Question

Consider two companies: United States steel (X) and Facebook (FB).

Look at the profiles (financial statements for 2016) of each on yahoo finance and discuss the followings (you need to calculate these values yourself and show details of your calculations):

How many outstanding shares the company has?

What is the market value of the company?

What is the book value of the company?

What is the beta for the company?

How do you find the risk free rate? (consider the market risk premium to be 8%)

Using CAPM calculate the expected return on the equity for the company.

(To get the required rate of return on debt, divide the interest expense by total debt)

(To get the total debt, add the short term debt to long term debt)

What is the Weighted average cost of capital (WACC) for the company?

What is the leverage (total debt/equity ratio) for the company?

Answer 1

	(Amounts in $ Million)
S.No	Details	United States steel	Face Book
1	Interest	230	0
2	Weighted Average number of shares	157	2863
3	Stock Holders Equity	2274	59194
4	Long term debt	2981	0
5	Short Term Debt	50	0
6	Book Value(3+4+5)	5305	59194
7	Market Price/share	33.01	115.05
8	Market Value(2*7)	5182.57	329388.15
9	Cost of Debt kd(1/4+5)	7.59%	0.00%
10	Market Risk Premium(Rm-Rf)	8%	8%
11	Market Rate of return(S&P 500 Index)	11.90%	11.90%
12	Risk Free Rate(11-10)	3.90%	3.90%
13	Opening Price of Stock	7.98	104.66
14	Closing Price of stock	33.01	115.05
15	Stock rate of return(13-12)/12	314%	10%
16	Beta of company(15-12)	3.10	0.06
17	Expected Rate of return= Rf+Beta(Rm-Rf)	29%	4%
18	Weights of Equity	42.87	100.00
19	Weights of Debt	57.13	-
20	WACC(17*18+19*9)	16.63	4.38
21	Debt Equity Ratio(4+5)/3	1.33	-