Question

In: Finance

Consider the following financial data for Accenture US 30-Year T-Bond Yield = 2% Market Risk Premium...

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%

5.339%

2.330%

2.950%

8.622%

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

.95%

8.25%

7.2%

2.95%

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

$111.61 B

$75.02.B

$67.05B

$101.82B

$61.72B

Solutions

Expert Solution

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

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Consider the following financial data for Salesforce, Inc.: US 10-Year T-Bond Yield = .63% Market Risk...

Consider the following financial data for Salesforce, Inc.: US 10-Year T-Bond Yield = .63% Market Risk Premium = 6.25% Tax Rate = 21% Also the following data for Salesforce, Inc. : Stock Price = $249.21 Market Cap = $226.78 billion Beta = 1.24 Moody's = A- (111 basis points) Total Debt = $6.19 billion Number of Shares Outstanding = 910 million EPS = $2.59 Return on Assets = .93% Total Debt/Equity = 16.10 Current Ratio = 1.14 Book Value/share =...

Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5% Market risk premium is = 5%

Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5% Market risk premium is = 5%; company's beta is 0.7; D1 = $2.00; current stock price is $30.00; future growth of dividends is 6%.

which of the following is not an element in the bond yield plus risk premium approach?...

which of the following is not an element in the bond yield plus risk premium approach? Select one: a. The benchmark's bond's internal rate of return. b. The current yield on U.S. Treasury Bonds. c. The future cash flows from the benchmark bond. d. The company's CAPM.

Consider the following US government (risk-free) bonds: Bond A: 2-year note issued one year ago with...

Consider the following US government (risk-free) bonds: Bond A: 2-year note issued one year ago with a coupon rate of 5% Bond B: 3-year note issued two years ago with a coupon rate of 5% The price of the first bond is 100 and the price of the second bond is 101. For simplicity, assume that investors do not face margin requirements or interest payments to short-sell assets. a. Assume there are no transaction costs. Establish an arbitrage trade to...

You have determined the following data for a given bond: Real risk-free rate (r*) = 3%; inflation premium = 8%; default risk premium = 2%; liquidity premium = 2%; and maturity risk premium = 1%.

You have determined the following data for a given bond: Real risk-free rate (r*) = 3%; inflation premium = 8%; default risk premium = 2%; liquidity premium = 2%; and maturity risk premium = 1%.What is the interest rate on short-term Treasury securities, or T-bills, of the relevant maturity?What is the interest rate on long-term corporate bonds, of the relevant maturity?

Here are data on two companies. The T-bill rate is 4% and the market risk premium...

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecasted Return 12% 11% Standard Deviation of Returns 8% 10% Beta 1.5 1.0 1) What would be the fair return for each company, according to the capital asset pricing model (CAPM)? 2) Explain how the CAPM is used to perform this calculation and how a financial advisor would utilize this information to advise a client. 3)...

Here are data on two companies. The T-bill rate is 4% and the market risk premium...

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecast return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 Based on the fair return and according to the capital asset pricing model (CAPM), is each firm properly priced? Company Expected Return $1 Discount Store (Click to select)Properly pricedUnderpricedOverpriced % Everything $5 (Click to select)UnderpricedProperly pricedOverpriced %

The going yield-to-maturity on a 30 year US Treasury bond is about 1.4% (as of last...

The going yield-to-maturity on a 30 year US Treasury bond is about 1.4% (as of last Friday). Does this mean that an investor who buys this bond today will earn a rate of return of 1.4% % with certainty? Explain in detail

The quoted ask yield on a 30-year $1,000 par T-bond with a 6.25 percent coupon and...

The quoted ask yield on a 30-year $1,000 par T-bond with a 6.25 percent coupon and a price quote of 106.50 is ___________

Look up the current risk-free rate (the yield on a 10-year US Treasury bond will work)....

Look up the current risk-free rate (the yield on a 10-year US Treasury bond will work). Now make an estimate of the market rate of return (an estimate can be found on Damodaran’s website – look at the homepage – at the bottom you will see his estimate for the current equity risk premium). You could also use another source. Be sure to cite your sources. Also, look up beta for Netflix, Inc. (NFLX). Report all information that you found...

Subjects