using the capm approach you are required to calculate the weighted average required returns on investment for both division x and division y- Savvy Essay Writers | savvyessaywriters.net

Task 1 – Cost of Capital

Part (a)

ABC (Ltd) has two divisions: Division X and Division Y. Each division employs debt equal to 30% and preferred stock equal to 20% of its total requirements, with equity capital used for the remainder. The current borrowing rate is 14%, and the company’s tax rate is 35%. At present, preferred stock can be sold yielding 13%.

ABC (Ltd) wishes to establish a minimum standard for each division based on the risk of that division. This standard then would serve as the transfer price of capital to the division. The company has taught about using the capital asset pricing model in this regard. It has identified two sample companies, with model value betas of 0.80 for Division X and 1.10 for Division Y.

Assume that the sample companies had similar capital structures to that of ABC (Ltd). The risk-free rate is currently 13% and the expected return on the market portfolio is 17%.

Using the CAPM approach, you are required to calculate the weighted average required returns on investment for both Division X and Division Y?

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