Corporations often use different costs of capital for different operating divisions

Corporations often use different costs of capital for different operating divisions

Corporations often use different costs of capital for different operating divisions. Using an example, calculate the weighted cost of capital (WACC). What are some potential issues in using varying techniques for cost of capital for different divisions? If the overall company weighted average cost of capital (WACC) were used as the hurdle rate for all divisions, would more conservative or riskier divisions get a greater share of capital? Explain your reasoning. What are two techniques that you could use to develop a rough estimate for each division’s cost of capital? Your initial response should be 200 to 250 words.

 

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There are various methods of calculating the cost of capital. Some of the methods used are; 

Net operating income approach

Modigliani miller proposition

Weighted average cost of capital

An example;

A firm borrowed $200,000 with an interest rate of 10% and the rate of return is 12.5%. The firm’s net income is $50,000. Calculate the firm’s WACC.

Solution:………………………..

APA

214 words

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