DIVISIONAL WACC In 2006, Anheuser-Busch Companies Inc. (BUD), engaged in the
production and distribution of beer worldwide, operating through four business segments:
Domestic Beer, International Beer, Packaging, and Entertainment. The Domestic Beer
segment offers beer under Budweiser, Michelob, Busch, and Natural brands in the United
States, in addition to a number of specialty beers including non-alcohol brews, malt
liquors, and specialty malt beverages, as well as energy drinks. The International Beer
segment markets and sells Budweiser and other brands outside the United States and
operates breweries in the United Kingdom and China. In addition, the International Beer
segment negotiates and administers license and contract brewing agreements with various
foreign brewers.The Packaging segment manufactures beverage cans and can lids for drink
customers, buys and sells used aluminum beverage containers, and recycles aluminum
containers. Finally, the Entertainment segment owns and operates theme parks.
In 2005,Anheuser-Busch reported the following segment revenues and net income:
($ millions) Domestic BeerInternational Beer Packaging Entertainment
Gross sales$ 10,121.00$ 864.00$ 1,831.50$ 904.40
Net income$ 1,421.90$ 433.70$ 74.60$ 133.40
Assume that you have just been charged with the responsibility for evaluating the
divisional cost of capital for each of the business segments.
a. Outline the general approach you would take in evaluating the cost of capital for
each of the business segments.
b. Should the fact that $1,156 million of the Packaging segment’s revenues come from
internal sales to other Busch segments affect your analysis? If so, how?
These are the Key factors to display in the calculations Hint to calculations.a. For each segment,
1. Identify a set of comparable companies that have traded equity. The criteria for “comparable” is: similar line of business and similar size.
2. Use standard regression techniques to compute the beta of leverd equity of the comparable companies.
3. Unlever the levered equity betas using standard formula (assume reasonable values for beta of debt)
4. Calculate the average of the unlevered betas of comparable companies. This is a proxy for the unlevered beta of the segment.
5. Using standard formula, relever the unlevered beta of the segment using a D/E ratio that is consistent with the debt capacity of the segment.
6. apply CAPM on the releverd beta to get the cost of equity.
7. apply CAPM on the assumed beta of debt to get the pre-tax cost of debt.
8. Compute the segment-WACC as the weighted average of the cost of equity and the after-tax cost of debt. The weights on the after-tax cost of debt is given by the ratio of book debt to (book debt + market capitalization).
b. The point here is that the risks of the Packaging division are not unique but are driven largely by the risks of the other operating divisions from which the bulk of its sales are derived.