Your company has two divisions: one division sells software and the other sells computers through a direct sales channel, primarily taking orders over the internet. You have decided that Dell Computer is very similar to your computer division, in terms of both risk and financing. You go online and find the following information: Dells beta is 1.21, the risk-free rate is 4.5%, its market value of equity is $67 billion, and it has $700 million worth of debt with a yield to maturity of 6%. Your tax rate is 30% and you use a market risk premium of 5% in your WACC estimates.

a. What is an estimate of the WACC for your computer sales division?

b. If your overall company WACC is 12% and the computer sales division represents 40% of the value of your firm, what is an estimate of the WACC for your software division?

c. Under what assumptions can the WACC be used to value a project?

d. What are the possible problems that might be associated with the assumptions used in applying the WACC method?

e. Now consider that your company expects to receive 5 million euros in one year from exports. It can use any one of the following strategies to deal with the exchange rate risk. Estimate the dollar cash flows received as a result of using the following strategies: Unhedged strategy Money market hedge Option hedge Forward hedge

The spot rate of the euro as of today is $1.10. Interest rate parity exists. Your Company uses the forward rate as a predictor of the future spot rate. The annual interest rate in the U.S. is 8% versus an annual interest rate of 5% in the Eurozone. Put options on euros are available with an exercise price of $1.11, an expiration date of one year from today, and a premium of $.06 per unit. Similarly, call options on euros are available with an exercise price of $1.14, an expiration date of one year from today, and a premium of $.05 per unit. Estimate the dollar cash flows it will receive as a result of using each strategy. Which hedge is optimal? Show your calculation for situation.