Buy It Cheap has an overall beta of .88 and a cost of equity of 11.2 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)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 percent?

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of capital for Division A can be calculated using the following formula: Cost of capital = Risk-free rate + Beta * Market risk premium. The risk-free rate is assumed to be 5 percent, the beta for Division A is given as 1.34, and the market risk premium is given as 5 percent. Plugging these values into the formula, we get: Cost of capital = 5% + 1.34 * 5% = 13.5%.

Buy It Cheap Has an Overall Beta of