Question

Uber has a market capitalization of $48.778 billion and $5.707 billion in long-term debt. The table below shows Uber’s debt-to-equity ratio and competitive comparison data. Uber’s managers believe that the present value of financial distress costs will exceed tax benefits by $20 million if Uber were to issue debt to raise the $0.5 billion. Assuming an otherwise perfect market, estimate Uber’s firm value if the debt issuance were to go ahead. Uber has a corporate tax rate of 34 percent. Discuss any qualitative factors which Uber should consider before making a debt issue.

Answer 1

Firm Value also Known as Enterprise Value (EV) is Calculated as below

EV = MC + D - C

MC = Market Capitalization

D = Total Debt (Short Term and Long Term)

C = Cash and Cash Equivelants

Using the formula above

EV = $ 48.778 + $ 5.707 + $ 0.5 - $ 0 = $ 54.985 Bn

Data Relates to Cash and Cash Equivalent is not given therefore ignored for the calculation above

Financial Distress Costs will not be considered for the above calculation as Enterprise Value/Firm Value is the amount which you will have to pay to buy the whole equity and debt of the company, as you receive some Cash which company holds at the time of acquisition it is reduced from the same (EV)

Qualitative Factors which should be considered before making debt issue (Comparitive Table is missing so I have adjusted my answer accordingly, don't worry if you have the data you can refer it along this solution you will get required answer)

New Debt Equity Ratio = $ 6.207 / $ 48.778 = 0.127

It is very low in comparison to ideal which is 2

Therefore it is good for company to have more leverage in its capital which help to increase bottom line i.e net profit and help increase return on equity for investors

Also this ratio be compared with Debt to Equity ratio of its peers

While considering whether to raise more debt or not company should consider its future cash flows, whether they are enough to service the debt or not

Company should keep in mind that high debt can lead to financial instability and higher balance sheet sensitivity to changes in interest rates if the debt is raised at a variable rate