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by: Kenya Windler


Kenya Windler
GPA 3.58


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Class Notes
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This 2 page Class Notes was uploaded by Kenya Windler on Monday October 26, 2015. The Class Notes belongs to BUSFIN1311 at University of Pittsburgh taught by Staff in Fall. Since its upload, it has received 92 views. For similar materials see /class/229357/busfin1311-university-of-pittsburgh in Finance at University of Pittsburgh.




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Date Created: 10/26/15
MBI COST OF CAPITAL Finance Moeller MBI is a publicly listed computer and software producer The rm uses standard weighted average cost of capital WACC and CAPM calculations to nd its cost of capital The rm has two divisions that are exactly equal in size ie total market value the software division and the hardware division The targetlevel of longterm debt over assets is 50 for MBI 25 for the software division and 75 for the hardware division respectively Because of the rm s relatively high level of debt it is not reasonable to assume the beta of debt is zero but you can assume that small changes in capital structure do not affect the beta of debt Projects undertaken by the software division are usually shortterm up to 1 year projects Hardware projects usually involve longerterm 39 39 Fr 39 39y 10 years Use the nancial information on the next page to answer the following questions a Calculate the cost of capital RWACC for MBI b Calculate the cost of capital RWAcc for the software division of MBI 0 Calculate the cost of equity for the hardware division of MBI 3 1 MBI is considering a project for its hardware division which will cost 155 million and create 19 million after tax yearly in ows forever to the division Using a typical WACC based FCF approach should you do this project D The CFO has just returned from a meeting with MBI s bankers and is seriously considering switching a large portion of debt from xed to oating rate and altering the target capital structure to keep a constant dollar amount of debt rather than a constant proportion You have decided that before moving forward you should re estimate the cost of capital from parts a b and c Assume that the new debt amount is the same as the debt amount you previously used to estimate parts ac quot1 Reestimate the NPV from part d with your new cost of capital from part e Does it change your decision CONSOLIDATED BALANCE SHEET EOR MBI CORPORATION 2006 2007 in millions of dollars Assets M m Cash 1090 1234 Cash Equivalents 3457 4567 Accounts Receivables 9345 12345 Inventories 5 445 11 346 Total Current Assets 19337 29492 Net Plant Property and Equipment 44678 58849 Software 4592 5515 Other Net Fixed Assets 21 938 28 835 Total Assets 90545 122691 Liabilities Accounts Payable 1943 1365 Deferred Income 8935 3575 Compensation and Bene ts m E Total Current Liabilities 16244 9619 Longterm Debt 34921 43452 Common Stock and Surplus 30000 30000 Retained Earnings m 39 620 Total Stockholders Equity 39 380 69 620 Total Liabilities and Stockholders39 Equity 90545 122691 OTHER FINANCIAL INFORMATION FOR MBI Shares outstanding 125 billion December 2007 closing price per share 28 Betal 2485 Corporate Tax Rate 34 INDUSTRY INEORMATION ALL DEBT REEERs TO LONG TERM DEBT DLT E V Average DebttoEquity ratio for software companies 02 1 Average Equity Beta for software companies 1575 Average Debt Beta for software companies 03 Average DebttoEquity ratio for hardware companies Unavailable Average Unlevered Equity for hardware companies Unavailable BOND MARKET INFORMATION AND CREDIT SPREADs Rates on longterm government bonds 10year 7245 Rates on shortterm government notes 1year 5355 Market Risk Premium RM Rf 6578 MBI Debt Software Rate Premium above Government 175 MBI Debt Hardware Rate Premium above Government 200 1 Beta has been calculated using regression analysis where stock returns of the corporation for the past 200 days are regressed on the past 200 days of returns on the SampP 500 stock market index


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