Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.18, the risk-free rate is 4.1%, its market value of equity is $67.4 billion, and it has $704 million worth of debt with a yield to maturity of 5.5%. Your tax rate is 40% and you use a market risk premium of 5.9% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 12.9% and the computer sales division represents 41% of the value of your firm, what is an estimate of the WACC for your software division? a. What is an estimate of the WACC for your computer sales division? The weighted average cost of capital for your computer sales division is 10.98 %. (Round to two decimal places.) b. If your overall company WACC is 12.9% and the computer sales division represents 41% of the value of your firm, what is an estimate of the WACC for your software division? The WACC for your software division is 14.23 %. (Round to two decimal places.)
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.18, the risk-free rate is 4.1%, its market value of equity is $67.4 billion, and it has $704 million worth of debt with a yield to maturity of 5.5%. Your tax rate is 40% and you use a market risk premium of 5.9% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 12.9% and the computer sales division represents 41% of the value of your firm, what is an estimate of the WACC for your software division? a. What is an estimate of the WACC for your computer sales division? The weighted average cost of capital for your computer sales division is 10.98 %. (Round to two decimal places.) b. If your overall company WACC is 12.9% and the computer sales division represents 41% of the value of your firm, what is an estimate of the WACC for your software division? The WACC for your software division is 14.23 %. (Round to two decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily
taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and
financing. You go online and find the following information: Dell's beta is 1.18, the risk-free rate is 4.1%, its market value of equity is $67.4
billion, and it has $704 million worth of debt with a yield to maturity of 5.5%. Your tax rate is 40% and you use a market risk premium of 5.9%
in your WACC estimates.
a. What is an estimate of the WACC for your computer sales division?
b. If your overall company WACC is 12.9% and the computer sales division represents 41% of the value of your firm, what is an estimate of the
WACC for your software division?
a. What is an estimate of the WACC for your computer sales division?
The weighted average cost of capital for your computer sales division is 10.98 %. (Round to two decimal places.)
b. If your overall company WACC is 12.9% and the computer sales division represents 41% of the value of your firm, what is an estimate of the
WACC for your software division?
The WACC for your software division is 14.23 %. (Round to two decimal places.)
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