Question

In: Finance

some information the risk free rate is 1.902 Market Cap (the market value of equity) 254.89...

some information

  1. the risk free rate is 1.902
  2. Market Cap (the market value of equity) 254.89 Billion; Enterprise Value (market-value equity + net debt) 319.73 Billion; Total Cash 10.11 billion ; Total Cash Per Share 5.62 ; Total Debt 56.96 billion; Beta 0.7
  3. pre tex cost of debt 3.522%

questions:

  1. Compute the weights for equity and debt based on the market value of equity and market value of debt
  2. Calculate the company's cost of equity capital using the CAPM, the risk-free rate you collected, and a market risk premium of 5%.
  3. Assume that the company has a tax rate of 35%, calculate the effective (after-tax) cost of debt capital.
  4. Calculate the company's WACC using the market value of equity and debt.
  5. Calculate the company's net debt by subtracting its cash from its debt. Recalculate the weights for the WACC using the market value of equity, net debt, and enterprise value (note: enterprise value is the total market value of a firm's equity and debt, less the value of its cash and marketable securities). Recalculate the company's WACC using the weights based on the net debt. How much does it change?
  6. How confident are you of your estimates in steps 4 and 5?Which implicit assumptions did you make during your data collection efforts?

Solutions

Expert Solution

Source weight Weight =individual value/total value of firm
market value of equity 254.89 77.28%
market value of debt =total value of firm -market value of equity 74.95 22.72%
total value of firm = total enterprise value + cash & marketable securities 329.84
2-
cost of equity capital in %= risk free rate+(market risk premium)*beta 1.902+(5)*.7 5.402
3-
after tax cost of debt in %= pre tax cost of debt*(1-tax rate) 3.522*(1-.35) 2.2893
4-
WACC = source weight component cost weight*component cost
debt 22.72% 5.40% 1.23%
equity 77.28% 2.29% 1.77%
WACC = sum of weight*component cost 3.00%
5-
source market value Weight =individual value/total value of firm
market value of equity 254.89 79.72%
market value of debt 64.84 20.28%
total value of firm = total enterprise value + cash & marketable securities 319.73
WACC = source weight component cost weight*component cost
debt 79.72% 5.40% 4.31%
equity 20.28% 2.29% 0.46%
WACC = sum of weight*component cost 4.77%
6-
These estimates are based on certain assumptions like component cost will remain same over the period, there is no change in tax rate. Thus we can say that estimate are more reliable

jeff jeffy answered 7 months ago
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