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 1.22, the risk-free rate is 4.3%, its market value of equity is $66.2 billion, and it has $706 million worth of debt with a yield to maturity of 6.4%. Your tax rate is 38% and you use a market risk premium of 5.3% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 11.9% and the computer sales division represents 35% 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.

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 1.22, the risk-free rate is 4.3%, its market value of equity is $66.2 billion, and it has $706 million worth of debt with a yield to maturity of 6.4%. Your tax rate is 38% and you use a market risk premium of 5.3% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 11.9% and the computer sales division represents 35% 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.

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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11. 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 Hewlett Packard is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Hewlett Packard's beta is 1.18, the risk-free rate is 4.7%, its market value of equity is $67.6 billion, and it has $694 million worth of debt with a yield to maturity of 5.9%. Your tax rate is 25% and you use a market risk premium of 5.9% in your WACC estimates. **round to two decimal places** 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 36% 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.

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