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Enterprise value and beta of business assets

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In Mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity beta of .90 (as report on Yahoo! Finance). Included in AOL's assets was 1.5 billion in cash and risk free securities. Assume that the risk free rate of interest is 3% and the market risk premium in 4%.
A - What is AOL's enterprise value?
B - What is the beta of AOL's business assets?
C - What is AOL's WACC?

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Your corporate finance question was listed as follows:

In Mid-2012, AOL Inc. had $100 million in debt, total equity capitalization of $3.1 billion, and an equity beta of .90 (as report on Yahoo! Finance). Included in AOL's assets was 1.5 billion in cash and risk free securities. Assume that the risk free rate of interest is 3% and the market risk premium in 4%.
A - What is AOL's enterprise value?
B - What is the beta of AOL's business assets?
C - What is AOL's WACC?

This question touches on the different ways that financial analysts consider companies as a mix of equity and debt instruments.

Part A
Enterprise value (EV) is calculated as the sum of debt and equity minus cash and other short term investments. The idea behind EV is that it is what an investor would need to pay to own all the assets of a company after selling off any extra cash or other short term securities that are lying around.
As an example, ...

Solution Summary

The enterprise values and beta of business assets are provided. The AOL's WACC is determined.

$2.19
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The Capital Asset Pricing Model

Assignment:

Using Yahoo! Finance find the value of beta for Verizon wireless. Discuss the following items:

a. What is the estimated beta coefficient of your company? What does this beta mean in terms of your choice to include this company in your overall portfolio?

b. Given the beta of your company, the present yield to maturity on U.S. government bonds maturing in one year (currently about 4.5% annually) and an assessment that the market risk premium (that is - the difference between the expected rate of return on the 'market portfolio' and the risk-free rate of interest) is 6.5%, use the CAPM equation in order to find out what is the present 'cost of equity' of your company? Explain what is the meaning of the 'cost of equity'.

c. Choose two other companies, look up their "Beta" and report the names of these companies and their betas. Suppose you invest one third of your money in each of the stocks of these companies. What will the beta of the portfolio be? Given the data in (b), what will the Expected Rate of Return on this portfolio be? Do you feel that the three-stock portfolio is sufficiently diversified or does it still have risk that can be diversified away? Explain.

Make sure to demonstrate a strong understanding of the concept of beta and the risk/return trade off.

response is 658 words, includes computations

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