Your company has 2 divisions: One division sells software and
the other division sells computers through a direct sales channel,
primarily taking orders over the web. You have decided that Dell
Computer is very similar to your computer division, in terms of
both risk + financing. You go online and find the following info:
Dells beta is 1.21, the risk-free rate is 4.5%, its market value of
equity is $67 billion, and it has $700 million worth of debt with a
yield to maturity of 6%. Yours tax rate is 35% and you use a market
risk premium of 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 12% and the computer sales division represents 40% of the value of your firm, what is an estimate of the WACC for your software division?
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