In mid-2012, AOL Inc. had $200 million in debt, total equity capitalization of $
ID: 2613380 • Letter: I
Question
In mid-2012, AOL Inc. had $200 million in debt, total equity capitalization of $3.1 billion, and an equity beta of 0.97 (as reported on Yahoo! Finance). Included in AOL's assets was $1.6 billion in cash and risk-free securities. Assume that the risk-free rate of interest is 2.9% and the market risk premium is 3.9%.
a. What is AOL's enterprise value? Correct answer is 1.7 billion
b. What is the beta of AOL's business assets? Correct answer is 1.77
c. What is AOL's WACC? Correct answer is 9.803%
I know how to calculate a) and c), but not b).
In addition the same question has been asked before, but the answer to b) has been incorrect.
Explanation / Answer
EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.
Market value of common stock = 3.1 billion
market value of debt = 0.2 billion
cash and investment = 1.6 billion
= 3.1 + 0.2 - 1.6 = 1.7 billion
b)
Asset beta = B/(1+(1-T)*(R)), where "B" is the company's beta, "T" is the tax rate and "R" is the debt to equity ratio.
B = company beta = 0.97 t = tax rate = 30% assumption, r = debt to equity ratio = 0.065
0.97/(1+(1-0.3)*0.065
= 8.84
as debt to equity ratio is very low = 0.065
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