BWM operates two divisions: automobiles and financial services. The present value of all predicted cash flows from the automobile division is twice the present value of cash flows from the financial services division. BWM is a publicly listed company and has 25 billion shares outstanding, trading at $4.50 per share. Investors estimate that the current value of the automotive divisions equity is $65 billion. The marginal corporate tax rate of the company is 35%. BWM maintains a constant leverage policy with continuous rebalancing with a target debt-equity ratio for the whole corporation of 0.4. According to the latest estimations, the average unlevered asset beta and average debt beta in the financial services industry are 0.14 and 0.02, respectively. There is the following information on comparable companies in the automotive industry:

a) What is the value of BWM and each division? What is the debt-to-value ratio in each division?

b) Assume BWM cost of debt in the two divisions is in line with the industry average. What is the cost of levered equity for each division and for the company as a whole? Motivate assumptions used in your calculations.

c) What is the cost of debt for the company as a whole? Explain what the obtained value represents. What other ways of estimations of cost of debt can be used in practice?

d) Calculate the company-wide WACC and WACC for each division. Explain the consequences of using the company-wide cost of capital to benchmark projects in the automotive division, use examples in your discussion.

e) BWM invests in a new investment technology in the interests of all divisions of the company. The technology becomes obsolete after 3 years. During the next 3 years, the use of this technology generates sales of $2 billion per year, manufacturing costs of $0.8 billion per year. The costs for technology of $1.8 billion paid upfront will be depreciated via the straight-line method over that period. Keeping the target debt-equity ratio, how should BWM adjust its total debt with new investment?

D/V Company Toyota Volvo Nissan Volkswagen Equity Beta 1.46 1.32 1.44 1.45 0.58 0.41 0.45 Debt Rating . BB BBB A 0.53 The information on debt beta is given by rating: AAA-A 0.05 BBB 0.10 BB 0.17 B 0.26 CCC 0.31 Avg. Beta The risk-free rate is 3% and value-weighted return on wide stock-market index is 9%. D/V Company Toyota Volvo Nissan Volkswagen Equity Beta 1.46 1.32 1.44 1.45 0.58 0.41 0.45 Debt Rating . BB BBB A 0.53 The information on debt beta is given by rating: AAA-A 0.05 BBB 0.10 BB 0.17 B 0.26 CCC 0.31 Avg. Beta The risk-free rate is 3% and value-weighted return on wide stock-market index is 9%