The Cost of Capital Graded Assignment Due Sunday 06.17.18 at 115 PM Attempts Ave

Question

The Cost of Capital Graded Assignment Due Sunday 06.17.18 at 115 PM Attempts Average: 4 10. Adjusting the cost of capital for risk Aa Aa Divisional Costs of Capital Newtown Propane currently has only a wholesale division and uses only equity capital; however, it is considering creating marketing and retail divísions. Its beta is currently 1.3. The marketing division is expected to have a beta of 22, because it will have more risk than the firm's wholesale division. The retal division is expected to have a beta of 0.8, because it will have less risk than the firm's wholesale division. The risk-free rate is 4.4%, and the market-risk premium is 6.4%. Based on this information, fill in the missing information in the following below: Cost of Capital Wholesale division- Marketing division Retail division If SS% of Newtown Propane's total value ends up in the wholesale division, 20% in the marketing division, and 25% in the retald division, then its investors should require a return of Save & C

Explanation / Answer

Cost of capital = Risk free rate + Beta * Market risk premium

Wholesale cost = 4.40 + (1.3 * 6.40) = 12.72 %

Marketing division cost = 4.40 + (2.2 * 6.40 ) = 18.48 %

Retail division =  4.40 + (0.80 * 6.40 ) = 9.52 %

Required return = (Respective returns * Respective Investment weights)

= ( 12.72 * 0.55) + ( 18.48 * 0.20 ) + ( 9.52 * 0.25 )

= 13.072 %

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