You are the Chief Financial Officer of Oracle Corporation. A number of financial

Question

You are the Chief Financial Officer of Oracle Corporation. A number of financial opportunities have been presented and you are looking for the best plan to continue growing your $63 billion market cap. Use the Value Line provided for answering the following questions. Disregard any current information you are familiar with about Oracle when doing this analysis. a) Larry Ellison, Chairman, CEO, and majority stockholder, has just come to you and has suggested a preferred stock offering to allow for continued growth of Oracle’s wireless networking ideas. What would adding an additional $500 million do to the capital structure of Oracle? Current debt costs 7.5%, equity costs 12.14%, and preferred stock would cost 10.11 percent. Current weights for debt are 3% and for common stock is 97%. Weights would become approximately 3%, 5% for preferred and 92% for common. The wireless internet investment has an internal rate of return of about 22% per year. (10 points) b) Oracle is attempting to purchase Peoplesoft. Peoplesoft is trading at $15.25 per share. Oracle offered $19.50 per share. Given the current price listed, what is the ratio of exchange? (5 points) c) Given the P/E ratio, the book value, and beta considerations, is the stock over-priced, under-priced, or just right? Should they be paying a dividend? What information is not provided that would help with this decision? (10 points) d) IBM has made a tender offer for Oracle of $21.00 per share. What issues should be looked at when considering this offer?

Explanation / Answer

Answer to Part a)

If additional capital of $ 500 million is added, the Weighted rate of return will change as detailed below:

Current Weighted Rate of return = (0.03 * 0.075) + (0.97 * 0.1214) = 11.77%

Proposed Weighted Rate of return = (0.03* 0.075) + (0.05 * 0.1011) + ( 0.92 * 0.1214)

Proposed Rate of return = 11.17%

Answer to Part b)

Peoplesoft Current trading price = $ 15.25

Offered Price = $ 19.50

Ratio of Exchange = 19.50/15.25 = 1.28 shares for 1 shre of Peoplesoft

Answer to Part c)

The details about Net income and beta are not provided

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