Problem 2 (22 marks): Skyworks Solutions, Inc. (Skyworks) is engaged in the production of analog semiconductors. Skyworks is considering expanding into a new line of business by developing a line of cloud-based computing services. Currently, Skyworks has a before tax cost of debt of 8%, and an effective tax rate of 40%. Its stock has twice as much systematic risk as the market portfolio, and the firms debt to equity ratio is 0.4. The firm has identified a pure play company (Salesforce.com) whose only business is offering cloud-based computing services to major U.S. companies. Salesforce.com also has a before tax cost of debt of 6%, its beta is 3, and it has a debt to equity ratio of 0.50. The effective tax rate of Salesforce.com is 30%. The expected return on the market is 7%, and the risk free rate of interest is 3%.

a) Determine the appropriate discount rate (WACC) Skyworks should use for evaluating new projects within its business of analog semiconductors production. (6 marks)

b) Determine the appropriate discount rate (WACC) Skyworks should use for evaluating the new venture if the new venture will have a debt to equity ratio similar to that of Skyworks. (12 marks)

c) What would happen if Skyworks uses the WACC of its business of analog semiconductors production to evaluate this new venture? Briefly explain. No calculations are required. (4 marks)