Different divisions with differing lines of business use different costs of capital because their cost of equity is different and also because the could be different.

Question

Quizplus · Accepted Answer

The different divisions may have different levels of risk and therefore different optimal debt-equity ratios. Using a different cost of capital for each division based on their individual debt-equity ratios would ensure that each division is being evaluated on a level playing field. The other choices (optimal volatility, asset mix, and current ratio) do not necessarily vary based on division and therefore would not necessarily warrant the use of different costs of capital.

Different Divisions with Differing Lines of Business Use Different Costs