The IQ Corporation has two divisions. Division A does lobotomies and has an
estimated market beta of 0.80. Division B does brain transplants, and its beta is
estimated to be 1.50 (for obvious reasons.)Approximately 80% of the corporation's
total investment supports Division A; the remainder is invested in Division B. The
relevant risk-free rate is 5%, and the market equity premium is 8%. What is IQ's cost
of capital? What should it require as a minimum rate of return for projects undertaken
by the transplant division?

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The Answer of The IQ Corporation has two divisions. Division A does lobotomies and has an
estimated market beta of 0.80. Division B does brain transplants, and its beta is
estimated to be 1.50 (for obvious reasons.)Approximately 80% of the corporation's
total investment supports Division A; the remainder is invested in Division B. The
relevant risk-free rate is 5%, and the market equity premium is 8%. What is IQ's cost
of capital? What should it require as a minimum rate of return for projects undertaken
by the transplant division?

The IQ Corporation Has Two Divisions