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%
