Suppose Your Firm Has Decided to Use a Divisional WACC

question 86

Multiple Choice

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.5, 1.0, 1.3 and 1.6, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7 percent) is 14 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A through D?

• A) 9.00 percent; 10.25 percent; 12.95 percent; 13.15 percent
• B) 9.75 percent; 12.00 percent; 12.65 percent; 13.75 percent
• C) 9.25 percent; 11.00 percent; 12.05 percent; 13.10 percent
• D) 8.95 percent; 10.15 percent; 12.50 percent; 13.45 percent

---

Definitions:

Preparatory Depression

Emotional distress and adjustment issues experienced in anticipation of a known loss or change, often relating to grief or terminal illness.

Reactive Depression

A type of depression triggered by a specific external event or series of events, as opposed to originating from internal or biological causes.

Dying People

Individuals who are in the final stage of life, approaching death.

Suicide Rate

The number of suicide deaths in a given population over a specified period of time, typically expressed per 100,000 individuals.