Assume that your company is made up of two divisions

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June 7th, 2024

Assume that your company is made up of two divisions. Division 1 comprises 50 percent of the company while Division 2 makes up 50 percent of the company. The levered beta for the company as a whole is equal to 1.10 and the company’s debt/value ratio is 50 percent (you may assume that appropriate values for Division 1 and 2 are also 50 percent). If the risk-free rate is 4.0 percent, the market risk premium is 10.00 percent, the marginal tax rate is 40 percent, and the before-tax cost of debt is 6.00 percent then, as you can calculate, the WACC for the company is 9.30 percent.Now assume that other “pure” companies equivalent to Division 2 have an average unlevered beta of 0.58. Using this proxy for Division 2’s unlevered beta, you should be able to determine (back out) the unlevered beta for Division 1, re-lever both betas, calculate the corresponding cost of equity, and then determine the appropriate WACC for each division. (For the purposes of levering and un-levering betas, you may use the Hamada equations and assume that the beta for debt is equal to zero.) Given this information, determine the appropriate WACC for Division 1.

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