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.
Homework Answers
Part 1
Enterprise value= Market capitalization + Total Debt - Cash & Cash equivalents
=140 + 25.4 - 60.4
=$105 billion
Part 2
Rf = 2%
Market risk premium= 5%
To find Unlevered cost of capital , first we need to find the Unlevered beta or asset beta. The formula for that is
Unlevered beta = Equity beta * weight of Equity + Debt beta * Weight of debt
= 1.09 * (140 / 105) + 0
=1.453
Putting this in the formula for Unlevered cost of capital
Unlevered cost of capital = Rf + Unlevered beta (asset beta) * (Market risk premium)
= 2% + 1.453 * 5%
= 9.27%
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