Suppose Your Firm Has Decided to Use a Divisional WACC

question 94

Multiple Choice

Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 4 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%) is 14% and the after-tax yield on the company's bonds is 8%, what are the WACCs for divisions A through D?

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

---

Definitions:

Net Income

The total profit of a company after all expenses and taxes have been subtracted from revenues.

ROCE

Return on Capital Employed; an economic metric that evaluates how effectively a firm uses its capital to generate profits.

Variable Costs

Expenses that shift in direct proportion to the amount of production or sales, like labor and materials.

Fixed Costs

Costs that remain consistent for a company irrespective of how much goods or services it produces.