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 12% and the waste water clean-up business has a cost of equity capital of 8%.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)12%
B)8%
C)10%
D)11%
E)6%

Question

Quizplus · Accepted Answer

The appropriate cost of capital to evaluate the business is the cost of equity capital of the waste water clean-up business, which is 8%. Since the acquisition is specifically for the waste water business, its own cost of equity capital should be used for evaluation.