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BlackZzzverrR [31]
3 years ago
8

Assume that your firm consists of Division 1 (40 percent of the firm) and Division 2 (60 percent of the firm). The capital struc

ture for each of the divisions is the same as for the firm as a whole; 20.0 percent debt, at a before-tax cost of debt of 6.0 percent, and 80.0 percent equity (i.e., D/E-0.25). Also assume that the firm calculates the cost of equity for each division using a divisional beta, where Division 1 has an unlevered beta of 1.20, while Division 2 has an unlevered beta of 1.46. Finally assume that the risk-free rate is 4.0 percent and the expected return on the market is 12.0 percent, and the firm's tax rate is 40%.Given this information, determine the difference between the WACC for Division 1 and the WACC for Division 2 Answer in decimal format, rounded to 4 decimal places. For example, if your answer is 1.334%, enter "O.0133"
Business
2 answers:
tresset_1 [31]3 years ago
6 0

Answer:

Division 1's WACC - Division 2's WACC = 11.752% - 14.6656% = - 1.9136% or Division 1 has the lower cost of capital of 1.9136% in absolute term comparing to Division 2.

Explanation:

Before starting, we need to convert unlevered beta into levered beta:

Levered beta of Division 1: 1.2 x ( 1 + (1-40%) x 0.25) = 1.38

Leverage beta of Division 2: 1.46 x ( 1+ (1-40%) x 0.25) = 1.679

Then, we start step by step as below:

First, using the CAPM model: Cost of equity = risk-free rate of return +  beta *(Market Rate of Return – Risk-free Rate of Return) , we find the cost of equity for Division 1 and Division 2.

  - Division 1's cost of Equity = 4% + 1.38 x( 12% -4%) = 15.04%

  - Division 2's cost of equity = 4% + 1.46 x (12% - 4%) = 17.432%

Second, determine the post-tax cost of debt applied for both Division: 6% x (1-tax rate) = 6% x (1 -40%) = 3.60%

Third, calculate the WACC for each Division:

  - Division 1's WACC = % of debt in capital structure x cost of debt + % of equity in capital structure x cost of equity = 20% x 3.6% + 80% x 15.04% = 11.752%;

  - Division 2's WACC = % of debt in capital structure x cost of debt + % of equity in capital structure x cost of equity = 20% x 3.6% + 80% x 17.432% = 14.6656%;

Finally, compare the WACC between the two Division:

Division 1's WACC - Division 2's WACC = 11.752% - 14.6656% = - 1.9136% or Division 1 has the lower cost of capital of 1.9136% in absolute term comparing to Division 2.

saul85 [17]3 years ago
3 0

Answer:

WACC of division 2 - WACC of division 1 = 1.9136%

Explanation:

Firstly, when we adjust beta of firm (unlevered beta) for financial leverage, we wil have equity beta (levered beta). Equity beta will be calculated as below:

Levered beta = Unlevered beta x [1 + (1 - Tax rate) x (Debt/Equity)]

Putting relevant number together, we have:

Levered beta of division 1 = 1.2 x [1 + (1 - 40%) x 0.25] = 1.38.

Levered beta of division 2 = 1.46 x [1 + (1 - 40%) x 0.25] = 1.679.

Next, we will calculated cost of equity for each division using capital asset pricing model:

Cost of equity = Risk-free rate + Beta x (Expected market return - Risk-free rate)

Putting relevant number together, we have:

Cost of equity of division 1 = 4% + 1.38 x (12% - 4%) = 15.04%.

Cost of equity of division 2 = 4% + 1.679 x (12% - 4%) = 17.432%.

Finally we will calulate WACC of each divsion as below:

WACC = After tax cost of debt x (Debt/Asset) + Cost of equity x (Equity/Asset)

Putting all the numbers together, we have:

WACC of division 1 = 6% x (1 - 40%) x 20% + 15.04% x 80% = 12.752%.

WACC of division 2 = 6% x (1 - 40%) x 20% + 17.432% x 80% = 14.6656%.

So, WACC of division 2 - WACC of division 1 = 1.9136%.

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pickupchik [31]

Answer:

Several low-risk portfolios With the higher returns:

  1. Municipal Bonds.
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Explanation:

  1. Municipal Bonds: Municipal bonds are loans made to local authorities by the creditors. Cities, territories, districts, or other municipalities.
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8 0
3 years ago
Lysol sanitizing wipes entered the market at a low sales price and was supported by heavy couponing. As the initial trial period
sergij07 [2.7K]

Answer:

True

Explanation:

Penetration pricing represents a marketing strategy employed by organisations with the goal of attracting customers to new products or services. These products or services are often offered at lower prices specifically to encourage people to test them and thus bring their awareness to the market, in other words, penetrate the market.

At times penetration pricing is not only used to acquaint consumers to a product, it is also used to thin out a competitor's customer base. Specifically, low prices and as stated in the question heavy couponing are strategies that are used to attract a wide number and range of customers to a product.

Lysol  therefore, used penetration pricing  based on low sales price and heavy couponing to attract consumers to its sanitizing wipes and when a satisfactory result had been achieved, the pricing rose and the couponing reduced. However, the consumer base is already established.

3 0
3 years ago
Read 2 more answers
In September 2019, the budget committee of Jason Company assembles the following data: 1. Expected Sales October $1,800,000 Nove
Sliva [168]

Answer:

$1,068,000

Explanation:

JASON COMPANY

Budgeted Income StatementFor the Month Ended October 31, 2019

Sales $1,800,000

Cost of goods sold

Inventory, October 1 $216,000

Purchases $1,068,000

Cost of goods available for sale $1,284,000

($1,068,000+$216,000)

Less: Inventory, October 31 $204,000

Cost of goods sold $1,080,000

($1,284,000-$204,000)

Gross profit $720,000

($1,800,000-$1,080,000)

Supporting Computations:

Budgeted cost of goods sold $1,080,000

Desired ending merchandise inventory 204,000

Total $1,284,000

Less: Beginning merchandise inventory ,($216,000)

Budgeted merchandise purchases$1,068,000

October

$1,800,000 × 60% = $1,080,000.

($1,700,000 × 60%) × 20% = $204,000.

$1,080,000 × 20% = $216,000.

6 0
2 years ago
Negotiated transfer prices
horrorfan [7]
The devision agrees a transfer price between themselves. This price may not reflect opportunity cost by producing and selling products. Reflects bargaining prowess of individual mangers.
6 0
2 years ago
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm’s t
posledela

Answer:

Based on the DuPont equation and given information, ROE of Harrington Inc is 13.818%.

Explanation:

We have to find the total equity and total debt of Harrington Inc in order to apply the DuPont equation for finding ROE because net income, sales of Harrington Inc. are already given.

- To find Harrington Inc's total debt, apply the Debt-to-capital formula: The Harrington Inc's total debt/The Harrington Inc's total capital = 45% =>  Harrington Inc's total debt = The Harrington Inc's total capital * 45% = $250,000 x 45% = $112,500;

- To find Harrington Inc's total equity, apply the accounting equation Asset = Liabilities + Owner's Equity: The Harrington Inc's total equity = The Harrington Inc's total asset - The Harrington Inc's total debt = $250,000 - $112,500 = $137,500;

- Using the Dupont equation, calculate the ROE as followed:

(NI/Sales)* (Sales/ Total assets) * (Total assets/ Total common equity) = (19,000/325,000) * ( 325,000/ 250,000) * (250,000/137,500) = 13.818%.

- Thus, the ROE = 13.818%.

5 0
3 years ago
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