Stuck on a corporate finance question on capital structure (WACC). PLEASE HELP (URGENT). Question 1, part A and B. Would be great if someone can solve it for me, if not, please teach me how to calculate estimate of WACC of one division when given overall company WACC and value in % of another division. And how can I tackle part B using Excel Solver? Thanks a bunch in advance, please help!!

RSM333 Assignment #2 Spring 2015 You may work in groups of 4 to 5 students Due by 4:00 p.m. at Rotman Commerce, April 2nd, 2015 - 50 MARKS TOTAL Question 1 10 marks (WACC) Part\tA Your computer company has two divisions: One division sells software and the other division sells hardware through a direct sales channel, primarily taking orders over the Internet. You have decided that Hewlett Packard is very similar to your hardware division, in terms of both risk and financing. Your colleague finds the following information about Hewlett Packard, that its equity beta is 1.21, its riskfree rate is 4.5%, its equity market value is $67 billion, and it has $700 million worth of debt with a yield to maturity of 6%, the same as the current market yield on similar debt. Your company has a leverage ratio of 1, and pays on its debt the same yield to maturity than Hewlett Packard. You use a market risk premium of 5% in your WACC estimates. 1. What is an estimate of the WACC for your hardware sales division, assuming both companies do not pay taxes? (2 marks) 2. What is an estimate of the WACC for your hardware sales division, assuming both companies have a 35% tax rate? (2 marks) 3. In part A.2, if your overall company WACC is 10% and the hardware sales division represents 40% of the value of your firm, what is an estimate of the WACC for your software division? (1 mark) Part\tB A company can issue new 20year bonds at par that pay 5% annual coupons. The net proceeds to the firm (after taxes) will be 98% of par value ($1,000). They estimate that new preferred shares providing a $2 annual dividend could be issued to investors at $25 per share to \"net\" the firm $22 per share issued (after floatation costs). The company has a beta of 1.10, and present market conditions are such that the riskfree rate is 1% , while the expected return on the market index is 10%. The firm's common shares trade for $30, and they estimate the net proceeds from a new common share issue would be $28.50 per share (after floatation costs). The firm's tax rate is 20%. 1. Determine the firm's cost of longterm debt, preferred shares, and common equity financing (internal and external sources) under the conditions above. (Please use Excel Solver or a Financial Calculator to calculate the aftertax cost of debt. Please show your work. If you use Excel, please also hand in the print out of your Excel solution.) (2 marks) 2. What is the firm's weighted average cost of capital, assuming that the company plans to keep its \"target\" capital structure of 30 percent debt, 10 percent preferred equity, and 60 percent common equity? Assume that it has $3 million in internal funds available for reinvestment and requires $3 million in total financing. (1 mark) 3. Suppose everything remains as above, except that the company decides it needs $5 million in total financing. Calculate the firm's marginal cost of capital. (2 marks) RSM333 Assignment #2 Spring 2015 You may work in groups of 4 to 5 students Due by 4:00 p.m. at Rotman Commerce, April 2nd, 2015 - 50 MARKS TOTAL Question 2 10 marks (Capital Structure) Company ABC is allequity financed. It has an expected cash flow of $10 million per year in perpetuity, and 10 million shares. Its average cost of capital is 10%. The company plans to open a new plant, which will cost $4 million, and generate $1 million in additional cash flow every year. This project has the same risk than the overall company. 1) Calculate the expected return on equity and the price of the stock before the new investment. (1 mark) 2) Assume that the plant is financed with new equity and calculate: a. ABC's expected return on equity and weighted average cost of capital. (1 mark) b. ABC's stock price. (1 mark) c. The number of shares issued to finance the new investment. (1 mark) 3) Assume that the plant is financed with new perpetual debt at a 6% interest rate and calculate: a. ABC's expected return on equity and weighted average cost of capital. (1 mark) b. ABC's stock price after the new investment. (1 mark) 4) Is ModiglianiMiller satisfied? (1 mark) 5) Now assume that the company has a 35% tax rate and that the $10m and the $1m cash flows are net of taxes. Solve again parts (1), (2) and (3) in this new setting. (3 marks) Question 3 10 marks (Dividend Policy) ABC has 1M shares outstanding. The stock price of ABC is $10. ABC is considering paying a total cash dividend of $1.5M to its shareholders. The CFO of ABC does not know whether it should finance the payment of this dividend by issuing new perpetual debt or by issuing new equity. The cost of debt is 4%. Corporate tax rate is 30%. Ignore other market imperfections. 1. Assume that the dividend is financed by debt and calculate: a. The share price of ABC right after the declaration. (1 mark) b. The share price of ABC at the exdividend date. (1 mark) 2. Assume that the dividend is financed by equity and calculate: a. The share price of ABC right after the declaration. (1 mark) b. The share price of ABC at the exdividend date. (1 mark) c. The total number of shares of ABC right after the dividend payment. (2 marks) 3. Assume that the dividend is financed half by debt and half by equity, and calculate: a. The share price of ABC right after the declaration. (1 mark) b. The share price of ABC at the exdividend date. (1 mark) c. The total number of shares of ABC right after the dividend payment. (2 marks) RSM333 Assignment #2 Spring 2015 You may work in groups of 4 to 5 students Due by 4:00 p.m. at Rotman Commerce, April 2nd, 2015 - 50 MARKS TOTAL Question 4 10 marks (Firm Valuation) XYZ has 10,150,000 shares outstanding. The WACC of XYZ is 10%. If XYZ was 100% financed by equity the WACC would be 11.5%. The cost of debt is 4.6%. The corporate tax rate is 34.43%. A business plan of XYZ is provided in the Appendix. In the long run, the business is expected to grow at a perpetual rate of 2%. After 2024, the financial result should remain constant. 1. Estimate the share price of XYZ using the DCF method. Please use the Excel file provided in the Appendix and fill in the blanks. (5 marks) 2. Estimate the share price of XYZ using the APV method. Please use the Excel file provided in the Appendix and fill in the blanks. (5 marks) Question 5 10 marks (Mergers) 1. 2. 3. 4. Firm A is considering making an offer to purchase Firm B. Firm A has 1,000,000 shares trading at $15, firm B has 250,000 shares trading at $36. Securities analysts expect the earnings and dividends of B (currently $1.80/share) to grow at a constant rate of 5% each year. Moreover, the acquisition would provide firm B with some economies of scale that would improve the growth rate to 7% per year. What is the value of firm B to firm A? (2 marks) If A offers $40 for each share of B, what would the NPV of the acquisition be? (2 marks) If instead A were to offer 600,000 of its shares in exchange for the outstanding stocks of B, what would the NPV of the acquisition be? (2 marks) Should the acquisition be attempted and, if so, should it be a cash or stock offer? (1 mark) Firm A's management thinks that 7% growth is too optimistic and that 6% is more realistic. How does this change your previous