4202 millions

Book Value of Facebook = $84127 millions

4. Beta of United States Steel = 2.761

Beta of Facebook = 0.5768

5. To find the risk free rate we will consider the Treasury bill rate as on 31^st December 2018. This rate was 2.25%.

6. WACC Calculation

Debt equity ratio

United states steel = 2602/3235 =0.80

Facebook = 6190/378850 =0.016