You have been asked to estimate the cost of capital for Simtel Enterprises, a firm with operations in different businesses. You are given the breakdown of the three businesses that Simtel is in below:

Business Estimated Value: Telecomm Services=$2.0 billion, Computer Software=$1.0 billion, Real Estate Management=$1.0 billion

Unlevered beta for comparable firms: Telecomm Services=1.00, Computer Software=1.25, Real Estate Management=0.60

Simtel has 100 million shares outstanding, trading at $ 20 a share; its remaining capital is in the form of corporate bonds with a BB rating, carrying a default spread of 4% over the risk-free rate. Simtel's marginal tax rate is 40%. The long-term treasury bond rate is 6% and the market risk premium is 4%.

a) Estimate the cost of capital for Simtel.

b) Now assume that Simtel sells its real estate services division at its estimated value and uses the funds to retire debt. This will cause its rating to rise to A and the default spread on its bonds to drop to 1.5%. Estimate the new cost of capital for Simtel. What are the assumptions you make in deriving the WACC?