Your compary has two divisions: One division sells software and the other divisi

Question

Your compary has two divisions: One division sells software and the other division sells computer through a direct sales channel, prinarily taking orders over the interent. 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 1.25, the risk -free rate id 4.3 percent its market value of equity if dollor 65.6 billion, and it has dollor 695 million worth of debt with a yield to maturity of 6.2percent Your tax rate is 38percent and you use a market risk premium of 5.1percent in your WACC estimates. what is an estimate of the WACC for your computer sales division? If your overall company WACC is 11.2 percent and the computer sales division represents 43percent of the value of your firm, what is an estimate of the WACC for your software division? What is an estimate of the WACC for your computer sales division? The weighted average cost of capital for your computer sales division is percent

Explanation / Answer

WACC = (Equity / Total Capital) * Cost of Equity + (Debt / Total Capital) * Cost of Debt * (1 - Tax Rate) In the given problem : Total Capital = 65,600 million USD Equity + 695 million USD Debt = 66295 million USD Using the formula given above, WACC = (65600/66295)*(5.1%-4.3%)*1.25 + (695/66295)*6.2*(1-38%) 13.93% Thus the weighted average cost of capital for your computer sales division is 13.93%.

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