Suppose your firm has decided to use a divisional WACC approach to analyze proje

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 of 0.7, 1.0, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with half debt and half equity, the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 8 percent) is 14 percent and the after-tax yield on the company’s bonds is 10 percent.

What will the WACCs be for each division? (Round your answers to 2 decimal places.)

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 of 0.7, 1.0, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with half debt and half equity, the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 8 percent) is 14 percent and the after-tax yield on the company’s bonds is 10 percent.

Explanation / Answer

For Each Project Project A Project B Project C Project D Cost of Debt 5.00% 5.00% 5.00% 5.00% Proportion of Equity Ratio of Equity in Finance 7.00% 7.00% 7.00% 7.00% Beta for Equity 0.7 1 1.4 1.6 Adjusted Cost of Equity 5% 7% 10% 11% WACC for each project 9.90% 12.00% 14.80% 16.20%

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