Colt manufacturing has two divisions. 1) pistols and 2) Rifles. Betas for the tw
ID: 2725430 • Letter: C
Question
Colt manufacturing has two divisions. 1) pistols and 2) Rifles. Betas for the two divisions have been determined to be beta (pistol)= .5 and beta (rifle)= .8. the current risk free rte of return is 4.5% and the expected market rate of return is 9%. the after-tax cost of debt for Colt is 2.5%. The pistol divisions financial proportions are 40% debt and 60% equity, and the rifle divisions are 50% debt and 50% equity.
a. What is pistol divisions WACC
b. What is rifle divisions WACC
please show all steps
Explanation / Answer
Pistol Division Expected Return = Risk Free Rate+ Beta( Market Return- Risk Free Rate) = 4.5+ .5(9-4.5) = 6.25 WACC = .6*6.25+.4*2.5 3.75+1 WACC = 4.75% Rifles Division Cost of Equity = 4.5+.8(9-4.5) 8.10% WACC = .5*8.10+.5*2.5 5.30%