Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume that you are the CFO of Microsoft Company and you were asked to estimate the cost of capital. Microsoft has 1500 bonds that now

Assume that you are the CFO of Microsoft Company and you were asked to estimate the cost of capital. Microsoft has 1500 bonds that now has 20 years to maturity and a 7.00% annual coupon. The bond currently sells for $925 and the companys tax rate is 30%. Moreover, Microsoft has 60,000 common stock ($10 par value) and the risk premium over its own debt cost is 5.00% and the the yield on a Treasury bond is 4%. The company recently decided that its target capital structure should have 35% debt, with the balance being common equity.

Furthermore, the CEO identified two investments opportunities. Project A will cost $50,000 and Project B will cost $90,000. The CEO has decided that it will invest in one project but not both. The expected cash flow that will be generated by both project are listed below:

Project A Project B

Initial capital expenditure $50,000 $90,000

Cash year 1 25,000 30,000

2 20,000 40,000

3 15,000 14,000

4 10,000 26,000

5 10,000 10,000

In addition, the following table provides the close share price for Microsoft Corporation (MSFT) and NASDAQ, and the net income for MSFT:

MSFT

NASDAQ

Net Income

Total Dividend

2015

$50

$5,000

$200,000.00

$130,000.00

2016

$55

$5,500

$206,000.00

$133,900.00

2017

$50

$6,000

$214,240.00

$139,256.00

2018

$60

$6,750

$224,952.00

$146,218.80

2019

$66

$7,500

$237,324.36

$154,260.83

2020

$72

$7,853

$253,937.07

$165,059.09

*Knowing that: Total risk for Microsoft is 10.55% and the market risk for Microsoft is120% (1.20), cost of debt is 5.4248% and cost of equity is 12.74972%, and WACC is 10.186% QUESTION: If you have one million dollars, would you invest in MSFT, NASDAQ, or both, justify your answer?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance For Development

Authors: Barbara Stallings

1st Edition

0815780850, 978-0815780854

More Books

Students also viewed these Finance questions

Question

1. Define mass and mediated communication

Answered: 1 week ago