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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,
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 O 10.56% capital; however, it is considering creating consulting and distribution O 13.78% divisions. Its beta is currently 1.4. The risk-free rate is 4.4%, and the O 4.40% market-risk premium is 6.7% O 8.80% 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 2.0, because it will be O 19.15% riskier than the firm's real estate division. O 17.80% O 20.30% This means that the firm's consulting division will have a cost of capital of: O 18.75% The distribution division will have less risk than the firm's real estate division, O 19.75% so its beta is expected to be 0.5 O 7.75% O 19.85% This means that the distribution division's cost of capital will be: O 18.55%
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