Buy It Cheap has an overall beta of.88 and a cost of equity of 11.2 % for the firm overall. The firm is 100 % financed with common stock. Division A within the firm has an estimated beta of 1.34 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 5 %?

Question

Quizplus · Accepted Answer

The correct answer is A.The cost of capital for division A can be calculated using the following formula:Cost of capital = Risk-free rate + Beta * Market risk premiumThe risk-free rate is assumed to be 5%. The beta for division A is 1.34. The market risk premium is 5%.Therefore, the cost of capital for division A is:Cost of capital = 5% + 1.34 * 5% = 13.5%

Buy It Cheap Has an Overall Beta Of