As the acting CFO of Oracle Corporation, you have been tasked with increasing th
ID: 2811219 • Letter: A
Question
As the acting CFO of Oracle Corporation, you have been tasked with increasing the company’s valuation. Several options are under consideration and need your assessment. (10 points each) The company may issue preferred stock to raise $500 million to fund new wireless networking products. The products are estimated to provide a 13% IRR. What is WACC currently? How much would it be if the preferred stock is issued? Is this a feasible alternative? Facts: Current debt costs 4.0% (net of tax), current equity costs 12.25%, and the preferred stock would cost 10.00%. Debt currently is $300 million and equity is $900 million. The company could choose to execute a stock buyback. Based on the ValueLine report provided, is Oracle’s stock overpriced, underpriced, or is it fairly priced? Is a stock buyback feasible?
ORACLE NOO RD 1 27.93|Rho 11.5(Meint 177)|PELAm .751 0.9% 01 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013VALUE LINE PUB LLC 15-1 kations softw3re, and hardware systems, primory cowssm of owers: Lawrence Elio, 224%; ote, rein & dots conputer server and skinge products. 2011 "wenn treakdor 08%GV11 proxy) Chami Jethey0. Herde, CEO Law erceLH 500 6t02 62 har tae system s. 123% hrivesuspot 94e5 Tel 6503067000 wer et ww me on uct support, 41st Oracle Corporation's software bui nlingod demand for its procducts and ness has recovered nicely, The roups services, whether in support of its custom- Deliliid Revenue 1 largepersh. 10.0% in stark contrast with the figures posted in 1 25% 19.0% 3Ist) on an up Exalyts. Meanwhile, from an operating coming in at somewhat better than $2.40 a timates for fiscal 2013 are $39.0 billion in our system, ard are now avorably and $2.60 a share, It appears that spen ranked for Timeliness. The evolution of sc stable so far in calendar 2012. with ture and the explosion of data being gener- ases of software and related systems ated, as mobile computing platforms have showing a degree of strength. True, the increasingly grown in popularity, present are uneven, given the dillicult situation in titon is keen its markets, contractin endar Mar 31 Jun.30 Sep.10 Dee3rts of Europe and slow B market has so far remained active, provid- stck may also interest investors with an ing a niament bakdrop or intermediate hortzon. 0 to 46 55 75 60 50 0 28-28 96 56 50 04 55 D 1-180 44 35 as- 11 213Explanation / Answer
Answer:
Equity = $900 million
Debt = $300 million
Weightage of equity = 900 / (900+300) = 0.75
Weightage of Debt = 300 / (900+300) = 0.25
Cost of Debt = 4%
Cost of Equity = 12.25 %
WACC = 12.25% * .75 + 4% * .25 = 10.18%
If preferred stock is issued:
Preferred stock Value = $500 million
Cost of preferred stock = 10%
Weightage of equity = 900 / (900+300+500) = .53
Weightage of Debt = 300 / (900+300+500) = .18
Weightage of Preferred stock = 500 / (900+300+500) = .29
WACC = 12.25%*.53 + 4%*.18 + 10%*.29 = 10.11%
Issuing preferred stock is a feasible alternative to raise fund. The reason is that company can raise fund without diluting the ownership. Unlike ordinary shares, preferred stockholder has no voting rights. But company has to give predefined dividend to the prefrerred stockholders. Further, Preferred stock is less risky than long-term debt financing. If the firm is unable to pay periodic dividend or to redeem preferred stocks at maturity, preferred stock holders cannot take the company into bankrupcy. Because, from legal point of view, preferred stockholders are owners of the company.
Note: since there is no information provided regarding valueline report of the company, we cannot recommend about the company's stock price.
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