Question
Skyworks solutions, Inc,(Skyworks) is engaged in the production of analog semiconductors, Skyworks is considering expanding into a new line of business by developing a line
Skyworks solutions, Inc,(Skyworks) is engaged in the production of analog semiconductors, Skyworks is considering expanding into a new line of business by developing a line of cloud-based computing services. Currently, Skyworks has a before-tax cost of debt of 8%. And an effective tax rate of 40%. It beta is 2, and firms debt to equity ratio is 0.4. The firm has identified a pure-play company( Salesforce.com)whose only business is offering cloud-based computing services to major U.S companies. Salesforce.com also has a before-tax cost of debt of 6%, its beta is 3, and it has a debt-to-equity ratio of 0.5. The effective tax rate of Salesforce.com is 30%. The expected return on the market is 7%, and the risk-free rate of interest is 3%.
A. Determine the appropriate discount rate(WACC) Skyworks should use for evaluating the cloud-based computing services division if this new division has a debt-to-equity ratio and a cost of debt identical to those of Skyworks.
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