Question

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 computer​division, 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

$66.4

​billion, and it has

$703

million worth of debt with a yield to maturity of

6.4%.

Your tax rate is

38%

and you use a market risk premium of

5.9%

in your WACC estimates.

a. What is an estimate of the WACC for your computer sales​ division?

b. If your overall company WACC is

11.2%

and the computer sales division represents

40%

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

11.4411.44​%.

​ (Round to two decimal​ places.)b. If your overall company WACC is

11.2%

and the computer sales division represents

40%

of the value of your​ firm, what is an estimate of the WACC for your software​ division?The WACC for your software division is

nothing​%.

Answer 1