SuperOnline is a company composed of two divisions: online commerce and fintech. It is planning to spin off its fintech division. Currently, SuperOnline has 10 million shares of stocks trading at $170. Its debt / value ratio is 10%. It will keep its debt /value ratio constant forever (even after spin-off). The online commerce division’s EBIT is expected to be 100 million at the end of this year and is expected to grow by 2% every year. Fintech division’s EBIT is expected to be 50 million at the end of this year and is expected to grow 7% every year. 

Fintech division’s current debt is 150 million and it will keep its debt/value ratio constant forever (even after spinoff). EasyFintech is SuperOnline’s fintech business rival and it is only in fintech business. EasyFintech’s debt/equity ratio is 25%, its cost of equity is 15%. Assume all debts are riskless. The risk-free rate is 10%. The market Risk premium is 8%. The tax rate is 35%. 

(a) What is the cost of capital for SuperOnline’s fintech division?

(b) What is the fair value of SuperOnline’s fintech division’s equity? 

(c) Compute the value and debt of the online commerce division of SuperOnline (3pt) (d) What is the cost of capital of SuperOnline’s online commerce division?

Answer rating: 100% (QA)

a Cost of capital for Fintech Division Cost of equity x EquityDebt Equity Cost of debt x DebtDebt Eq... View the full answer