Question

In​ mid-2015, Qualcomm Inc. had ​$15 billion in​ debt, total equity capitalization of ​$87 ​billion, and an equity beta of 1.32 ​(as reported on​ Yahoo! Finance). Included in​ Qualcomm's assets was​$25 billion in cash and​ risk-free securities. Assume that the​ risk-free rate of interest is 2.9% and the market risk premium is 3.9%.

a. What is​ Qualcomm's enterprise​ value?

b. What is the beta of​ Qualcomm's business​ assets?

c. What is​ Qualcomm's WACC?

TAX RATE WAS NEVER MENTIONED PERIOD.

Answer 1

Ans -

Part (A) Enterprise value = equity market capitalisation + debt - cash and cash equivalents

= 87 + 15 - 25

= $77 billion

Part (B) Assuming no tax rate

BETA asset = beta / ( 1 + D/E (1-T))

= 1.32 / ( 1 + 15/87)

= 1.32 / (1 + 0.172)

= 1.32 / 1.1724

= 1.125

Assuming 40% tax rate

BETA asset = beta / ( 1 + D/E (1-T))

= 1.32 / ( 1 + 15/87( 1 - 0.4))

= 1.32 / (1 + 0.172(0.6))

= 1.32 / 1 + 0.10

= 1.32 / 1.10

= 1.196

Part (C) Total capital employed = 15 + 87

=102

WEIGHT OF DEBT = 15/102

=0.147

WEIGHT OF EQUITY = 87/102

= 0.853

Expected rate of return = RF + B ( MARKET PREMIUM)

= 2.9 + 1.32 (3.9%)

= 8.048%

Assuming cost of debt is at risk free rate with no tax rate = 2.9%

WACC = 0.853(EQUITY ) + 0.147(DEBT )

= 0.853 (8.048) + 0.147 (2.9)

= 6.86 + 0.426

= 7.286

Assuming cost of debt is at risk free rate with tax rate 40% = 2.9%

WACC = 0.853(EQUITY ) + 0.147(DEBT ) (1- t)

= 0.853 (8.048) + 0.147 (2.9) (1-0.4)

= 6.86 + 0.255

= 7.115