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?
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- 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 computerdivision, in terms of both risk and financing. You go online and find the following information: Dell's beta is 1.16, the risk-free rate is 4.6% its market value of equity is $65.5 billion, and it has $ 696 million worth of debt with a yield to maturity of 6.5%. Your tax rate is 38% and you use a market risk premium of 5.5% 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 41% 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.John Banks works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate WACC for an average-risk project in the expansion division. Richard finds two publicly traded stand-alone firms that produce the same products as his new division. The average of the two firms' betas is 1.25. Further, he determines that the expected return on the market portfolio is 13.00% and the risk-free rate of return is 4.00%. Banks's firm finances 50% of its projects with equity and 50% with debt, and has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?3. Choco Ltd, an all equity confectionery firm is about to engage in a major diversification into consumer electronic industry. Choco equity beta is 1.4, whilst the average equity beta of the electronic industry average is 1.5. Gearing in the electronic industry averages 35% debt and 65% equity. Corporate debt is risk free. Returns on the market are 20%, risk free return is 10% and corporate tax rate is 30%.RequiredWhat would be a suitable discount rate for the new investment if Choco Ltd were to finance the new project in each of the following ways?a. Entirely by equityb. By 40%debt and 60% equityc. Entirely debt
- Apex Industries Ltd. (AIL) asked you to find the required rate of return to be used for a new project it is going to take in Information Technology Industry (IT Industry). As part of your assignment you have collected the following information of a company in the IT Industry: Beta of the company’s equity is 1.5; Debt to value ratio of the company is 50%; Market risk premium is 8% (expected return of market portfolio minus risk-free rate), risk-free rate is 6%, The company’s cost of debt is 10% and its corporate tax rate is 30%. AIL wants to finance the project with a debt to value ratio of 40%. It can borrow at 8% interest rate and its corporate tax rate is also 30%. 1. Find out the required rate of return, i.e. RWACC, that AIL wants to use as the discount rate to find out the NPV of the project.…Situational Software Co. (SSC) is trying to establish its optimalcapital structure. Its current capital structure consists of 25% debt and 75% equity;however, the CEO believes that the firm should use more debt. The risk-free rate, rRF,is 4%; the market risk premium, RPM, is 5%; and the firm’s tax rate is 40%. Currently,SSC’s cost of equity is 12%, which is determined by the CAPM. What would beSSC’s estimated cost of equity if it changed its capital structure to 40% debt and60% equity?Hager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona, Hager’s treasurer and your boss, has been asked to place a value on the target and he has enlisted your help. LL has 20 million shares of stock trading at $12 per share. Security analysts estimate LL’s beta to be 1.25. The risk-free rate is 5.5% and the market risk premium is 4%. LL’s capital structure is 20% financed with debt at an 8% interest rate; any additional debt due to the acquisition also will have an 8% rate. LL has a 25% federal-plus-state tax rate, which will not change due to the acquisition. The following data incorporate expected synergies and required levels of total net operating capital for LL should Hager’s complete the acquisition. The forecasted interest expense includes the combined interest on LL’s existing debt and on new debt. After 2024, all items are expected to grow at a constant 6% rate. Note: aDebt is added on the first day of the year, so the 2019 debt is LL’s debt prior to the acquisition. Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board: What are the steps in valuing a merger using the compressed APV approach?
- Hager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona, Hager’s treasurer and your boss, has been asked to place a value on the target and he has enlisted your help. LL has 20 million shares of stock trading at $12 per share. Security analysts estimate LL’s beta to be 1.25. The risk-free rate is 5.5% and the market risk premium is 4%. LL’s capital structure is 20% financed with debt at an 8% interest rate; any additional debt due to the acquisition also will have an 8% rate. LL has a 25% federal-plus-state tax rate, which will not change due to the acquisition. The following data incorporate expected synergies and required levels of total net operating capital for LL should Hager’s complete the acquisition. The forecasted interest expense includes the combined interest on LL’s existing debt and on new debt. After 2024, all items are expected to grow at a constant 6% rate. Note: aDebt is added on the first day of the year, so the 2019 debt is LL’s debt prior to the acquisition. Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board: Why can’t we estimate LL’s value to Hager’s by discounting the FCFs at the WACC? What method is appropriate? Use the projections and other data to determine the LL division’s free cash flows and interest tax savings for 2020 through 2024. Notice that the LL division’s sales are expected to grow rapidly during the first years before leveling off at a sustainable long-term growth rate.Hager’s Home Repair Company, a regional hardware chain, which specializes in “do-it-yourself” materials and equipment rentals, is considering an acquisition of Lyon Lighting (LL). Doug Zona, Hager’s treasurer and your boss, has been asked to place a value on the target and he has enlisted your help. LL has 20 million shares of stock trading at $12 per share. Security analysts estimate LL’s beta to be 1.25. The risk-free rate is 5.5% and the market risk premium is 4%. LL’s capital structure is 20% financed with debt at an 8% interest rate; any additional debt due to the acquisition also will have an 8% rate. LL has a 25% federal-plus-state tax rate, which will not change due to the acquisition. The following data incorporate expected synergies and required levels of total net operating capital for LL should Hager’s complete the acquisition. The forecasted interest expense includes the combined interest on LL’s existing debt and on new debt. After 2024, all items are expected to grow at a constant 6% rate. Note: aDebt is added on the first day of the year, so the 2019 debt is LL’s debt prior to the acquisition. Hager’s management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Hager’s board: Briefly describe the differences between a hostile merger and a friendly merger.8. Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.85, the risk-free rate is 3.7%, and the market risk premium is 4.6%. If your firm's project is all-equity financed, estimate its cost of capital. The cost of capital is _____%. (Round to one decimal place.)
- Instructions: Assume the following data for two firms (U = unlevered firm) and (L = levered firm). Assume the two firms are in the same risk class when it comes to business risk. Both firms have EBIT = €1000 000. Firm U has zero debt and its required rate of return (KsU = 12%). Firm L has €2000 000 debt and pays 10% interest rate. Based on the data provided, answer the following questions and show all your computations and interpret your results. Find the value of unlevered (U) and levered (L) firms under zero corporate tax assumption. Find the market value of the firm’s L’s debt and equity. Do 1 and 2 under the assumption of corporate tax = 60%The conglomerate H has 2 divisions: A and B, representing 20.0% and 80.0% of the market value of H. By analyzing market participants who operate in the same sector as A and B, we conclude that the RoA of A and B are 28.0% and 25. 0%. H borrows at the risk-free rate 8. 0%. It is financed 40. 0% by equity and the rest by debt. The market risk premium is 20.0%. 1. Calculate the cost of capital for H! 2. Calculate the equity beta of H!Listed Digital Industry players have the following market value and earnings per share: Player Market Value per share Earnings per share P/E Ratio A 46.50 5.00 B 45.24 6.03 C 16.25 2.18 D 25.11 3.72 E 34.32 4.29 An analyst is looking into the performance of another firm in the same industry but is not listed, the company reported earnings of Php 1.25 per share. How much is the value of the firm?
