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:

Proposition

A suggested plan or course of action.

O Proposition

In traditional logic, an O proposition is a type of categorical statement that asserts some S are not P, where S and P are the subject and predicate respectively.

Contrary

Opposite in nature, direction, or meaning; conflicting with each other.

Contraries

In the traditional square of opposition, a pair of categorical propositions that, in virtue of their logical form, could not both be true but could both be false (A and E).