A firm's cost of capital is often a reflection of its activities and funding needs. Consider...
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A firm's cost of capital is often a reflection of its activities and funding needs. Consider the case of Wizard Company, and answer the following questions: Wizard Co. currently has only a real estate division and uses only equity capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.2. The risk-free rate is 4.4%, and the market-risk premium is 6.4%. This means that the firm's real estate division will have a cost of capital of: The consulting division is expected to have a beta of 2.0, because it will be riskier than the firm's real estate division. This means that the firm's consulting division will have a cost of capital of: The distribution division will have less risk than the firm's real estate division, so its beta is expected to be 0.6. This means that the distribution division's cost of capital will be: Wizard Co. expects 75% of its total value to end up in the real estate division, 10% in the consulting division, and 15% in the distribution division. Based on this information, what rate of return should its investors require once it opens the new divisions? 8.80% 12.08% 4.40% 9.68% 18.55% 19.70% 18.15% 17.20% 17.95% 19.25% 19.15% 8.24% 16.77% 12.02% 13.32% 14.87% A firm's cost of capital is often a reflection of its activities and funding needs. Consider the case of Wizard Company, and answer the following questions: Wizard Co. currently has only a real estate division and uses only equity capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.2. The risk-free rate is 4.4%, and the market-risk premium is 6.4%. This means that the firm's real estate division will have a cost of capital of: The consulting division is expected to have a beta of 2.0, because it will be riskier than the firm's real estate division. This means that the firm's consulting division will have a cost of capital of: The distribution division will have less risk than the firm's real estate division, so its beta is expected to be 0.6. This means that the distribution division's cost of capital will be: Wizard Co. expects 75% of its total value to end up in the real estate division, 10% in the consulting division, and 15% in the distribution division. Based on this information, what rate of return should its investors require once it opens the new divisions? 8.80% 12.08% 4.40% 9.68% 18.55% 19.70% 18.15% 17.20% 17.95% 19.25% 19.15% 8.24% 16.77% 12.02% 13.32% 14.87%
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Answer rating: 100% (QA)
SOLUTIONS To calculate the cost of capital for each division and the required rate of return for investors we can use the Capital Asset Pricing Model CAPM formula Cost of Capital RiskFree Rate Beta Ma... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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