Question

Wizard Co. currently has only a real estate division and uses only equity capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.3. The risk-free rate is 4.4%, and the market-risk premium is 6.2%. @ 8.80% 4.40% 10.12% 12.46% This means that the firm's real estate division will have a cost of capital of: The consulting division is expected to have a beta of 2.2, because it will be riskier than the firm's real estate division. OOOO 20.54% © 19.39% 18.99% 18.04% This means that the firm's consulting division will have a cost of capital of: The distribution division will have less risk than the firm's real estate division, so its beta is expected to be 0.4. 0 20.09% 0 18.79% 06.88% 0 19.99% This means that the distribution division's cost of capital will be Wizard Co. expects 60% of its total value to end up in the real estate division 25% in the consulting division, and 15% in the distribution division. OOOO Based on this information, what rate of return should its investors require once it opens the new divisions 0 14.32% O 13.02% 0 15.87%

Answer 1

1 QUESTION Risk premium = 6.2% Peta = 1.3 Kisk free return = 4.4% Cost of Capital = Risk free return & (Peta X Risk premium or = 4.4 + (1.3 X 6-2) Real estate = 12.46 % QUESTION 2 Risk Premium = 6.2% Rick free return = 4.4% Bela = 2.2 risk premewire) Cost of capital = - Consulting = Risk free return t (Beta x 4.4 + (2.2 X 6.2) 18.04 %) QUESTION 3 4sk Mem / m 2 6.2-1. Рk Phее 4e4ukh 2 4. •е Peta = 0.4 Kisk premwan) Cost of capital = Risk free return & Peta X of = 4.4+0.486.2) distribution = 16.88%

Question 4 Total cost of Capital = (Cestof Cayestalotscal estate x Weighto Ixcelested + + (costof capital of Consulting & Weight of consulting (cost of capital or distribution X beight of distribution) = (12646x604) + (18.04x254) +(6.88X 15%) z 7.47 6 + 4.51+ 1.032 = 13.018 i e 13.02 %
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