Your company has two divisions: One division sells software and the other division sells computers through...
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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 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 1.19, the risk-free rate is 4.8%, its market value of equity is $65.8 billion, and it has $694 million worth of debt with a yield to maturity of 6.4%. Your tax rate is 22% and you use a market risk premium of 5.4% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 12.4% and the computer sales division represents 42% 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. a. What is an estimate of the WACC for your computer sales division? The weighted average cost of capital for your computer sales division is 11.16 %. (Round to two decimal places.) b. If your overall company WACC is 12.4% and the computer sales division represents 42% of the value of your firm, what is an estimate of the WACC for your software division? The WACC for your software division is 13.96 %. (Round to two decimal places.) That's incorrect. The firm's WACC should be the weighted average of the divisional WACCS: WACC firm = 0.42xWACC computer +0.58 WACC software OK 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 1.19, the risk-free rate is 4.8%, its market value of equity is $65.8 billion, and it has $694 million worth of debt with a yield to maturity of 6.4%. Your tax rate is 22% and you use a market risk premium of 5.4% in your WACC estimates. a. What is an estimate of the WACC for your computer sales division? b. If your overall company WACC is 12.4% and the computer sales division represents 42% 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. a. What is an estimate of the WACC for your computer sales division? The weighted average cost of capital for your computer sales division is 11.16 %. (Round to two decimal places.) b. If your overall company WACC is 12.4% and the computer sales division represents 42% of the value of your firm, what is an estimate of the WACC for your software division? The WACC for your software division is 13.96 %. (Round to two decimal places.) That's incorrect. The firm's WACC should be the weighted average of the divisional WACCS: WACC firm = 0.42xWACC computer +0.58 WACC software OK
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