ASSIGNMENT 1. For GE please calculate the WACC for one of the divisions. http://csimarket.com/stocks/competitionSEG2.php?code=GE

ASSIGNMENT

1. For GE please calculate the WACC for one of the divisions.

• Locate similar companies to that division
  •  Calculate their unlevered equity betas
  •  Re-lever the equity based on the division’s estimated capital structure
• For another company with multiple divisions (a company of your choice) calculate the WACC for one of its divisions.

– Risk characteristics of the Division are different than the risk characteristics of the Company as a whole

-Find comparative companies

1.  Stand alone companies that serve same industry
   1.  Select three
   1.  Calculate unlevered equity for each company
   1.  Compute an average unlevered equity
   1.  Re-lever the cost of equity for your division
   1.  Calculate WACC
      1. New re-levered cost of equity
      1. Company capital structure
      1. Company tax rate

HOMEWORK NOTES

DIVISIONAL COST OF CAPITAL

• Capital Structure
  •  Align with overall company – general rule
  •  Exceptions driven by debt to capital ratios sustainable by the cash flows of that business / industry. 
    •  Starting point:  debt to capital ratio OR interest coverage ratios for comparable companies
• Cost of Debt – use company
• Tax Rates  – use company or higher
• Cost of Equity – Appropriate to Risk of Assets

DIVISIONAL TAX RATE

• The relevant tax rate for a division would be what the tax rate would be if it didn’t operate as part of a larger company.
  •   Typically higher than the company’s average tax rate because ‘corporate headquarters’ is normally a generator of tax benefits for the company.
    •  Overhead costs reduce EBIT.
    •  May not be material

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