Marcosoft Inc. is a publicly traded company that operates in the software and entertainment business, deriving...

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Finance

Marcosoft Inc. is a publicly traded company that operates in thesoftware and entertainment business, deriving 60% of its value fromsoftware and 40% from entertainment. You have collected thefollowing information on comparable firms:
Comparable companies
Leveraged beta
D/E ratio
Software industry
1.40
0.25
Entertainment
1.25
0.5
Macrosoft has 60 million shares outstanding, trading at$10/share and $180 million in 10-year corporate bonds (with acoupon rate of 4%) outstanding, trading at par. The company alsohas lease commitments of $40 million a year for the next 6 yearsand a marginal tax rate of 40%.
Estimate the current debt to equity ratio (in market valueterms) for Macrosoft (make sure to capitalise the leasecommitments)
Estimate the levered beta for the company
Estimate the current cost of equity for the company if riskfree rate (Rf) is 2% and the market risk premium (Rm – Rf) is5.8%
Finally, compute the cost of capital for the company

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4.0 Ratings (500 Votes)

a since bonds are trading at par we are assuming cost of debt is equal to the coupon rate Working Note 1 Fig in millions Year cashflow Tax40 After tax cashflow discount factor 4 PV of cashflows 1 40 16 See Answer

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Marcosoft Inc. is a publicly traded company that operates in thesoftware and entertainment business, deriving 60% of its value fromsoftware and 40% from entertainment. You have collected thefollowing information on comparable firms:Comparable companiesLeveraged betaD/E ratioSoftware industry1.400.25Entertainment1.250.5Macrosoft has 60 million shares outstanding, trading at$10/share and $180 million in 10-year corporate bonds (with acoupon rate of 4%) outstanding, trading at par. The company alsohas lease commitments of $40 million a year for the next 6 yearsand a marginal tax rate of 40%.Estimate the current debt to equity ratio (in market valueterms) for Macrosoft (make sure to capitalise the leasecommitments)Estimate the levered beta for the companyEstimate the current cost of equity for the company if riskfree rate (Rf) is 2% and the market risk premium (Rm – Rf) is5.8%Finally, compute the cost of capital for the company

	Comparable companies
	Leveraged beta	D/E ratio
Software industry	1.40	0.25
Entertainment	1.25	0.5