Suppose that a couple years ago, Yahoo! apart from its core business held a large stake...
Suppose that a couple years ago, Yahoo! apart from its core
business held
a large stake in Alibaba Group. At that time, Yahoo!’s market
capitalization was $7 billion, its
core business was worth $5 billion with beta of 0.9, and the stake
in Alibaba Group was worth $8
billion with beta of 1.5. Yahoo!’s equity cost of capital is 14.5%
and the yield to maturity on its
outstanding debt was 5.7%. Yahoo!’s marginal tax rate was 20%. The
risk free rate was 3% and
the market risk premium was 5%.
(a) Compute Yahoo!’s asset beta. If Yahoo!’s expected losses in
default are 60 cents on a dollar,
compute the annual probability of default for Yahoo!
(b) Compute Yahoo!’s WACC. Suppose Yahoo! wants to invest in the
expansion of its financial
services business, which is similar in terms of the market risk to
its core business. The current
investment are $3.5 million and the increase in EBIT is $300,000
from the next year on. Find
the net present value of this new project. Which discount rate
should Yahoo! use to discount
cash flows from this project?
(c) Suppose that Yahoo! did not undertake the new investment, but
instead sold its stake in
Alibaba and used cash proceeds to pay off its debt and invested the
rest into short-term
government bonds, which are essentially risk-free. Compute Yahoo!’s
equity cost of capital
after this deal.
Homework Answers
Add Answer to:
Suppose that a couple years ago, Yahoo! apart from its core
business held
a large stake...
Effect of Investment Accounting on Performance Ratios Since 2005, Yahoo! Inc. has held a significant investment...
Effect of Investment Accounting on Performance Ratios Since 2005, Yahoo! Inc. has held a significant investment in Alibaba Group. In September, 2014, Alibaba Group closed its initial public offering (IPO) of American Depository Shares (shares). Yahoo! sold 140 million shares in the IPO realizing a pretax gain of $10.3 billion. Following completion of the IPO, Yahoo! retained 383.6 million shares of Alibaba Group representing ap- proximately 15% of the outstanding shares. Note 2 to Yahoo!'s 2014 10-K report details its...
In mid-2018, Qualcomm Inc. had $21 billion in debt, total equity capitalization of $79 billion, and an equity beta of 1.49 (as reported on Yahoo! Finance). Included in Qualcomm's assets was $37 billion in cash and risk-free securities. Assume that the ris
In mid-2018, Qualcomm Inc. had $21 billion in debt, total equity capitalization of $79 billion, and an equity beta of 1.49 (as reported on Yahoo! Finance). Included in Qualcomm's assets was $37 billion in cash and risk-free securities. Assume that the risk-free rate of interest is 3.1% and the market risk premium is 4.1%.a. What is Qualcomm's enterprise value?b. What is the beta of Qualcomm's business assets?c. What is Qualcomm's WACC?
Yahoo!, found in 1994, is a website company whose stock price had reached all time high...
Yahoo!, found in 1994, is a website company whose stock price had reached all time high of US$118.75 in 2000. However, after the dot-com bubble burst, it reached an all-time low of US$8.11 in 2001. In early 2012, the largest layoff in Yahoo!'s history was completed and 2,000 employees (14 percent of the workforce) lost their jobs. After turmoil of top management turnover, Yahoo hired Mayer as CEO. However, she failed to re-invent Yahoo as an independent company. In September...
6.2 A project's cost of capital The DW Media Group has an equity beta of 1.2 and 50% debt (debt over firm value) in its capital structure. The company has risk-free debt that costs 4% before...
6.2 A project's cost of capital The DW Media Group has an equity beta of 1.2 and 50% debt (debt over firm value) in its capital structure. The company has risk-free debt that costs 4% before taxes, and the expected rate of return of the stock market is 12%. DW is considering the acquisition of a new project in publishing business that is expected to yield 20% on after-tax operating cash flow. Penguin Publishing House, which has the same business...
U.S. Robotics (USR) has a current (and target) capital structure of 80 percent common equity and...
U.S. Robotics (USR) has a current (and target) capital structure of 80 percent common equity and 20 percent debt. The beta for USR is 1.1. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate of return of 25 percent. USR wishes to evaluate this investment proposal. If the investment is made, USR intends to finance the project with the same capital structure as its current business. USR’s marginal tax...
In August 2015, Cisco system had a market capitalization of $140 billion. It had debt of...
In August 2015, Cisco system had a market capitalization of $140 billion. It had debt of $25.4 billion as well as cash and short-term investments of $60.4 billion. Its equity beta was 1.09 and its debt beta was approximately zero. What was Cisco’s enterprise value at the time? Given a risk−free rate of 2% and a market risk premium of 5%, estimate the unlevered cost of capital of Cisco’s business.
