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9. Adjusting the cost of capital for risk Aa Aa Divisional Costs of Capital A firm's cost of capital is often a reflection of its
9. Adjusting the cost of capital for risk Aa Aa 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 capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.3. The risk-free rate is 4.4%, and the market-risk premium is 5.8% O 10.12% 11.94% 8.80% 4.40% 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 1.8, because it will be riskier than the firm's real estate division. O 15.79% 17.34% 16.19% 14.84% O This means that the firm's consulting division will have a cost of capital of: The distribution division will have less risk than the firm's real estate division so its beta is expected to be 0.4 O 6.72% O 16.79% O 15.5990 O 16.89% This means that the distribution division's cost of capital will be: Wizard Co. expects 60% of its total value to end up in the real estate division, 25% in the consulting division, and 15% in the distribution division. O 16.63% O 11.88% O 14.73% O 13.18% Based on this information, what rate of return should its investors require once it opens the new divisions
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