Question: Suppose your firm has decided to use a divisional WACC
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 0.9, 1.1, 1.3, and 1.5, respectively. If all current and future projects will be financed with 25 percent debt and 75 percent equity, and if the current cost of equity (based on an average firm beta of 1.2 and a current risk-free rate of 4 percent) is 12 percent and the after-tax yield on the company’s bonds is 9 percent, what will the WACCs be for each division?
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