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 1.21, the risk-free rate is 4.1%, its market value of equity is $66.5 billion, and it has $692 million worth of debt with a yield to maturity of 6.4%. Your tax rate is 35% and you use a market risk premium of 5.8% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACCC is 12.2% and the computer sales division represents 45% of the value of your firm, what is an estimate of the WACC for your software division? Note: Assume that the firm will always be able to utilize its full interest tax shield. 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 %. (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 1.21, the risk-free rate is 4.1%, its market value of equity is $66.5 billion, and it has $692 million worth of debt with a yield to maturity of 6.4%. Your tax rate is 35% and you use a market risk premium of 5.8% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACCC is 12.2% and the computer sales division represents 45% of the value of your firm, what is an estimate of the WACC for your software division? Note: Assume that the firm will always be able to utilize its full interest tax shield. 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 %. (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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