Choose a dividend paying stock (the Dow 30 list is one place to find one). You are to estimate your...

Question

Choose a dividend paying stock (the Dow 30 list is one place to find one). You are to estimate your company’s cost of capital. This value is critical in the capital budgeting decisions of your company. Next you’ll compare vital ratios for your firm over time and against a competitor.

1.Cost of Capital (WACC) Estimation:

a.Estimate the company’s cost of equity

i.Use the Dividend Discount Model as an estimation method

ii.Use the SML/CAPM as an estimation method

iii.Take an average for the overall estimate of cost of equity

b.Estimate the company’s cost of debt using the company’s longest maturity bond on the market.

c.Estimate the capital structure weights on equity and debt by using the Market Value of Equity and the Book Value of Debt.

d.Estimate the firm’s weighted average cost of capital using the values above.

2.Compare your firm’s financial condition over time and against a competitor:

a.Observe the Net margin (net profit margin), Asset Turnover (total asset turnover), and Equity Multiplier (Financial Leverage) over the past 5 years.

i.Make some brief summary statements of how your firm changed over past 5 years.

b.Compare the values in part a. to those of a close competitor company.

i.Make some brief summary statement of how your firm compares to its competitor.Copy and Paste Your Assignment Here

case-study-21-eaehr20f.docx

Siddharth · Accepted Answer

WACC
	WACC CALCULATION- MICROSOFT CORPORATION
	1. COST OF EQUITY ( DIVIDEND DISCOUNT MODEL & CAPM MODEL)
	2. COST OF DEBT
	3. CORPORATE TAX RATE
	4. WEIGHT OF EQUITY & DEBT
	5.WACC
	1.1COST OF EQUITY- DIVIDEND DISCOUNT MODEL
	SHARE PRICE	$   181.84
	DATE	ANNUAL DIVIDENDS	GROWTH RATE
	2020	0.51	0.11
	2019	0.46	0.10
	2018	0.42	0.08				COST OF EQUITY =		(D1/P0)+g
	2017	0.39	0.08
	2016	0.36	0.16
	2015	0.31	0.11
	2014	0.28	0.22
	2013	0.23	0.15
	2012	0.2	0.25
	2011	0.16	0.23
	2010	0.13
	Arithmetic Average Growth Rate		0.1480783873
	Geometric Average Growth Rate		0.1464699669
	PROJECTED DIVIDEND 2021		0.5846996831
	COST OF EQUITY	14.97%
	1.2 COST OF EQUITY - CAPM MODEL
	COST OF EQUITY=	Rf + Beat (B)*(Rm-Rf)			*REFER WORKING NOTE 1 
	Risk free rate (Rf) =	1.33
	Beta (B) =	0.9761
	Market Return (Rm) =	0.008031
	COST OF EQUITY=	3.96%
	1.3 Average Cost of Equity 
	Avergae cost of equity 	9.47%
	2. COST OF DEBT
	Using the longest maturity bond of Microsoft Corporation
	COST OF DEBT =	YTM OF A BOND =	3.16%
	3. CORPORATE TAX RATE 
		2019
	Income Before Taxes	43688
	Income Tax Expenses	6891
	Tax Rate	15.77%
	4. WEIGHT OF EQUITY & DEBT
	No. of shares outstanding	7580	(adjusted in million)
	Current Share Price	$   180.76
	Market Value of Equity	$   1,370,160.80
	Total Debt 	Current Debt + Long Term Debt
	Total Debt 	$   75,220.00
	Total Equity + Total Debt	$   1,445,380.80
	Percentage of Equity	94.80%
	Percentage of Debt 	5.49%
	5. WACC
	WACC= (PERCENTAGE OF DEBT)*COST OF DEBT* (1-TAX RATE) + (PERCENTAGE OF EQUITY) * (COST OF EQUITY) 
	WACC	9.12%
FINANCIAL ANALYSIS
	MICROSOFT CORPORATION
	Balance Sheet (amounts in millions)
		2019	2018	2017	2016	2015					2019	2018	2017	2016	2015
	Cash	$133,819	$133,650	$   132,981	$   113,240	$   96,526				Acc. Pay.	$9,382	$8,617	7390	6898	6591
	Acc. Rec.	29,524	26,481	19792	18277	17908				Notes Pay.	0	0	0	0	0
	Inventory	2,063	2,662	2181	2251	2902				Current Liab.	$69,420	$58,488	55745	59357	49647
	Current Assets	$165,406	$162,793	$154,954	$133,768	$117,336				Long-term Debt	$72,850	$77,810	81445	40557	27808
										Total Debt	$142,270	$136,298	$137,190	$99,914	$77,455
	Net Fixed Assets	$286,556	$258,848	$   250,312	$   193,468	$   174,472
										Total Equity	$309,692	$285,343	$268,076	$227,322	$214,353
	Total Assets	$451,962	$421,641	$405,266	$327,236	$291,808				Total D&E	$451,962	$421,641	$405,266	$327,236	$291,808
	MICROSOFT CORPORATION
	Income Statement (amounts in millions)
		2019	2018	2017	2016	2015
	Sales	$125,843	$110,360	$   96,571	$   91,154	$   93,580
	COGS	42,910	38,353	34261	32780	33038
	Gross Profit	$82,933	$72,007	$62,310	$58,374	$60,542
	Selling & Adm. Exp.	23,098	22,223	19942	19198	20324
	EBITDA	$59,835	$49,784	$42,368	$39,176	$40,218
	Depreciation Exp.	11,682	10,261	8778	7252	13455
	EBIT	$48,153	$39,523	$33,590	$31,924	$26,763
	Interest Expenses	2,400	2,400	2400	2400	2400
	EBT	$45,753	$37,123	$31,190	$29,524	$24,363
	Taxes (34% of EBT)	15,556	12,622	10,605	10,038	8,283
	Net Income	$30,197	$24,501	$20,585	$19,486	$16,080
	Div. Payout ratio	36.0%	78.0%	55.79%	65.43%	81.08%
	Dividends 	$10,871	$19,111	$11,485	$12,750	$13,037
	Additions to RE	$19,326	$5,390	$9,101	$6,736	$3,042
	*Total Asset Turnover = Sales/Total Assets
		2019	208	2017	2016	2015
	Asset Trunover Ratio	0.2784371252	0.2617392521	0.2382904068	0.2785573714	0.3206903169
	*Net Profit Margin = NI/Net Sales
		2019	2018	2017	2016	2015
	Net Profit Margin	0.2399575662	0.2220114172	0.213163372	0.2137683481	0.1718270998
	The Du Pont Identity
	operating efficiency and asset efficiency and financial leverage.
	ROE = Net Income/Total Equity = (Net Income/Assets)*(Assets/Total Equity)
	ROE  = (Net Income/Net Sales)*(Net Sales/Assets)*(Assets/Total Equity)
		2019	2018	2017	2016	2015
	Net Profit Margin	24.00%	22.20%	21.32%	21.38%	17.18%
	Total Asset Turnover	0.28	0.26	0.24	0.

Choose a dividend paying stock (the Dow 30 list is one place to find one). You are to estimate your company’s cost of capital. This value is critical in the capital budgeting decisions of your...

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