Question
Google purchasing Motorola mobility 1- In the previous 5 years, Google paid an annual dividend as follows: Year-Dividends 2011-2.7 2010-2.5 2009-2.2 2008-1.8 2007-1.5 Google is
Google purchasing Motorola mobility
1- In the previous 5 years, Google paid an annual dividend as follows:
Year-Dividends
2011-2.7
2010-2.5
2009-2.2
2008-1.8
2007-1.5
Google is expected to pay a dividends of $3 in the next year (2012). What is the cost of equity of Google if its current stock price is $90?
2- As a technology-based firm, Google has a high beta of 1.4. if the risk-free rate of return is 5% and the market risk premium is 3%, calculate the cost of equity of Google using the capital asset pricing model (CAPM)?
3- As a financial analyst, you know that both DGM and the CAPM used in # 1 and # 2 above can be inaccurate, so you decided to calculate the average cost of equity of google. What is the average cost of equity of Google?
4- Google has a preferred stock that pays an annual dividend of 6$ to shareholders. What is the cost of Google's preferred stocks if it is currently priced at $100?
5- Google has one bond outstanding that matures in 20 years. This bond has a coupon rate of 8%, paid semiannually. The bond currently sells for $1,124. What is the pre-tax cost of debt of Google?
6- Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. Use your answers in #3, #4, and #5 to calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%.
Motorola Mobility LLCis a companythat developsmobile devices. Headquartered inChicago,Illinois, United States, the company was formed on January 4, 2011 by the split ofMotorola Inc.into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including itsmobile phonebusiness and itscable modemsandset-top boxesfordigital cableandsatellite televisionservices, whileMotorola Solutionsretained 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 Google's required rate of return is its WACC.
7- Calculate net present value (NPV) for the above investment decision. Would you accept or reject this investment decision? Why?
8- Calculate payback period. If you know that google accepts projects with 4 years payback period. Would you accept that project?
9- Calculate the Motorola project internal rate of return (IRR). Would you accept or reject this project? Why?
10- Calculate the average accounting return (AAR). If you know that the required average accounting return is 25%. Would you accept that project?
11- Calculate profitability index of the above project. Would you accept or reject that deal? Why?
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