9-5 The Cisco Systems Corporation is the worldwide leader in networking for the...
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9-5
The Cisco Systems Corporation is the worldwide leader in networking for the Internet. The company was founded in 1984 by two computer scientists from Stanford University seeking an easier way to connect different types of computer systems. Cisco Systems is now a multi-national corporation, with over 35,000 employees in 115 countries. Today, Cisco solutions are the networking foundations for service providers, small to medium businesses and enterprise customers (corporations, government agencies, utilities and educational institutions). Ciscos networking solutions connect people, computing devices and computer networks, allowing people to access or transfer information without regard to differences in time, place or type of computer system. At present, the companys assets are financed with long-term debt and ordinary equity. You have the following information on the firms equity: o The company has 75,000 ordinary shares outstanding. o The current price of the firms common stock is $55. o Cisco will pay a $3.50 dividend per share one year from now. o The firms dividend is expected to grow by 6% per year after that. You have the following information on the companys debt: o The Cisco Systems Corporation has 4,000 bonds outstanding. o These bonds have been issued for a period of 6 years. o The current market interest rate for bonds with a similar risk profile is 5%. o The coupon payments on the bonds are on an annual basis and constitute 7% of the face value. Total book value of the firms equity is $3 million and $5 million for debt. The applicable corporate tax rate for the company is 25%. In answering the questions that follow, you will need to show all workings and intermediate calculations along with the final answer. a. Discuss the effect of taxes on various costs of capital and explain the impact that taxes have on the firms (1) cost of debt and (2) cost of equity. Show calculations, if applicable.
b. Calculate the corporate WACC for the Cisco Systems Corporation.
9-5
The Cisco Systems Corporation is the worldwide leader in networking for the Internet.
The company was founded in 1984 by two computer scientists from Stanford University seeking an easier way to connect different types of computer systems.
Cisco Systems is now a multi-national corporation, with over 35,000 employees in 115 countries.
Today, Cisco solutions are the networking foundations for service providers, small to medium businesses and enterprise customers (corporations, government agencies, utilities and educational institutions).
Ciscos networking solutions connect people, computing devices and computer networks, allowing people to access or transfer information without regard to differences in time, place or type of computer system.
At present, the companys assets are financed with long-term debt and ordinary equity.
You have the following information on the firms equity:
o The company has 75,000 ordinary shares outstanding.
o The current price of the firms common stock is $55.
o Cisco will pay a $3.50 dividend per share one year from now.
o The firms dividend is expected to grow by 6% per year after that.
You have the following information on the companys debt:
o The Cisco Systems Corporation has 4,000 bonds outstanding.
o These bonds have been issued for a period of 6 years.
o The current market interest rate for bonds with a similar risk profile is 5%.
o The coupon payments on the bonds are on an annual basis and constitute 7% of the face value.
Total book value of the firms equity is $3 million and $5 million for debt.
The applicable corporate tax rate for the company is 25%.
In answering the questions that follow, you will need to show all workings and intermediate calculations along with the final answer.
a. Discuss the effect of taxes on various costs of capital and explain the impact that taxes have on the firms
(1) cost of debt and (2) cost of equity. Show calculations, if applicable.
b. Calculate the corporate WACC for the Cisco Systems Corporation.
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