How companies estimate their cost of capital: The Diverse Co. has invested 40 percent of the company's assets in a project with a beta of 0.4 and the remaining assets in a project with a beta of 1.8. What is the beta of the company?

Question

Quizplus · Accepted Answer

The beta of the company can be calculated as the weighted average of the betas of its projects, where the weights are based on the proportion of assets invested in each project.

Beta of the project with beta 0.4 = 0.4
Beta of the project with beta 1.8 = 1.8

Weight of the project with beta 0.4 = 40%
Weight of the project with beta 1.8 = 60% (100% - 40%)

Beta of the company = (0.4)(40%) + (1.8)(60%)
= 0.16 + 1.08
= 1.24

Therefore, the answer is B) 1.24.

How Companies Estimate Their Cost of Capital: the Diverse Co