Question
Calculate the average accounting return (AAR) using excel (make formulas viewable) . If you know that the required average accounting return is 25%. Would you
Calculate the average accounting return (AAR) using excel (make formulas viewable). If you know that the required average accounting return is 25%. Would you accept that project?
Calculate profitability index of the above project using excel (make formulas viewable). Would you accept or reject that deal? Why?
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC for $12.5b. Google had a plan to keep Motorola mobility for 5 years. Google financial analysis team made the following forecasts:
Year | Cash flow (in billions) | Net income (in billions) |
2012 | 1.5 | 1 |
2013 | 2.5 | 2 |
2014 | 4 | 3 |
2015 | 3 | 2 |
2016 | 6 (includes 3.5b selling price) | 1.5 |
And that the average book value of asset is $8b and Googles required rate of return is its WACC.
Total capital = Common share capital + Preference share capital + Debt capital
Total capital = (5 million shares * $100) + (1 million shares * $100) + (1,00,000 Bonds * $1,124)
Total capital = $500 million + $100 million + $112.40 million = $712.40 million
Weight of debt = Debt / Total capital
Weight of debt = $112.40 / $712.40 million = 0.16
Weight of preference = Preference / Total capital
Weight of preference=$100/$712.40 million = 0.14
Weight of common shares = Common shares / Total capital
Weight of common shares = $500 / $712.40 million = 0.70
Cost of debt (before tax) = 3.43% or 0.0343
After tax cost of debt = Cost of debt * (1 - Tax rate @ 35% or 0.35)
After tax cost of debt = 0.0343 * (1 - 0.35) = 0.0223 or 2.23%
Cost of preference = 6% or 0.06
Cost of common shares = 13.76% or 0.1376
WACC = (0.16 * 0.0223) + (0.14 * 0.06) + (0.70 * 0.1376)
WACC = 0.0036 + 0.0084 + 0.0963
WACC = 0.1083 or 10.83%
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