Consider the following financial data for Accenture US 30-Year T-Bond Yield = 2%
ID: 2810777 • Letter: C
Question
Consider the following financial data for Accenture
US 30-Year T-Bond Yield = 2%
Market Risk Premium = 6.25%
Tax Rate = 21%
Also the following data for Accenture:
Stock Price = $174.19
Market Cap = $111.61B
Beta = .95
Moodys = A1 (95 basis points)
Total Debt = $28.8 million
Number of Shares Outstanding = 640.75 million
EPS = $6
Return on Assets = 16.01%
Total Debt/Equity (Book Value) = .28%
Book Value/share = $15.29
Revenues = $38.57B
Calculate the Cost of Capital for Accenture.
A. Calculate the Cost of Capital for Accenture. Choose the best answer from the list below.
B. Continuing with question 2 what is the Cost of Debt for Accenture?
1.
C. Using the Accenture financial profile information (see question above) calculate the MVA for Accenture.
1.
1. 7.938%Explanation / Answer
a.) Cost of capital is WACC
WACC = we*re + wd*rd*(1-t), where we is weight of market value of equity, re is cost of equity, wd is weight of market value of debt, rd is cost of debt, t is tax rate
market value of equity is market cap i.e. $111.61 billion
We will calculate re i.e. cost of equity by using capm
re = rf + beta*(rm - rf), where rf is risk free rate, rm - rf is market risk premium
risk free rate is treaury rate i.e. 2%
market risk premium = 6.25%
beta = 0.95
Putting these value in CAPM equation
re = 2 + 0.95*(6.25) = 7.9375%
Market value of debt = $28.8 million
rd = rf + risk premium
risk premium is the premium for taking risk, in this case it is Moody A1 rated and risk premium for that is 95 basis points i.e. 0.95%
So, rd = 2 + 0.95 = 2.95%
tax rate = 21%
we = Market value of equity/(Market value of equity+ market value of debt) = 111610/(111610+28.8) = 0.9997
wd = Market value of debt/(Market value of equity+ market value of debt) = 28.8/(111610+28.8) = 0.0003
Putting in WACC equation
Cost of capital = 7.9375*0.9997 + 2.95*0.0003*(1-0.21) = 7.938%
So the answer is option 1 i.e. 7.938%
b.) We have calculated cost of debt in previous part, it is 2.95%
So the answer is option 4.) i.e. 2.95%
c.) MVA is market mavlue added
It is calculated as market value of firm - market value put by shareholders and lenders
Market value of firm = m15.29**arket value of equity + market value of debt
Market value of firm = 111610 + 28.8 = 111638.8
Value put by shareholder is book value of shares i.e. Book value per share*shares outstanding
Book value of shares = 15.29*640.75 = 9797.068 million
Total debt / equity (book value ) = 0.28%
Book value of debt = 0.28*9797.068 = 66.62 million
MVA = 11638.8 - (66.62+9797.068) = 101775.1 i.e. 101.775 billion
The closest option is option 4. i.e. $101.82 billion
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