Suppose Your Firm Has Decided to Use a Divisional WACC

question 14

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 1.25 and 2.5, 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 4 percent) is 12 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A and B?

• A) 11.00 percent; 16.00 percent
• B) 15.00 percent; 30.00 percent
• C) 25.00 percent; 30.00 percent
• D) 20.00 percent; 34.00 percent

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Definitions:

Chicago

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American Federation Of Labor

An early labor union founded in 1886 in the United States, which aimed to organize skilled workers into national unions to improve their working conditions.

Samuel Gompers

An English-born American labor union leader who founded the American Federation of Labor (AFL) and was its president from 1886 to 1924, promoting fair wages and working conditions.

Eugene Debs

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