SCAN is a multi-divisional utility company. SCAN has four divisions with the following betas and proportions of the firm's total assets:
The risk-free rate is 8 percent and the market risk premium is 5 percent. If SCAN is considering a residential development, what should the firm use as its cost of equity in evaluating this project?
A) 13.05%
B) 16.20%
C) 12.25%
D) 15.00%

Question

SCAN is a multi-divisional utility company. SCAN has four divisions with the following betas and proportions of the firm's total assets: 
The risk-free rate is 8 percent and the market risk premium is 5 percent. If SCAN is considering a residential development, what should the firm use as its cost of equity in evaluating this project?
A) 13.05% 
B) 16.20% 
C) 12.25% 
D) 15.00%

Quizplus · Accepted Answer

Solution: k_e = 0.08 + 1.40(0.05) = 0.15 or 15%

SCAN Is a Multi-Divisional Utility Company