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

---

Definitions:

Prototype Testing

The process of evaluating a preliminary model of a product to identify any potential issues or improvements before it is produced on a larger scale or released to the market.

Profitability Ratios

Financial metrics used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time.

Leverage Ratios

Financial metrics used to assess a company's ability to meet its financial obligations, with a focus on its use of debt.

Asset Management Ratio

Asset Management Ratio is a financial metric that assesses how effectively an organization is managing its assets to generate revenue, including turnover ratios for inventory, receivables, and fixed assets.