Cost of Capital (WACC).
Suppose your company 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 0.5 and 1.5, 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 5%) is 16%
and the after-tax yield on the company’s bonds is 6%, what are the WACCs for
divisions A and B? Hint: First Solve for Market Risk Premium (MRP). MRP =

  1. Division
    A WACC?

  2. Division
    B WACC?