Question

Consider the following financial data for Accenture

US 30-Year T-Bond Yield = 2%

Market Risk Premium = 6.25%

Tax Rate = 21%

Also the following data for Accenture:

Stock Price = $174.19

Market Cap = $111.61B

Beta = .95

Moodys = A1 (95 basis points)

Total Debt = $28.8 million

Number of Shares Outstanding = 640.75 million

EPS = $6

Return on Assets = 16.01%

Total Debt/Equity (Book Value) = .28%

Book Value/share = $15.29

Revenues = $38.57B

Calculate the Cost of Capital for Accenture.  

A. Calculate the Cost of Capital for Accenture. Choose the best answer from the list below.

1. 7.938%

2.

5.339%

3.

2.330%

4.

2.950%

5.

8.622%

B. Continuing with question 2 what is the Cost of Debt for Accenture?

1.

.95%

2.

8.25%

3.

7.2%

4.

2.95%

C. Using the Accenture financial profile information (see question above) calculate the MVA for Accenture.

1.

$111.61 B

2.

$75.02.B

3.

$67.05B

4.

$101.82B

5.

$61.72B

Answer 1

a.) Cost of capital is WACC

WACC = w_e*r_e + w_d*r_d*(1-t), where w_e is weight of market value of equity, r_e is cost of equity, w_d is weight of market value of debt, r_d is cost of debt, t is tax rate

market value of equity is market cap i.e. $111.61 billion

We will calculate r_e i.e. cost of equity by using capm

r_e = r_f + beta*(r_m - r_f), where r_f is risk free rate, r_m - r_f is market risk premium

risk free rate is treaury rate i.e. 2%

market risk premium = 6.25%

beta = 0.95

Putting these value in CAPM equation

r_e = 2 + 0.95*(6.25) = 7.9375%

Market value of debt = $28.8 million

r_d = r_f + risk premium

risk premium is the premium for taking risk, in this case it is Moody A1 rated and risk premium for that is 95 basis points i.e. 0.95%

So, r_d = 2 + 0.95 = 2.95%

tax rate = 21%

w_e = Market value of equity/(Market value of equity+ market value of debt) = 111610/(111610+28.8) = 0.9997

w_d = Market value of debt/(Market value of equity+ market value of debt) = 28.8/(111610+28.8) = 0.0003

Putting in WACC equation

Cost of capital = 7.9375*0.9997 + 2.95*0.0003*(1-0.21) = 7.938%

So the answer is option 1 i.e. 7.938%

b.) We have calculated cost of debt in previous part, it is 2.95%

So the answer is option 4.) i.e. 2.95%

c.) MVA is market mavlue added

It is calculated as market value of firm - market value put by shareholders and lenders

Market value of firm = m15.29**arket value of equity + market value of debt

Market value of firm = 111610 + 28.8 = 111638.8

Value put by shareholder is book value of shares i.e. Book value per share*shares outstanding

Book value of shares = 15.29*640.75 = 9797.068 million

Total debt / equity (book value ) = 0.28%

Book value of debt = 0.28*9797.068 = 66.62 million

MVA = 11638.8 - (66.62+9797.068) = 101775.1 i.e. 101.775 billion

The closest option is option 4. i.e. $101.82 billion