Verano Ltd 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?

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 7%. Since Verano is considering a purchase in the same business line (waste water clean-up), the cost of equity capital relevant to that division should be used.

Verano Ltd Has Two Business Divisions - a Software Product