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

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 1.22, the risk-free rate is 4.9%, its market value of equity is S67.8 billion, and it has $707 million worth of debt with a yield to maturin' of 5.9%. Your tax rate is 40% and you use a market risk premium of 5.9% in your WACC estimates. What is an estimate of the WACC for your computer sales division? If your overall company WACC is 12.1% and the computer sales division represents 36% 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 12.01 %. (Round to two decimal places.) If your overall company WACC is 12.1% and the computer sales division represents 36% of the value of your firm, what is an estimate of the WACC for your software division? The WACC for your software division is

Explanation / Answer

From part A, we can see that you have calculated the WACC for the computer sales division as 12.01% which contributes to 36% of your total firm value

Hence weight of computer sales division Wcs = 0.36

Weight of software division is 1-0.36 = 0.64. Hence weight of Software division Wsd = 0.64

WACC for Computer sales = 12.01%

WACC for software division = ?

Overall Firm WACC = 12.1%

Hence overall WACC = Wcs* WACC of computer sales + Wsd * WACC of software division

= 12.1 = 12.01*0.36 + 0.64* WACC of software division

Hence WACC of software Division = 12.15%

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