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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

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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 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 2.8%, and the market-risk premium is 6.2%. 0 2.80% O 11.48% 6.72% 5.60% 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 1.8, because it will be riskier than the firm's real estate division 15.31% 14.91% 16.46% 13.96% 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, 7.76% 16.01% 15.91% so its beta is expected to be 0.8 This means that the distribution division's cost of capital will be: 14.71% Wizard Co. expects 70% of its total value to end up in the real estate division, 20% in the consulting division, and 10% in the distribution division 12.90% 14.45% 11.60% 16.35% Based on this information, what rate of return should its investors require once it opens the new divisions

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