- 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
alone companies that serve same industry
- Select three
- Calculate unlevered equity for each company
- Compute an average unlevered equity
- Re-lever the cost of equity for your division
- New re-levered cost of equity
- Company capital structure
- Company tax rate
DIVISIONAL COST OF CAPITAL
- 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
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
- Typically higher than the company’s average tax rate because ‘corporate headquarters’ is normally a generator of tax benefits for the company.