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Trava [24]
3 years ago
14

In mid-2015, Qualcomm Inc. had $13 billion in debt, total equity market value of $87 billion and an equity beta of 1.41. Include

d in Qualcomm’s assets was $21 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%.
Business
1 answer:
lesya692 [45]3 years ago
8 0

Answer:

A) Qualcomm's enterprise value= $95 billion

B) Asset Beta of Qualcomm’s business = 1.29

C) Qualcomm's WACC= 7.931%

Explanation:

The question relates to Capital asset pricing model (CAPM) which is used to calculate the required return from an investment given the level of risk associated with the investment. Now there are many risk that the level of cash flows and hence the required return from an investment such as systematic and unsystematic risks, business and finance risks etc.

The requirements of the question are as follows:

a)What is Qualcomm’s enterprise value?

b)What is the beta of Qualcomm’s business assets?

c)What is Qualcomm’s WACC?

The first two requirements will help us compute requirement C so we begin solving it form A as follows:

A) Qualcomm's enterprise value= ve- vd +va

ve= value of equity

vd= value of debt

va= value of asset

Qualcomm's enterprise value= $87b - $13b +$21b

Qualcomm's enterprise value= $95 billion

B) Beta of Qualcomm’s business assets:

Now beta is an index used to measure systematic risks (risks posed by macro-economic factors such as tax, interest rates etc). There are two beta indexes, asset beta and equity beta. Asset beta measures business risks only and equity beta measures both business and finance risks. In the question we already have equity beta so we need to calculate asset beta in order to compute Qualomm's WACC.

ba = be× ve/enterprise value

ba = asset beta

be= equity beta

ba= 1.41× $87÷$95

Beta of Qualcomm's business= 1.29

C) Qualcomm’s WACC:

The formula is as follows:

Ke= Rf + (market premium)× ba

ke = WACC

Rf= risk free rate of interest

ba= asset beta

ke= 2.9% + (3.9% ×1.29)

ke/WACC= 7.931%

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On January 1, 2017, Ayayai Company purchased 8% bonds having a maturity value of $200,000, for $216,849.76. The bonds provide th
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Answer:

1. 1/01/2017

Dr Bonds receivable 200,000

Dr Premium on bonds receivable 16,849.76

(216,849.76-200,000)

Cr Cash 216,849.76

2. Carrying amount of bonds

1/01/2017 216,849.76

1/01/2018 213,859.76

1/01/2019 210,691.35

1/01/2020 207,332.83

1/01/2021 203,772.8

1/01/2022 200,000

3. 31/12/2017

Dr Interest receivable 16,000

Cr Interest revenue 13,010

Cr Premium on bonds receivable 2,990

Explanation:

1. Preparation of the journal entry at the date of the bond purchase.

1/01/2017

Dr Bonds receivable 200,000

Dr Premium on bonds receivable 16,849.76

(216,849.76-200,000)

Cr Cash 216,849.76

2. Preparation of a bond amortization schedule.

Date Cash received Interest revenue Premium amortized Carrying amount of bonds

1/01/2017 216,849.76

1/01/2018 16,000 13,010 2,990 213,859.76

1/01/2019 16,000 12,831.59 3,168.41 210,691.35

1/01/2020 16,000 12,641.48 3,358.52 207,332.83

1/01/2021 16,000 12,439.97 3,560.03 203,772.8

1/01/2022 16,000 12,227.20 3,772.80 200,000

Workings;

1/01/2018

($200,000*8%)=16,000

($216,849.76*6%)=13,010

(16,000-13,010)=2,990

(216,849.76-2,990)=213,859.76

1/01/2019

($200,000*8%)=16,000

(213,859.76*6%)=12,831.59

(16,000-12,831.59)=3,168.41

(213,859.76-3,168.41)=210,691.35

1/01/2020

($200,000*8%)=16,000

(210,691.35*6%)=12,641.48

(16,000-12,641.48)=3,358.52

(210,691.35-3,358.52)=207,332.83

3.Preparation of the journal entry to record the interest revenue and the amortization on December 31, 2017.

31/12/2017

Dr Interest receivable 16,000

($200,000*8%)

Cr Interest revenue 13,010

($216,849.76*6%)

Cr Premium on bonds receivable 2,990

(16,000-13,010)

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3 years ago
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