The first part of this assignment asks you to estimate the weighted average cost of capital (WACC) for Microsoft Corporation.

Assume that Microsoft's optimal debt ratio is 40%, tax rate is 30% and its cost of debt is 6%.

To compute the required rate of return on equity, go to Yahoo Finance website https://finance.yahoo.com/. Look for Microsoft Corporation price data (just search for it either typing the full name or using the symbol of the company MSFT). Once you are on the Microsoft page click on "Historical Data". The time period has to be of 5 years (from October 1st 2012 to October 1st 2017) and the frequency is monthly. Secondly, you need to download the data for the market portfolio. Use the S&P 500 index. For both Microsoft and the S&P 500 use the adjusted prices ("adj price" column when downloading from Yahoo Finance).

In your calculation of the required rate of return (i.e. return on equity) using the CAPM formula, assume the risk-free rate to be 3%.

Once you have all the data, you have to:

1) (10 points) Compute the annual Beta of Microsoft using simple (i.e. not log) returns. (Hint: compute the monthly returns using the prices you just downloaded and then aggregate monthly returns to annual returns using one of the two methods we saw in class). What is the interpretation of the Beta you just computed?

1. 2)(2 points) Plot the trendline (Characteristic line)
2. 3)(2 points) Compute the return on the market portfolio.
3. 4)(2 points) Compute the required rate of return (i.e. return on equity).
4. 5)(4 points) Compute the WACC (round it to the closest integer).

Please upload your spreadsheet.

Microsoft Corporation just constructed a manufacturing plant in Ghana. The construction costs 10 billion Ghanian cedi. Microsoft intends to leave the plant open for three years.

At the end of the first year, the revenues are expected to be 5 billion cedi and the costs of 2 billion cedi. For the remaining 2 years, revenues are expected to grow at 5%, while costs at 3%. At the end of the third year, Microsoft expects to sell the plant for 5 billion cedi. Additionally, the plant has to be depreciated at 25% in year 1 and 2, and at 50% in year 3.

Microsoft has a required rate of return (i.e. wacc) that you computed in task (5). Assume that the tax rate in Ghana is 35% and in the US is 30%. Lastly, inflation rates in the US and Ghana are 10% and 3%, respectively.

1. 6)(15 points) Compute the NPV in Ghanian cedi by using the WACC as appropriate discount rate. Would Microsoft build the plant?
2. 7)(10 points) Compute the NPV of the project in US dollars by using the WACC and by converting all the cash flows from Ghanian cedi to US dollars.
3. The CEO expects you to use an internal model that offers better estimates of future spot exchange rates compared to the PPP. This model forecasts that the cedi is expected to depreciate by 5 percent per year. Currently, it takes 8,700 Ghanian cedi to buy 1 US dollar. Would Microsoft build the plant?
4. 8)(8 points) Re-do the analysis of task 7, but using the PPP to estimate future spot exchange rates. Are the two NPVs different or the same? Why? Explain.
5. 9)(7 points) Compute the NPV of the project in US dollars by converting the NPV in Ghanian cedi into US dollars using the current spot exchange rate. Compare the NPV you get in this task with the NPVs computed in tasks 7 and 8. Are the NPVs different

or the same? Why? Explain.

10) (10 points) Determine the APV of the project in US dollars considering an all-equity required rate of return for Microsoft of 10%. Use the internal model to estimate future spot exchange rates. Would the decision of Microsoft change?

Suppose now that the Ghanian Government has promised to arrange for a substantial portion of the construction cost to be financed at an attractive concessionary interest rate if the plant is built there.

The conditions offered are the following:

a) Microsoft is allowed to borrow up to 7.5 billion Ghanian cedi at a rate of 4% per year b) The loan schedule for the principal is to be repaid in 3 equal instalments.

11) (15 points) What is the amount of debt that Microsoft has to take to keep its debt ratio stable? And, what is the percentage of the concessionary loan that Microsoft should shield?

12) (15 points) How is the APV in US dollars now?