Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 4 divisions, A through D, with average betas for each division of 0.5, 1.2, 1.5 and 1.8, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5 percent, market premium of 10 percent) is 15 percent and the after-tax yield on the company's bonds is 7 percent, what will the WACCs be for each division?

Question

Quizplus · Accepted Answer

The Answer of Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 4 divisions, A through D, with average betas for each division of 0.5, 1.2, 1.5 and 1.8, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5 percent, market premium of 10 percent) is 15 percent and the after-tax yield on the company's bonds is 7 percent, what will the WACCs be for each division?

Suppose Your Firm Has Decided to Use a Divisional WACC