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 4.3 %​, its market value of equity is $ 65.3 ​billion, and it has $ 705 million worth of debt with a yield to maturity of 6.2 %. Your tax rate is 35 % 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 12.5 % and the computer sales division represents 43 % 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.

Answer 1

Step-by-step explanation:

a) WACC of computer sales division:

Cost of equity = 4.3%+1.18×5.9%

=11.262%

WACC =(65300/(65300+705))×11.262%+(705/(65300+705))×6.2%×(1-35%)

=0.99*11.262% + 0.01*6.2%*0.65 = 11.15%+0.0403% = 11.2%

b. 12.5% = 43%×11.2%+57%×WACC (software div)

12.5% = 481.6% + 57%WACC

57%WACC = 469.1%

WACC (software division) = 8.23%