question 3/4
The management at FactoryVille, a packaging material manufacturing company, has been reading all the hype about Apple and Motorola Mobility in the WSJ and decides to start a new line of business in mobile phones. They are an all equity firm and plan to finance the deal with equity. They look at some figures and find out that Apple has equity worth $600B and $40B in debt. They calculate betas for equity and debt at 0.88 and 0.04. Motorola Mobility, on the other hand, has equity and debt worth $60B and $20B, with betas of 1.6 and 0.3. Suppose the risk-free rate is 3% and the expected market return is 9%, what discount rate should Factoryville use for their new line of mobile phones? (There's not one correct answer here, so briefly state why you estimated the discount rate the way you did.) 3. Microsoft has an equity value of $250B, but has only $10B in debt. Management decides they'd like to increase the D/(D+E) ratio to 40% and use the proceeds to repurchase shares of equity, 4. i.e. a leveraged recapitalization. Before the recapitalization, the debt is considered risk-free and the equity has a beta of 1.13; afterwards, the debt beta becomes 0.3. How much debt does Microsoft issue? By how much has this restructuring changed the riskiness of equity in Microsoft, i.e. what is the equity beta after the recapitalization? If the risk-free rate is 3% and the expected market return is 9%, what are the expected returns to equity holders before and after the recapitalization? a. b. The management at FactoryVille, a packaging material manufacturing company, has been reading all the hype about Apple and Motorola Mobility in the WSJ and decides to start a new line of business in mobile phones. They are an all equity firm and plan to finance the deal with equity. They look at some figures and find out that Apple has equity worth $600B and $40B in debt. They calculate betas for equity and debt at 0.88 and 0.04. Motorola Mobility, on the other hand, has equity and debt worth $60B and $20B, with betas of 1.6 and 0.3. Suppose the risk-free rate is 3% and the expected market return is 9%, what discount rate should Factoryville use for their new line of mobile phones? (There's not one correct answer here, so briefly state why you estimated the discount rate the way you did.) 3. Microsoft has an equity value of $250B, but has only $10B in debt. Management decides they'd like to increase the D/(D+E) ratio to 40% and use the proceeds to repurchase shares of equity, 4. i.e. a leveraged recapitalization. Before the recapitalization, the debt is considered risk-free and the equity has a beta of 1.13; afterwards, the debt beta becomes 0.3. How much debt does Microsoft issue? By how much has this restructuring changed the riskiness of equity in Microsoft, i.e. what is the equity beta after the recapitalization? If the risk-free rate is 3% and the expected market return is 9%, what are the expected returns to equity holders before and after the recapitalization? a. b
