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 o 0.9, 1.0, 1.6, and 1.7, respectively. Assume all current and future projects will be financed with 50 debt and 50 equity, the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 4 percent) is 13 percent and the after-tax yield on the company's bonds is 6 percent. What will the WACCs be for each division? (Round your answers to 2 decimal places.) WACCs Division A Division E Division C Division D 1%

Answer 1

Cost of equity - Rf +Beta x Market risk premium [0.13-0.05] risk free rate 4.0% 4.0% 40% 40% beta market risk premium Cost of equity 0.9 1.0 1.6 1.7 WACC 9.05% 9.50% 12.20% 12.65% 12.10% 13.00% 18.40% 19.30% 9.0% 9.0% 9.0% 9.0% (0.5*0.06)+(0.5*0.1210) (0.5*0.06)+(0.5*0.13) (0.5*0.06)+(0.5 0.184) (0.5*0.06)+(0.5*0.1265) Division A Division B Division C Division D