Question
IBM is a large firm with two very different business units, and has no debt. The consumer product's unit has an asset beta of 0.55,expects
IBM is a large firm with two very different business units, and has no debt. The consumer product's unit has an asset beta of 0.55,expects to generate free cash flow of
$73million the upcoming year, and anticipates a 3%perpetual growth rate after that. The cyclical products unit has an asset beta of 1.14,expects to generate free cash flow of $59 million the upcoming year, and anticipates a 2% perpetual growth rate after that. Suppose the risk-free rate is 3%and the market risk premium is6%.CAPM holds and ignore taxes.
a. Estimate the COC and value of each business unit.
b. What is IBM's beta and its COC?
c. Is IBM's overall COC useful for valuing IBM's projects?
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