Question

In this question you are required to extract financial information on Texas Instruments which can be found in its annual report. You should refer in

particular to Texas Instruments’ 2019 consolidated financial statements. The notes to these statements may also be relevant. You are required to:

a. use two appropriate methods to calculate the cost of equity for Texas Instruments

b. use two methods to calculate a cost of debt for Texas Instruments

c. If you have to select one of the methods from above, which one would you choose and why?

d. If you would be prospective investor, would you invest in Texas shares or bonds? Specify the reason.

Make sure you clearly describe and reference the source of the information used in your calculations. If you would like to use an additional approach that requires external information, you should provide details of these additional sources and your reasons for using them.

Note the following:

· the risk-free rate is 1.64% p.a.

· the equity risk premium is 3% p.a.

In addition to your numerical work, you should provide an explanation of your methodology and justify your choice of inputs in the formul

Answer 1

Source 10-k : https://www.sec.gov/ix?doc=/Archives/edgar/data/97476/000009747620000009/txn-20191231.htm

a) Cost of Equity - CAPM Method ( Capital Asset Pricing Model

= R_{​​​​​F +} (R_{​​​​​m} - R_{​​​​f}​)

R_​​F = Risk free rate

R_{​​​​​​M -} R_{​​​​​F =} Equity Risk Premium

As per the question Risk free rate = 1.64% p.a and Equity Risk Premium = 3% p.a

Beta = 1.12

Source for Beta : https://finance.yahoo.com/quote/TXN/

CAPM = 1.64 + 1.12(3)

= 1.64 + 3.36 = 5%

b) Ke using dividend (assuming no growth rate)

Ke = DIVIDEND PER SHARE/CURRENT MARKET PRICE OF SHARE

= 3.6/133.89 = 2.68%

Source for dividend and current market price:

https://www.nasdaq.com/market-activity/stocks/txn/dividend-history