In? mid-2015, Qualcomm Inc. had ?$11 billion in? debt, total equity capitalizati
ID: 2620022 • Letter: I
Question
In? mid-2015, Qualcomm Inc. had ?$11 billion in? debt, total equity capitalization of ?$90 ?billion, and an equity beta of 1.44 ?(as reported on? Yahoo! Finance). Included in? Qualcomm's assets was ?$22 billion in cash and? risk-free securities. Assume that the? risk-free rate of interest is 2.9 % and the market risk premium is 3.9 % . a. What is? Qualcomm's enterprise? value? b. What is the beta of? Qualcomm's business? assets? c. What is? Qualcomm's WACC?
a. What is? Qualcomm's enterprise? value? ?Qualcomm's enterprise value is ?$_____ billion.???(Round to the nearest whole? number.)
b. What is the beta of? Qualcomm's business? assets? The beta of unlevered equity is _____ . ? (Round to two decimal? places.)
c. What is? Qualcomm's WACC? The WACC is _____ ?%. ?(Round to one decimal? place.)
Explanation / Answer
(a) Debt = D = $ 11 billion, Equity = E = Total Equity Capitalization = $ 90 billion, Cash and Risk-Free Securities = $ 22 billion
Enterprise Value = D + E - Cash and Risk-Free Securities = 11 + 90 - 22 = $ 79 billion
(b) Equity Beta = Be = 1.44, Debt to Equity Ratio = DE = 11/90 = 0.122
Tax Rate is assumed to be zero as nothing is mentioned.
Asset Beta = Ba = Be/[1+ DE] = 1.44 / [1+0.122] = 1.28
(c) Risk-Free Rate = 2.9 % and Market Risk Premium = 3.9 %
Cost of Equity = 2.9 + 1.44 x (3.9 - 2.9) = 4.34 %
Cost of Debt = 2.9 % (assuming debt to eb risk free)
Debt Ratio = 11 / 101 = 0.109
Equity Ratio = 90 / 101 = 0.891
WACC = 0.891 x 4.34 + 0.109 x 2.9 = 4.183 %