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

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Definitions:

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A theory of knowledge asserting that information comes primarily from sensory experience and observation.

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Events, patterns, or characteristics that are found across all cultures and societies, transcending local or specific cultural customs.

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The set of distinct phonemes (unit sounds) that make up a particular spoken language, defining its unique sound system and rules for sound combinations.