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

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Definitions:

Process Perspective

An approach to management that focuses on the optimization and improvement of business processes to achieve better performance and outcomes.

Budgeted Costs

Projected expenses for a specified period under budgetary control, guiding spending and financial planning.

Fixed Costs

Costs that do not vary with the level of production or sales over a certain period, such as rent, salaries, and insurance.

Variable Costs

Costs that change in proportion to the level of production or business activity.