1. Recommend weighted average costs of capital (i.e., WACCs) for EPCâs consumer
products, medical devices, and pharmaceuticals divisions respectively? [6 pts]
Hints:
⢠Remember the pure-play method to calculate each divisionâs ď˘e
i. unlever comparable companyâs ď˘e to get ď˘u of each company.
ii. then use average ď˘u of the comparables to relever to represent the target
leverage ratio in market value terms.
⢠Pay attention to differences in leverage and investment horizon among the
divisions.
2. Explain what would occur if EPC were to use a single corporate-wide WACC for
evaluating investment opportunities in each of its lines of business? What would be the
likely consequence for the company over time if this were to occur? [2 pts]
3. What do you think? [2 pts]
What would be your estimate of EPCâs corporate-wide WACC?
Hints:
⢠EPCâs corporate-wide beta is 1.04. This beta is based on EPCâs historical market
leverage ratio. You will need to use the same unlever-relever process to find the
correct ď˘e for EPC.
⢠Once you have ď˘e, youâll have to make choices regarding other parameters in
calculating WACC. You just need to state your choice and the rationale/reason to
justify the decision, then youâll receive full credits.