Suppose Your Firm Has Decided to Use a Divisional WACC

question 27

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%) is 14% and the after-tax yield on the company's bonds is 6%, what are the WACCs for divisions A and B?

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

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Definitions:

Detrimental

Refers to something that causes damage, harm, or a negative effect.

Managerial Control

The authority and processes through which managers direct and organize resources, activities, and people to achieve organizational goals.

Job Classifications

A system of categorizing and organizing jobs based on duties, responsibilities, and often, compensation levels.

Management Practices

Encompasses the strategies, methods, and behaviors managers use to operate and guide organizations effectively towards their objectives.