Verano Inc.has two business divisions-a software product line and a waste water clean-up product line.The software business has a cost of equity capital of 10% and the waste water clean-up business has a cost of equity capital of 7%.Verano has 50% of its revenue from software and the rest from the waste water business.Verano is considering a purchase of another company in the waste water business using equity financing.What is the appropriate cost of capital to evaluate the business?
A)10%
B)7%
C)8.5%
D)9%
E)6.5%

Question

Quizplus · Accepted Answer

The appropriate cost of capital to evaluate the purchase in the waste water business is 7%, as it reflects the cost of equity capital specific to that line of business.