Toys R Us has an overall beta of 0.88 and a cost of equity of 11.2%...
Toys R Us has an overall beta of 0.88 and a cost of equity of 11.2% for the firm overall. The firm is 100% financed with common stock. Division A within the firm has an estimated beta of 1.34 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 5%?
Homework Answers
Since the beta of division A is higher, the cost of capital for division A will be greater than the firm's cost of equity.
the appropriate cost of capital = cost of equity + (beta of division - beta of firm) * market risk premium
=> 11.2% + (1.34-0.88) * 5%
=>11.2% + 2.3%
=>13.5%.
Appropriate cost of capital for division A = 13.5%.
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