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Lenovo Wacc

In: Business and Management

Submitted By Rubin22
Words 1009
Pages 5
Lenovo Group Limited
Background:
Lenovo Group Limited is a technology company that is principally engaged in the sales of personal computers, tablets, smartphones and other cutting-edge technology. It is the global leader in personal computer sales.i While it operates in over 160 countries, 38% of its sales (over
68% of adjusted pre-tax income) come from China.ii Lenovo trades on the US OTC market
(LNGVY) at $31.10 a share and trades on the Hong Kong stock exchange (0992:HK) at
HKD11.94 a share. Its total market capitalization as of 9/19/2014 is about $16.2B with around
520.4M shares outstanding. Lenovo operates in over 160 countries and has a global headcount of
54,000. Lenovo breaks its performance into four geographic regions in its annual report: China,
Asia Pacific (AP), Americas (AG), and Europe-Middle East-Africa (EMEA). In the fiscal year ended March 31, 2014, China accounted for 38% of total revenue, AP accounted for 16% of total revenue, AG accounted for 21% of total revenue, and EMEA accounted for 25% of total revenue.
Additionally, revenue is broken up as follows: 51% is in notebook sales, 28% is in desktop sales,
15% is in mobile internet devices, and the rest is in other areas.iii
Cost of Equity:
Re=Rf + CRP + β (MRP) = 2.59% + .90% + .76 (3.07%) = 5.82%
To calculate Lenovo’s cost of equity, I used a method of CAPM in which I added a country risk premium to the standard CAPM equation.
Rf =2.59%
In order to maintain consistency between cash flows and the risk free rate, I chose to use the current yield on a 10-year treasury bond to estimate the risk free rate because Lenovo reports its results in US dollars. The current yield on a 10-year treasury bond is 2.59%. iv β u = β L / (1 + (1 – t) (D/E)) = .81 / (1 + (1 – .25) (.0883)) = .76
I compared the monthly returns of Lenovo over the past five years to the average monthly returns of a group of five large...

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