Consider a firm with two equally sized divisions (in terms of their value) that engage in

completely different lines of business with different risks.

a. If these 2 divisions have betas of 0.8 and 1.3, what is the beta of the firm?

b. If one division has a beta of 0.8, and the beta of the firm is 1.0, what is the beta of the

second division?

c. For the firm in part (b), what beta should be used to compute the cost of capital for the

low risk division, i.e., should it be the firm beta or the divisional beta?