Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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 capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.2. The risk-free rate is 4.8%, and the market-risk premium is 6.1%. 9.60% 12.12% 10.56% 4.80% Q ? 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 2.1, because it will be riskier than the firm's real estate division. 17.61% 18.56% ? 20.11% 18.96% 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, so its beta is expected to be 0.4 7.24% 19.56% O 19.66% This means that the distribution division's cost of capital will be: ? 18.36% Wizard Co. expects 65% of its total value to end up in the real estate division, 25% in the consulting division, and 10% in the distribution division. ? 14.34% Q 13.04% ? 17.79% 15.89% Based on this information, what rate of return should its investors require once it opens the new divisions
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started