Question
10. Adjusting the cost of capital for risk Divisional Costs of Capital Newtown Propane currently has only a wholesale division and uses only equity capital;
10. Adjusting the cost of capital for risk
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 1.4. The marketing division is expected to have a beta of 2.2, because it will have more risk than the firms wholesale division. The retail division is expected to have a beta of 0.4, because it will have less risk than the firms wholesale division. The risk-free rate is 3.6%, and the market risk premium is 6.7%. Based on this information, fill in the missing cost of capital information below:
Wholesale division ___________
Marketing division _____________
Retail division _________________
If 60% of Newtown Propanes 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 __________
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