Verano Inc. has two business divisions - a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 12% and the waste water clean-up business has a cost of equity capital of 8%. Verano has 50% of its revenue from software and the rest from the waste water business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business?

Question

Quizplus · Accepted Answer

The appropriate cost of capital to evaluate the purchase of another company in the waste water business is the cost of equity capital for the waste water business, which is 8%.