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 1.1. The marketing division is expected to have a beta of 2.1, because it will have more risk than the firms wholesale division. The retail division is expected to have a beta of 0.5, because it will have less risk than the firms wholesale division. The risk-free rate is 3.6%, and the market risk premium is 5.8%. Based on this information, fill in the missing cost of capital information below:

Wholesale division

7.20%

9.98%

7.56%

3.24%

Marketing division

16.73%

18.28%

15.78%

17.13%

Retail division

17.73%

6.5%

17.83%

16.53%

If 75% of Newtown Propanes total value ends up in the wholesale division, 10% in the marketing division, and 15% in the retail division, then its investors should require a return of

14.79%

11.34%

10.04%

12.89%