My company is a multi-divisional company. I have four divisions with the following betas and proportion of the company's total assets:
Division Beta % of Assets
Electric & Gas 0.85 60
Bus transportation 0.95 10
Real estate 1.40 25
Recreation 1.15 5
The risk-free rate is 8 percent and the market risk premium is 5 percent. If my company is considering a residential development, what should my company use as its cost of equity in evaluating this project?
The cost of equity should reflect the risks associated with the project. Since the company ...
The solution explains how to determine the cost of equity to be used in evaluating a project.