Suppose Your Firm Has Decided to Use a Divisional WACC

question 14

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 1.25 and 2.5, 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 4 percent) is 12 percent and the after-tax yield on the company's bonds is 8 percent, what are the WACCs for divisions A and B?

• A) 11.00 percent; 16.00 percent
• B) 15.00 percent; 30.00 percent
• C) 25.00 percent; 30.00 percent
• D) 20.00 percent; 34.00 percent

---

Definitions:

White-Collar

Referring to jobs performed in an office or other administrative setting as opposed to manual labor jobs, usually involving professional, clerical, managerial, or administrative work.

Street Crimes

Include arson, burglary, assault, and other illegal acts disproportionately committed by people from lower classes.

White-Collar Crime

Non-violent crime committed by individuals, usually during the course of their occupation, for personal or corporate benefit.

Respectability

The quality of being regarded with honor and esteem by society, often through conforming to its norms and values.