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You have the opportunity to visit sap ag

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Reference no: EM13652199

SAP AG

You have the opportunity to visit SAP AG, the business software company. Based in Walldorf, Germany, SAP offers software development and implementation in application areas such as accounting, logistics and human-resource management to large businesses in Europe, North America and around the world. In 2000 the company had sales of over EUR 6.2 billion.

In recent months the company's stock price has been depressed, and management is concerned about re-examining the financial structure. Management is also concerned with the financing of forthcoming acquisitions: should SAP continue to take advantage of its strong cash flow, or should it begin to use debt financing? If it does raise additional debt, the proceeds will be used for a stock buyback.

You have been asked to evaluate whether the company has an appropriate amount of debt. You have collected the following information about SAP's current position:

 

Current share price: 117 EUR

Shares outstanding: 316 million

Beta of the stock based on the German DAX index: 1.3

Debt outstanding: 200 million EUR

Debt rating: AAA

Market rate on bonds with rating AAA: 5.65%

Government 10-year bond rate: 4.80%

DAX long-run expected return: 9.80% or 5% over governments

Company's marginal tax rate: 38%

2001 estimated pre-tax profit: 1568 million EUR

2001 estimated book value of equity 3734 million EUR

Based on the company's business, its interest coverage and other factors, you have prepared a table showing what an increase in long term debt would do to the company's ratings and its cost of borrowing as well as several key ratios:

Additional New Rating Interest Interest Interest Debt/ Debt/

Debt rate expense coverage ratio capitalization book

Equity

0 AAA 5.65% 11 139.76 1% 0.1

2500 AAA 5.65% 153 11.28 7% 0.7

5000 A+ 6.22% 323 5.85 14% 1.4

7500 A- 6.56 669 3.34 27% 2.7

10000 BB- 9.40% 1,429 2.10 41% 4.1

Should SAP take on additional debt? If so, how much?

What is the weighted average cost of capital before and after additional debt?
How much does SAP's value increase/decrease as a result of the lower/higher cost of capital?

Reference no: EM13652199

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