Murphy Inc. operates in the automotive parts business. Murphy is considering expanding. Currently, Murphy has a...
Murphy Inc. operates in the automotive parts business. Murphy is considering expanding. Currently, Murphy has a before tax cost of debt of 6%, and an effective tax rate of 40%. Murphy's capital structure consists of 40% debt and 60% equity. Murphy has identified the following pure play company: Brown Inc. who operates in a similar automotive parts line of business. Brown Inc. has a before tax cost of debt of 5%, a debt to equity ratio of 0.50, and an...
. Global Production (GP) is a large conglomerate thinking of entering the smart alarm business, where it plans to finance a project with a debt-to-value ratio of 20 percent. GP expects to borrow for its smart alarm venture at an interest rate of 10%. Th
Global Production (GP) is a large conglomerate thinking of entering the smart alarm business, where it plans to finance a project with a debt-to-value ratio of 20 percent. GP expects to borrow for its smart alarm venture at an interest rate of 10%. There is currently one firm in the smart alarm industry, American Smart Alarm (ASA). This ASA firm is financed with 25 percent debt and 75 percent equity. The beta of ASA’s equity is 1+(0.1) . ASA has...
In financial analysis, it is important to select an appropriate discount rate. A project's discount rate...
In financial analysis, it is important to select an appropriate discount rate. A project's discount rate must be high to compensate investors for the project's risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity. Consider this case: Sunny Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Sunny Co.'s retained earnings will be sufficient...
Suppose Alcatel-Lucent has an equity cost of capital of 10.9%, market capitalization or 9.35 bill...
Suppose Alcatel-Lucent has an equity cost of capital of 10.9%, market capitalization or 9.35 billion, and an enterprise value or si 3 billion. Assume Alcatel-Lucent de cost and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: EEB a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How...
Effect of Investment Accounting on Performance Ratios Since 2005, Yahoo! Inc. has held a significant investment in Alibaba Group. In September, 2014, Alibaba Group closed its initial public offering (IPO) of American Depository Shares (shares). Yahoo! sold 140 million shares in the IPO realizing a pretax gain of $10.3 billion. Following completion of the IPO, Yahoo! retained 383.6 million shares of Alibaba Group representing ap- proximately 15% of the outstanding shares. Note 2 to Yahoo!'s 2014 10-K report details its...
6.2 A project's cost of capital The DW Media Group has an equity beta of 1.2 and 50% debt (debt over firm value) in its capital structure. The company has risk-free debt that costs 4% before taxes, and the expected rate of return of the stock market is 12%. DW is considering the acquisition of a new project in publishing business that is expected to yield 20% on after-tax operating cash flow. Penguin Publishing House, which has the same business...
In financial analysis, it is important to select an appropriate discount rate. A project's discount rate must be high to compensate investors for the project's risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity. Consider this case: Sunny Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Sunny Co.'s retained earnings will be sufficient...
Suppose Alcatel-Lucent has an equity cost of capital of 10.9%, market capitalization or 9.35 billion, and an enterprise value or si 3 billion. Assume Alcatel-Lucent de cost and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: EEB a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How...
Most questions answered within 3 hours.
-
list the elements in groups 3A to 6A in the same order as in the
periodic...
asked 9 minutes ago -
Estimating effect size. Peng and Chen (2014)
evaluated effect size estimates for various tests. In their...
asked 19 minutes ago -
Write a script in MySQL that creates and calls a stored
procedure name test. This procedure...
asked 19 minutes ago -
If we test the following: H0: μ = 17
vs. H1: μ ≠ 17 and the...
asked 30 minutes ago -
in the past year TVG had revenues of 3 million, cost
of goods sold of $25...
asked 36 minutes ago -
4) In a polypeptide, which bond cannot rotate because of its
partial double bond character?
The...
asked 1 hour ago -
Assume that in the short run L = 1,000 and K = 100. 1. What is...
asked 1 hour ago -
At a given temperature, 2.06 atm of H2 and 3.7 atm of Br2 are
mixed and...
asked 1 hour ago -
Sodium reacts with Hydrochloric acid to form sodium chloride and
hydrogen gas. 2Na(s)+ 2 HCl(aq)-> 2...
asked 1 hour ago -
The following circuits (1 & 2) are combined to form a
series-parallel circuit and resulting circuit...
asked 1 hour ago -
Feynman's use of path integrals can make some of the transition
from quantum scale to real...
asked 1 hour ago -
Pb(NO3)2 (aq) + 2 KCl (aq) PbCl2 (s) + 2 KNO3 (aq)
If 54.5mL of 3.82M...
asked 1 hour ago