Question: 1. Determine the market capital structure weights for Microsoft?
Weight of Debt=?
Weight of Equity=?
2. Estimate the cost of equity (rf) in two different ways:
(d0) = $0.39, (P0) = $64.90, Find (g) =?, Cost of Equity (using either the constant dividend model or the dividend growth model)= ?
b) Capital Asset Pricing Model
• Download the historical stock price of Microsoft and use Excel to calculate returns?
• Download the historical price of the S&P index to use it as an approximation of market performance. Use the price to find returns.
• Run a regression in which the returns are the dependent variable and the S&P 500 index returns are the independent variable. Estimate beta? Show regression results.
• Find (rf)=? What is the risk-free rate based on? State the source of (rf).
• Assume that the MRP is 6.1%. Using the information above, calculate the cost of equity using the CAPM. Cost of Equity =?
• Based on your different estimates, what do you think the cost of equity is? Cost of Equity=?
3. What is Microsofts WACC? Show the formula and numbers.
4. If Microsoft is considering a new project. At the end of the first year of the project they could earn net operating cash flow of $1 million, $2 million the following year and, $3 million in the last year. If the project requires an initial investment of $5 million, would you advise them to accept the project?
5. If Microsoft is considering a different project which could earn net operating cash flow of $500,000 per year for the next 10 years. The project costs $4 million. Would you advise them to accept the project?