Your company has twoâ divisions: One division sells software and the other division sells computers through a direct salesâ channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computerâ division, in terms of both risk and financing. You go online and find the followingâ information: Dell's beta is 1.24â, theâ risk-free rate is 4.5 %â, its market value of equity is $ 65.6 billion, and it has $ 691 million worth of debt with a yield to maturity of 6.3%. Your tax rate is 38 % and you use a market risk premium of 5.2% in your WACC estimates.
a. What is an estimate of the WACC for your computer salesâ division?
The weighted average cost of capital for your computer sales division is __%? (Round to two decimalâ places.)
b. If your overall company WACC is 12.1% and the computer sales division represents 38% of the value of yourâ firm, what is an estimate of the WACC for your softwareâ division?
The WACC for your software division is ___%? (Round to two decimalâ places.)
Your company has twoâ divisions: One division sells software and the other division sells computers through a direct salesâ channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computerâ division, in terms of both risk and financing. You go online and find the followingâ information: Dell's beta is 1.24â, theâ risk-free rate is 4.5 %â, its market value of equity is $ 65.6 billion, and it has $ 691 million worth of debt with a yield to maturity of 6.3%. Your tax rate is 38 % and you use a market risk premium of 5.2% in your WACC estimates.
a. What is an estimate of the WACC for your computer salesâ division?
The weighted average cost of capital for your computer sales division is __%? (Round to two decimalâ places.)
b. If your overall company WACC is 12.1% and the computer sales division represents 38% of the value of yourâ firm, what is an estimate of the WACC for your softwareâ division?
The WACC for your software division is ___%? (Round to two decimalâ places.)
Related questions
c14
1.
Stock in Dragula Industries has a beta of 1.6. The market risk premium is 6 percent, and T-bills are currently yielding 5.50 percent. The companyâs most recent dividend was $1.90 per share, and dividends are expected to grow at a 7.0 percent annual rate indefinitely.
| If the stock sells for $38 per share, what is your best estimate of the companyâs cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| Cost of equity | % |
#4
You are given the following information for Lightning Power Co. Assume the companyâs tax rate is 30 percent.
| Debt: | 6,000 7.9 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. |
| Common stock: | 510,000 shares outstanding, selling for $69 per share; the beta is 1.12. |
| Preferred stock: | 29,000 shares of 4 percent preferred stock outstanding, currently selling for $89 per share. |
| Market: | 10 percent market risk premium and 5.90 percent risk-free rate. |
| What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| WACC | % |
#5
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.84 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debtâequity ratio of 0.75, a cost of equity of 12.4 percent, and an aftertax cost of debt of 5.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of 3 percent to the cost of capital for such risky projects.
| What is the maximum initial cost the company would be willing to pay for the project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) |
| Maximum cost | $ |
#6
Berta Industries stock has a beta of 1.25. The company just paid a dividend of $0.40, and the dividends are expected to grow at 5 percent. The expected return on the market is 12 percent, and Treasury bills are yielding 6.4 percent. The most recent stock price for Berta is $81.
| a. | Calculate the cost of equity using the DCF method. (Round your answer to 2 decimal places. (e.g., 32.16)) |
| DCF method | % |
| b. | Calculate the cost of equity using the SML method. (Round your answer to 2 decimal places. (e.g., 32.16)) |
| SML method | % |
