(Oivisional costs of captal and investment decisions) Saddle Fiver Operating Company (SROC) is a Dallas.based independent ol and gas frm in the past the firm's managers have used a singie firm-wide cost of capital of 13 percent to evaluate new invesiments. However, the firm has iong recogrized that its expioration and production division is algnificansy more raky than the pipeine and transportation division. In fact, firms comparable to SROC's E.SP division have equity betas of about 1.8, whereas distribution companies typically have equity betas of onily 0.9. Given the importance of getsing the cost of capital estimate as close to correct as possible, the firm's chef friancial officer has asked you to prepare cost of capital estimates for each of the two divisions. The requisite infomanion needed to accompish your task is presented here: - The cost of debt financing is 8 percent before taxes of 36 percent. However, It the E8P division were to borrow based on its projects alone, he cost of debt would probably be 8.9 pericent, and the pipeline division could borrow at 6.4 percent. You may assume these costs of debt are after any fotation costs the firm might incur. - The risk-free rate of interest on long-term U.S. Treasury bonds is currently 5.9 percent, and the marke-erisk premium has avenged 6.6 percent over the past several years - The E8P division acheres to a target debt ratio of 50 percent, whereas the pipeline division utilizes 70 percent borrowed funds. - The firm has suifficient internally generated funds such that no new stock will have to be sold to raise equity financing. a. Estimate the divisional costs of capital for the E8P and pipeline divisions. b. What are the implications of using a company-wide cost of capltal to evaluate new investment groposals in light of the cimerences in the costs of captal you est mated previously? a. What is the divisional cost of capital for the E.8P division? (Round to two decimal places.)