Google’s total capital consists of $150 million in debt, $50 million in leased assets

| February 25, 2017

Question

1. Google’s total capital consists of $150 million in debt, $50 million in leased assets, no outstanding preferred stock, $500 million in common stock, and $300 million in retained earnings. Its after-tax specific costs are 7% for the debt, 8% for the leases, and 9% for the equity.
a. Find the Weighted Average Cost of Capital

b. If Google wanted to lower their WACC, what could they do?

c. Why is it important for Google to know their WACC?

2. Imagine that Google is considering a project that would cost $100 Million dollars today, and provide $25 Million cash flows for the next 6 years.

a. What is the Payback Period for this project?

b. What is the NPV of this project, if the discount rate is 8.6%? Should the firm accept this project?

c. What is the IRR of this project? Should the firm accept this project?

3. Imagine you are the CFO for Ford Motors, and are considering buying a new facility. The facility costs you $220 Million today, and would help you launch a new line for cars produced for the next 7 years. If your discount rate is 6%, based on the cash flows below, would you accept the project?

Year Cash Flow

1 30 Million

2 40 Million

3 50 Million

4 60 Million

5 50 Million

6 40 Million

7 30 Million

4. You are the head of Investment Banking for Goldman Sachs. Comcast comes to you because they want to buy the Disney Corporation today, feeling the stock is undervalued, and want to buy it today, and sell it in 5 years.

a. You need to buy 10 Million shares to be majority share holder

b. The Stock is currently selling for $38 per share

c. The discount rate is 5%

d. The cash flows for the next 5 years are stated below.

e. What should your maximum offering price be?

2008

2009

2010

2011

2012

Net Profit

74,000,000

84,000.00

80,000,000

90,000,000

98,000,000

Resale Value

179,000,000

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