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.
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.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter9: The Cost Of Capital
Section: Chapter Questions
Problem 13MC: m. Jana is interested in establishing a new division that will focus primarily on developing new...
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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.
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