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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.
http://csimarket.com/stocks/competitionSEG2.php?code=GE
  • 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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