Analysis the Sprint Nextel Corp - Essay Example

? Sprint Nextel Corporation analysis. Dear Mr. Qian, Sprint Nextel Corporation This company was established in 1899 and has been expanding its operations to date. The company went into international operations in 1990. It was the first company to offer internet in access 1992. In 2000, it was offering services in over 70 countries. In 2001, it became the first company to introduce a wireless Java for networking. Sprint Nextel Corporation offers a range of fixed, mobile, and broadband communications products and services. Sprint Nextel is widely recognized for developing, engineering and deploying innovative technologies. Internationally, it is known for internet networking and major development in technology. The cost of debt for the company can be computed by analyzing the various components of debts. These include bond issues, treasury bills, loans etc. Sprint Nextel has a variety of bond issues with different maturities (see table 1). This analysis will focus on the head quarter’s debt component analysis only (see table2). The coupons outlined here are three with the respective maturity dates. The value of a similar bond at similar rates is analyzed as having a par value of $1000 for the Canadian debt and $2500 for the unsecured notes. These are used to find the price of each bond. By discounting the annuity and the lump sum at maturity for each bond, the price of each bond is obtained. This method uses trial and error to ascertain the cost of each bond. The assumption made is that similar bonds yield $1000 and $2500 respectively. This is for the purposes of discounting the return of the bond towards a set amount of expected as per today. Further analysis shows that the price of each bond is effective once we added the tax factor. The assumed taxation factor in the United States is 35%. The after tax cost of each bond is obtained by multiplying the cost of bond (pre-tax) with the factor (1-tax rate). Another aspect to consider is that the company is financed by a long term loan. Given the worldwide economic crisis, the cost of repayment of loans has tremendous increased by 5%. An assumption is made that the loan of $166,855 has an interest rate of 16%. This is the cost of this loan. The total cost of debt is the mean of the cost of the loan and the bond issues. Accounting for this, the cost of debt is obtained as 6.19% The cost of equity: The equity components are ordinary share capital and preference share capital. To obtain the cost of equity, I will include the ordinary capital in this case. This is done by obtaining the dividend payable in the coming year divided by the current market price and then multiplying it by dividend growth. For the last three years, the financial statements indicate no dividend payment made by the firm. This trend is assumed to be continuous in the coming year. Therefore the dividend value per share is zero and the growth is also zero. The current market share value stands at $ 2.74. By doing the necessary computation, the cost of equity is zero. Weighted average cost of capital WACC is obtained by adding weight to the various capital components i.e. debt and equity. Capital is made up of equity and debt in this firm. By summing debt and equity, I get their weights as: the debt has a total weight of 44% and equity has a total weight of 56%. These percentages are then multiplied by the above computation of cost of debt and equity respectively. The two are added giving WACC of 3.45% The firm’s beta The firm’s beta is a measure of risk to the company. This is obtained through the use of the indexes for United States multiplying with the cost of capital. The beta stands at 1.16 which is indicates low risk measure. This can be unlevered by adding tax aspect to obtain 0.61. Debt to equity ratio of Sprint is obtained as 27.7 this indicates low risk to the company. Calculations: Table 1 - combined industry bond issues SECURITY Coupon Amount Maturity Unsecured senior notes 7.625 1650 1/30/11 Unsecured senior notes 8.375 2000 3/15/12 Unsecured senior notes 6.9 1729 5/1/19 Unsecured senior notes 6.875 2475 11/15/28 Unsecured senior notes 8.75 2000 3/15/32 Unsecured senior notes 6.875 1473 10/31/13 Unsecured senior notes 5.95 1170 3/15/14 Unsecured senior notes 7.375 2137 8/1/15 Export development Canada 3.39 750 3/30/12 Unsecured senior notes 6 2000 12/1/16 Unsecured senior notes 8.375 1300 8/15/17 Unsecured senior notes 9.25 200 4/15/22 First lien sr. sec notes 2410 300 5/1/13 Second-lien sr. sec. notes 4280 181 5/1/14 Assumption- the cost of debt is calculated for the sprint Nextel Corporation only2 Table 2 – Sprint Nextel Corporation bond issues. SECURITY Coupon Amount Maturity Export development Canada 3.39 750 3/30/12 Unsecured senior notes 6 2000 12/1/16 Unsecured senior notes 8.375 1300 8/15/17 Unsecured senior notes 9.25 200 4/15/22 Kd(1-T)= effective cost of bonds Coupon= coupon rate*par value Coupon 1 3.39%*750/5months= 5.085 Coupon 2 6%*2000=120 Coupon 3 8.375%*1300=108.88 Coupon 4 9.25*200=18.5 Tax rate= 35% Assumption made: similar bonds in Canada yield $1000 Assumption made: unsecured senior notes yield $ 2500 To calculate the cost of bonds Pv= sum of discounted cfs 1000= 5(pvifakdn1)+ 750(pvifkdn1) 2500=120(pvifkdn5)+2000(pvifkdn5) 2500=108.9(pvifkdn6)+1300(pvifkdn6) 2500=18.5(pvifkdn11)+200(pvifkdn11) Using the trial and error method to compute kd for each of the bond, then the results are summed up below: Kd1= 3% Kd2=5% Kd3=7% Kd4=8% Cost of bond= kd(1-T) Cost of bond 1= 3%*65% =1.95% Cost of bond 2= 5%*65% =3.25% Cost of bond 3=7%*65% =4.55% Cost of bond 4=8%*65% =5.2% Cost of loan =16% Cost of debt= mean of the debt involved = (1.95%+3.25%+4.55%+5.2%+16%)/5= 6.19% Cost of equity = 0/2.74+0 =0 Assumption and justification The company has not paid the dividends for the last three years hence the same trend is assumed in the next year. The growth of dividend is therefore assumed to be zero. Weighted average cost of capital debt + equity= 18535+14546=33081 weight of debt=0.56 weight of equity=0.44 wacc= 56%*6.19%+0*44%=3.45% 3.45% Beta of the company BL - firm's beta with leverage. Tc - corporate tax rate. D/E - company's debt/equity ratio. 1.16/(1+(1-.35)*27.7)) =0.61 Tax rate is taken at the current value of 35% Debt to equity ratio is 27.7 References 1. Hoovers Inc, 2007, Hoover's Handbook of American Business 2008, Volume 1 18th Ed., Hoover's. 2. http://www.sprintnextelcorp.org , financial analysis, capital and debt analysis. retrieved on 10/11/2011 Read More