Your company has a division on the Isle of Wight. The accounting beta of the division...

Your company has a division on the Isle of Wight. The accounting beta of the division is 0.90. Your company’s accounting beta is 1.2. Your company’s equity beta is 1.4. The firm has a value of 800M, debt of 200M, and cash and marketable securities of 50M. The risk-free rate is 2.5% and the GRP is 6%. What is the proper cost of capital for the division?

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Expert Solution

proper cost of capital for the division = risk-free rate + accounting beta of the division*GRP

proper cost of capital for the division = 2.5% + 0.90*6% = 2.5% + 5.4% = 7.9%

the proper cost of capital for the division is 7.9%.

jeff jeffy answered 2 years ago

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