Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribedimage text in transcribedimage text in transcribed 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 1.4 . The risk-free rate is 3.1%, and the market risk premium is 6.7%. This means that the firm's real estate division will have a cost of capital of: 12.48% 1.86% 6.20% 7.44% Wizard Co. expects 75% of its total value to end up in the real estate division, 10% in the consulting division, and 15% in the distribution division. Based on this information, what rate of return should its investors require once it opens the new divisions? (Note: Round your intermediate (alculations to two decimal places.) 13.31% 16.76% 12.01% 14.86% The consulting division is expected to have a beta of 2.2 , because it will be riskier than the firm's real estate division. This means that the firm's consulting division will have a cost of capital of: 17.84% 19.19% 18.79% 20.34% The distribution division will have less risk than the firm's real estate division, so its beta is expected to be 0.4 . This means that the distribution division's cost of capital will be: 5.78% 18.59% 19.89% 19.79%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Intelligence For IT Professionals

Authors: Karen Berman, Joe Knight, John Case

1st Edition

ISBN: 1422119149, 9781422119143

More Books

Students also viewed these Finance questions

Question

Describe the uses of information gained from job analysis.

Answered: 1 week ago