Suppose Your Firm Has Decided to Use a Divisional WACC

question 93

Multiple Choice

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 0.5 and 1.5, 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 5 percent) is 14 percent and the after-tax yield on the company's bonds is 6 percent, what are the WACCs for divisions A and B?

• A) 7.75 percent; 12.25 percent
• B) 8.75 percent; 12.00 percent
• C) 9.25 percent; 11.00 percent
• D) 8.95 percent; 10.15 percent

---

Definitions:

Mobile Networks

Wireless communication networks that allow devices to send and receive data without a physical connection.

WiMAX

Worldwide Interoperability for Microwave Access, a wireless communication standard designed to provide high-speed broadband access over long distances.

Wide-area

A term typically used in networking to describe a network that covers a large geographic area, such as a city, country, or even intercontinental distances, often referred to as a WAN (Wide Area Network).

Wireless Network

A computer network that uses wireless data connections between network nodes, enabling devices to connect to the internet without physical wires.