Production Unlimited has an overall beta of .92 and a cost of equity of 10.8 percent for the ﬁrm overall. The ﬁrm is 100 percent ﬁnanced with common stock. Division A within the ﬁrm has an
Estimated beta of 1.47 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 6 percent?

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM) formula:
Cost of Equity = Risk-Free Rate + Beta * (Market Risk Premium)
We can solve for the cost of equity for Division A:
10.8% = 0 + 0.92 * 6%
1.47 = 14.1%
Therefore, an appropriate cost of capital for Division A would be 14.1 percent.

Production Unlimited Has an Overall Beta of