our company has two divisions: One division sells software and the other diVIsion sells computers through a direct sales channel, primanily taking orders over the internet. You have decided that D 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 1.19, the risk-free rate is 4.2%, its market value quity is $66.5 billion, and it has $705 million worth of debt with a yield to maturity of 5.5%. Your tax rate is 35% and you use a market risk premium of 5.5% 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 37% 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.

our company has two divisions: One division sells software and the other diVIsion sells computers through a direct sales channel, primanily taking orders over the internet. You have decided that D 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 1.19, the risk-free rate is 4.2%, its market value quity is $66.5 billion, and it has $705 million worth of debt with a yield to maturity of 5.5%. Your tax rate is 35% and you use a market risk premium of 5.5% 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 37% 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.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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ou are considering setting up a firm to produce widgets. The cost of the project is $30 today. The demand for widgets is uncertain. It can be either high or low with equal probability. When the demand is high, cash flows in t = 1 are $66 and when the demand is low, cash flows in t = 1 are $34. The discount rate is 10%. What is the NPV of the project? Suppose you can commission a study that tells you whether the demand for widgets will be high or low. The study takes one year to complete. That is, if you commission the study you must decide in t = 1 whether to invest. If you invest the cash flows will arrive in t = 2. What is the maximum amount you are willing to pay for the study today?
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