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Opportunity cost of capital for the entire company

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Bar Co., an all equity-financed company, has traditionally employed a firm-wide discount rate for capital-budgeting purposes. However, its two divisions - publishing and entertainment - have different degrees of market risk given by ßPUB = 0.8, ßENT = 1.2. The beta for the overall firm is 1.0. Use 3% as the risk-free rate and 9% as the expected return on the market. The firm is considering the following projects:

Project IRR
Publishing A .14
Publishing B .125
Publishing C .09
Entertainment D .15
Entertainment E .10
Entertainment F .08

a. Which projects would the firm accept if it uses the opportunity cost of capital for the entire company?

b. Which projects would it accept if it estimates and uses a cost of capital separately for each division?

c. If Bar Co. only uses the firm-wide cost of capital for all decisions, what will happen to the riskiness of the firm, compared to if it used appropriate divisional costs of capital?

Reference no: EM132679096

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