Question

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.7, 1.3, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 20 percent debt and 80 percent equity, the current cost of equity (based on an average firm beta of 1.1 and a current risk-free rate of 4 percent) is 14 percent and the after-tax yield on the company’s bonds is 9 percent.

What will the WACCs be for each division? (Do not round intermediate calculations and round your final answers to 2 decimal places.)

Answer 1

Cost of Equity = Risk free rate +beta*Market risk premium

14% = 4% + 1.1*Market Risk Premium

Market Risk Premium = 9.09%

Division	A	B	C	D
Beta	0.7	1.3	1.4	1.6
Risk free rate	4	4	4	4
Market Risk Premium	9.09	9.09	9.09	9.09
Cost of Equity	10.363	15.817	16.726	18.544
Cost of Debt	9	9	9	9
WACC	10.0904	14.4536	15.1808	16.6352