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.
A)optimal volatility
B)optimal current ratio
C)optimal asset mix
D)optimal debt-equity ratio
E)cost of debt

Question

Quizplus · Accepted Answer

The optimal debt-equity ratio could be different for different divisions based on their risk profile and financial structure. The cost of equity is also different for each division, but the debt-equity ratio is a better indicator of the overall cost of capital for the division. The optimal debt-equity ratio is the one that minimizes the cost of capital and maximizes the value of the division. Therefore, different divisions with different lines of business would have different costs of capital based on their optimal debt-equity ratio.

Different Divisions with Differing Lines of Business Use Different Costs