The IQ Corporation Has Two Divisions

question 13

Essay

The IQ Corporation has two divisions. Division A does lobotomies and has an
estimated market beta of 0.80. Division B does brain transplants, and its beta is
estimated to be 1.50 (for obvious reasons.)Approximately 80% of the corporation's
total investment supports Division A; the remainder is invested in Division B. The
relevant risk-free rate is 5%, and the market equity premium is 8%. What is IQ's cost
of capital? What should it require as a minimum rate of return for projects undertaken
by the transplant division?

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Definitions:

Interaction Effect

A phenomenon in statistical analysis indicating that the effect of one variable on a certain outcome depends on the level of another variable.

Levels

Distinct categories or values that independent or dependent variables can take in a study or experiment.

dfWG

Degrees of freedom within groups, a concept in statistical analysis that represents the number of independent pieces of information available to estimate a parameter or calculate a statistic within a subset or group.

Degrees of Freedom

The total amount of discrete variables or numbers that are able to fluctuate within a study without breaking any limitations.