1. Assuming the stand-alone valuation in Table 9.10 is accurate, what is the imp

ID: 2656208 • Letter: 1

Question

1. Assuming the stand-alone valuation in Table 9.10 is accurate, what is the implied present value of Microsoft's anticipated synergies required for the firm to earn its cost of capital?

TABLE 9.10 Skype Stand-Alone Valuation Actual Forecast Period 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ASSUMPTIONS Net Revenue Growth Rate (%) EBIT as % of Net Revenue Marginal Tax Rate (%) Working Capital as % of Net Revenue -12.8 Amort. /Deprec. as % of Net Revenue 13.2 Capital Spending as % Net Revenue 0036 Software Industry Avg. Levered Beta1.06 Software Industry Avg. Debt/Equity" 0.05 Software Industry Avg. Debt/Total Capital Software Industry Avg. Unlevered Beta 1.03 Skype Debt-to-Equity Ratio Skype Levered Beta Skype Cost of Equity Skype Cost of Borrowing Skype Cost of Capital (2011-2020) Skype Cost of Capital (Terminal Period) 0.09 Terminal-Period Growth Rate (%) 0.35 0.35 0.3 0.25 0.2 0.15 0.1 0.4 0.2 0.2 0.08 0.07 0.06 0.05 0.04 0.04 0.04 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.35 0.35 0.35 0.45 0.45 0.42 0.15 0.35 0.38 0.36 0.34 0.32 0.3 0.3 0.2 0.25 0.25 0.25 0.25 0.25 0.25 0.3 0.35 0.35 0.35 0.3:5 0.49 0.15 0.2 0.13 0.1 0.036 0.04 0.045 0.05 0.22 1.35 0.12 0.03 0.11 0.05 Marginal Tax Rate ( 0.4

Explanation / Answer

Given:

Cost of Capital = 11% = 0.11

Year

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Perpetuity 2020

Free Cash Flow

521

564

662

851

856

864

908

1291

1464

1742

15836.4

Present Value

469.4

457.8

484.0

560.6

508.0

461.9

437.3

560.2

572.3

613.5

5577.3

Net Present Value

10702.4

Perpetuity 2020 free cash flow = (1742/0.11) = $15836.4

Present Value= (521)/(1.11) +(564)/(1.11^2) + (662)/(1.11^3) +(851)/(1.11^4) +(856)/(1.11^5) +(864)/(1.11^6) + (908)/(1.11)^7 + (1291)/(1.11)^8 + (1464)/(1.11)^9 + (1742)/(1.11)^10 + (15836.4)/(1.11)^10

= $10702.4