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Divisional Cost of Capital Approach vs Weighted Average Cost of Capital

Please explain how to calculate the weighted average cost of capital and how it compares to divisional cost of capital approach. Thank you.

Currently, Red Sun, Inc.'s capital structure is 65% equity based and 35% debt based. Red Sun is in the 20% marginal tax bracket in Japan and has a cost of equity of 12% and an average debt cost of 6%. Calculate Red Sun's Weighted Average Cost of Capital (WACC).
What is the main advantage of the Divisional Cost of Capital Approach over the WACC?

Use the available resources to research the NYSE and the Divisional Cost of Capital Approach to complete this assignment.

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ANSWERS

PART I
WACC: weighted cost of equity + weighted cost of debt = 7.8% + 2.1% = 9.9%
Weighted cost of equity = weight of equity x cost of equity = 65% x 12% = 7.8%
Weighted cost of debt = weight of debt x average cost of debt = 35% x 6% = 2.1%

PART II
First, according to the Certified Financial Analyst ® Institute WACC or weighted-average cost of capital is the "weighted average of the after-tax required rates of ...

Solution Summary

The solution examines divisional cost of capital approach versus the weighted average cost of capital.

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