From the capm model the cost of equity was calculated

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was suffering through the 2009 recession, I estimated the market risk to be 10%. From the CAPM model, the cost of equity was calculated at 15.24% In 2008, Sun had $1.26 billion of long-term debt, or 20.37% of the firm’s value. According to Moody’s rating, Sun Microsystems had its bond rating at Ba1 (or BB+ for S&P rating). The corporate bond yield of equivalent ratings corporation was 11.42%. As a result, I used 11.42% as a cost of debt. Finally, the weighted average cost of capital (WACC) was calculated at 14.46%. This rate was used as a discounted rate to estimate the firm value. 3. Sun’s equity value
Exhibit 1 in the last page shows the forecasted income statement of Sun Microsystems. In addition, I added a few calculations to come up with the FCF of the company. The FCF formula is: FCF = EBT + Depreciation – Change in Working Capital – Change in Capex In this case, I added depreciation expense back to operating income and subtracted the change in investment of PP&E. There was not enough information to estimate the working capital because there were large fluctuations in current assets and current liabilities in the past years without any justification. As a result, I omitted working capital in the calculation. From exhibit 1, it showed that the Sun performed poorly during the recession in 2009. But it shows improvements in the following five years by generating positive cash flows at the increasing rate. The next important task was to estimate the constant growth rate (g) for Sun Microsystems. Exhibit 2 in the last page shows the sensitivity analysis of Sun with different constant growth rates in the range from 2% to 8% which indicated the worst and the best scenarios. At the rate of 6%, the company’s stock price was $9.64 per share which was approximately equaled to Oracle offering price, $9.5 per share. IV. Conclusion/Summary Merging with Sun Microsystems would add the prized Java, MySQL, and Solaris platforms to Oracle’s portfolio. The move possibly created cannibalization on Oracle’s software, but the real effects was minimal because different software uncompetitively appealed to different
customers. With Sun’s support, Oracle could expand its market share to the lower-end customers

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