Q1. Book Value of Equity $4,711,480 Q2. Stock Price 310.11 Market Value of Equit
ID: 2787472 • Letter: Q
Question
Q1.
Book Value of Equity
$4,711,480
Q2.
Stock Price
310.11
Market Value of Equity (market Capitalization)
52.119B
Number of Shares Outstanding
168.07M
Stock Beta
0.73
3-month T-bill rate
1.06
Cost of Equity (show your calculation) 7% market risk premium
Q3.
Industry Average Beta
.46
Cost of Equity (show calculation using Industry Beta)
Which is more appropriate?
Q4.
Bonds
Book Value
Book Value Weight
Market Value
Market Value Weight
Yield to Maturity
1.
$3 B
$2.6 B
4.35%
2.
$1 B
$0.92 B
3.92%
3.
$2 B
$2.14 B
2.25%
4.
$2 B
1.86 B
2.86%
Weighted Average Cost of Debt (based on book values)
Weighted Average Cost of Debt (based on market values)
Which is more appropriate?
Q5.
Weighted Average Cost of Capital (based on book values of debt and equity) – show calculations
(35% marginal tax rate)
Weighted Average Cost of Capital (based on Market values of debt and equity) – show calculations
(35% marginal tax rate)
Which is more relevant?
Q6.
Any potential problems with this pure play approach?
What improvements do you suggest to better reflect the WACC of SMI?
Q1.
Book Value of Equity
$4,711,480
Q2.
Stock Price
310.11
Market Value of Equity (market Capitalization)
52.119B
Number of Shares Outstanding
168.07M
Stock Beta
0.73
3-month T-bill rate
1.06
Cost of Equity (show your calculation) 7% market risk premium
Q3.
Industry Average Beta
.46
Cost of Equity (show calculation using Industry Beta)
Which is more appropriate?
Explanation / Answer
1) Cost of Equity (Using Stock Beta) = Risk Free Rate + Stock Beta * Market Risk Premium = 1.06% + 0.73 * 7% = 6.17%
2) Cost of Equity (Using Average Industry Beta) = Risk Free Rate + Using Average Industry Beta * Market Risk Premium = 1.06% + 0.46 * 7% = 4.28%
3) It is better to use Stock Beta to calculate the Cost of Equity as this gives a true picture of the Risk of the Stock. Using Average Industry Beta can understate the risk of the company.
As a limitation I will be able to ans only the First Part. In case the solution for the second part is needed, would request you to post specifically the Second Part.
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