Estimate the divisional cost of capital for each Southeastern division assuming that both divisions have the same optimal (target) capital structure. (Hint: Use the CAPM to produce a cost of equity for each division, and assume the same corporate tax rate and debt cost for each division.)

expected rate of return of the market:

expected rate of return of the S&P 500 Index = 11.0%

Required rate of return of long term debt on average company

Yield to maturity on A-rated long term debt for a company with beta of 1.0 = 7.0%

Current yield curve on US Treasury Securities

Term of maturity Yield

3months 2.5%

6 months 3.0

9 months 3.0

1 year 3.5

5 year 4.0

10 years 4.5

15 years 4.8

20 years 5.0

25 years 5.1

30 years 5.2