Sp returns in excess of 1 year t bills prior 50 years

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S&P returns in excess of 1-year T-bills (Prior 50 years) 8.00% S&P returns in excess of 10 year T-bonds (Prior 50 years) 6.00% Consumer Electronics Industry returns in excess of 1-year T-bills (Prior 50 years) 9.00% Consumer Electronics Industry returns in excess of 10-year T-bonds (Prior 50 years) 7.00% Exhibit 12: Scatter Plot of Minecraft stock versus S&P 500 Monthly returns (Prior three years)y = 0.56x - 0.00R² = 0.1681-30.00%-25.00%-20.00%-15.00%-10.00%-5.00%0.00%5.00%10.00%15.00%20.00%-40.00% -30.00% -20.00% -10.00%0.00%10.00%20.00%30.00%Return on MINEReturn on S&P 500Minecraft
20 Exhibit 13: Selected Data on Other Leading Consumer Electronics Manufacturers Company Name and Nature of Business Equity Beta*Market Leverage (D/V)**Last Year’s Revenues (Billions $) San Yo Corporation (Consumer Electronics) 2.00 0.79 $4.23 Sharp Devices Corporation (Consumer Electronics) 0.60 0.30 $2.49 * Equity beta is estimated by regressing the monthly returns over last 3 years against the returns on S&P500 index **Market Value of total debt divided by the sum of market value of total debt and the market value of equity Exhibit 14: Returns on Gold and Silver Prior 3 years 17.What is the WACC that Minecraft should use to evaluate upcoming projects and for future evaluation of managerial performance? (20 points) 4.56% We are asked to calculate the WACC. The weighted average cost of capital (WACC) is defined as: (1)deDEWACCRRVVwhere D represents the market value of debt, E is the market value of equity, V is the market value of the firm (debt plus equity), Rdis the cost of debt, Reis the cost of equity, and τ is the corporate tax rate. Let’s determine each component in turn.
21 To get the capital structure weights, we need to remember that we want the TARGET weights. We are told in the write-up that “the target debt/equity ratio for the company was only 25%.” Thus, D/E = 0.25. We need D/V and E/V. Remember that to get from D/E to D/V we can use the fact that V=D+E thus, D/V = D/(D+E). Also, D/E = 0.25 means that D = 0.25E. Alternatively, E=4D. Thus, we can plug that equation into the first. So D/V = D/(D+4D) = D/5D = 1/5. D/V = 1/5 while E/V = 4/5. D/V = 0.20 and E/V = 0.80 We are also told in the write-up that the applicable tax rate is 40%. Hence, all that is left to do is to determine the cost of debt and the cost of equity. For cost of equity, we want the YTM of the firm’s bonds. However, we are told that the bonds are trading at par. Recall that if bonds are trading at par, the YTM equals the coupon rate and thus the YTM of the bonds must be 4%. All that is left is to determine the cost of equity for the firm. We can do this with CAPM. ()()*()ifiE RrEE MRPFor the risk-free rate, we want to use the current risk-free rate. Exhibit 11 gives us current Treasury rates for maturities of 1-year and 10-years. Since we are estimating the cost of capital for the firm, which presumably is long-term, we want to use a long-term rate. This eliminates the 1-year rate and thus we would use the 10-year rate. Thus, the risk-free rate is 3%. For the market risk premium, we will need to estimate it from historical premiums. Exhibit 11 provides different types of risk premiums for different lengths of time. The first set of premiums

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