10-9

Divisional Costs of Capital A firm's cost of capital is often a reflection of its activities and funding needs. Consider the case of Wizard Company, and answer the following questions: Wizard Co. currently has only a real estate division and uses only equity 2.80% capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.3. The risk-free rate is 2.8%, and the O 10.34% market-risk premium is 5.8%. O 5.60% O 6.44% This means that the firm's real estate division will have a cost of capital of: The consulting division is expected to have a beta of 2.1, because it will be O 14 98% riskier than the firm's real estate division. O 17.48% 16.33% This means that the firm's consulting division will have a cost of capital of O 15.93% The distribution division will have less risk than the firm's real estate division, 15.73% so its beta is expected to be 0.7. O 17.03% O 16.93% This means that the distribution division's cost of capital will be: O 6.86%