Adjusting the cost ot capital tor risk Aa Aa Divisional Costs of Capital firm's cost of capital is often a reflection of its activities and funding needs. Consider the case of Wizard Company, nd 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 1.5. The risk-free rate is 2.8%, and the market-risk premium is 5.8%. 5.60% 2.80% 11.50% o 7.00% 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 2.2, because it will be riskier than the firm's real estate division. 16.91% O 18.06% O 16.51% O 15.56% 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, MacBook Pro 2.0 2 4 5 0 The distribution division will have less risk than the firm's real estate division, so its beta is expected to be 0.5 17.51% 17.61% 5.70% 16.31% This means that the distribution division's cost of capital will be: Wizard Co. expects 65% of its total value to end up in the real estate d 25% in the consulting division, and 10% in the distribution division. o 16.71% 13.26% O 14.81% once it opens the new divisions?!! O11.96% 3 6 s lock