Northern Conglomerate Has Two Divisions,Division a and Division B

question 1

Multiple Choice

Northern Conglomerate has two divisions,Division A and Division B.Northern looks at competing pure-play firms to estimate the betas of each of the two divisions.After this analysis,Northern concludes that Division A has a beta of 0.8 and Division B has a beta of 1.5.The two divisions are the same size.The risk-free rate is 5% and the market risk premium is 6%.Assume that Northern is 100% equity financed.What is the overall composite WACC for Northern Conglomerate?

• A)10.74%
• B)11.31%
• C)11.90%
• D)12.50%
• E)13.12%

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Definitions:

Simulation

A method for modeling the operation of real-world processes or systems over time using computers or other technologies.

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A method of selecting a subset of individuals from a statistical population in such a way that every individual has an equal chance of being chosen.

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Normal Model

A type of statistical distribution in which data symmetrically clusters around the mean, forming a bell-shaped curve.