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Answer:
Risk-free Rate = 4.4%
Market Risk Premium = 6.4%
Cost of Capital = Risk-free Rate + beta*Market Risk Premium
Wholesale Division:
Beta = 1.1
Cost of Capital = 4.4% + 1.1*6.4%
Cost of Capital = 11.44%
Marketing Division:
Beta = 1,9
Cost of Capital = 4.4% + 1.9*6.4%
Cost of Capital = 16.56%
Retail Division:
Beta = 0.4
Cost of Capital = 4.4% + 04*6.4%
Cost of Capital = 6.96%
If 60% of Newton Propane’s total value ends up in the wholesale division, 25% in the marketing division, and 15% in the retail division, then its investors should require a return of:
Expected Return = 60%*11.44% + 25%*16.56% + 15%*6.96%
Expected Return = 12.048% The
closest answer is ~ 12.08%
9. Adjusting the cost of capital for risk Aa Aa Divisional Costs of Capital Newtown Propane...
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Divisional Costs of Capital Newtown Propane currently has only a wholesale division and uses only equity capital; however, it is considering creating marketing and retail divisions. Its beta is currently 1.1. The marketing division is expected to have a beta of 2.1, because it will have more risk than the firm's wholesale division. The retail division is expected to have a beta of 0.8, because it will have less risk than the firm's wholesale division. The risk-free rate is 4.4%,...
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Newtown Propane currently has only a wholesale division and uses only equity capital; however, it is considering creating marketing and retail divisions. Its beta is currently 1.1. The marketing division is expected to have a beta of 1.9, because it will have more risk than the firm's wholesale division. The retail division is expected to have a beta of 0.8, because it will have less risk than the firm's wholesale division. The risk-free rate is 4.8%, and the market-risk premium...
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option for wholesale division - 11.51%, 5.60%,1.96%, 6.44% option for Marketing division - 16.88%, 16.48%, 18.03%, 15.53% option for retail division - 17.48%, 16.28%, 8.16%, 17.58% option for 4 - 16.73%, 14.83%, 11.98%, 13.28% Divisional Costs of Capital Newtown Propane currently has only a wholesale division and uses only equity capital; however, it is considering creating marketing and retail divisions. Its beta is currently 1.3. The marketing division is expected to have a beta of 1.9, because it will have...
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