Question
Assume that your firm consists of Division 1 (55 percent of the firm) and Division 2 (45 percent of the firm). The capital structure for
Assume that your firm consists of Division 1 (55 percent of the firm) and Division 2 (45 percent of the firm). The capital structure for each of the divisions is the same as for the firm as a whole, 50.0 percent debt, at a before-tax cost of debt of 5.4 percent, and 50.0 percent equity. Also assume that the firm calculates the cost of equity for each division using a divisional beta, where Division 1 has an unlevered beta of 1.00, while Division 2 has an unlevered beta of 1.50. Finally assume that the risk-free rate is 4.0 percent and the expected return on the market is 15.0 percent [the firm uses CAPM for required returns]. Given this information, determine the average corporate-wide WACC for this firm. Use a tax rate of 40%.
Answer choices:
15.28%
15.50%
15.06%
15.19%
14.40%
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