When would a firm use different costs of capital for different divisions with the firm? If the firm was to try to determine cost of capital for different divisions, what problems could occur? What techniques could you use to estimate each divisions cost of capital?© BrainMass Inc. brainmass.com March 4, 2021, 7:48 pm ad1c9bdddf
The cost of capital that we calculate is for a firm as a whole and is the average cost of capital. If the risk profile of the different divisions is different from the average risk profile of the firm, then we need to use different costs of capital for different divisions.
The solution explains why a firm would use different costs of capital for different divisions.