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Paccar Roasters has two divisions: One division sells wholesale coffee beans and the other division sells coffee at retail locations. You have decided that Starbucks is very similar to your retail division in terms of both risk and financing. This implies that your retail division and Starbucks have the same debt-to-equity ratio. Starbuck’s beta is 0.75, its market value of equity is $89 billion and it has $2.3 billion worth of debt at a yield to maturity of 5%. Assume that the risk-free rate is 2%, the market risk premium is 7% and your tax rate is 35%.
(a) What is the WACC for your retail division?
(b) If the WACC for your wholesale division is 12.5% and the wholesale division is 25% of your firm’s value, what is the WACC for your overall company?
When choosing a capital structure, when will the firm's value be maximized?
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