Week 4 Discussion 2

Corporations often use different costs of capital for different operating divisions. Using an example, calculate the weighted cost of capital (WACC). What are some potential issues in using varying techniques for cost of capital for different divisions? If the overall company weighted average cost of capital (WACC) were used as the hurdle rate for all divisions, would more conservative or riskier divisions get a greater share of capital? Explain your reasoning. What are two techniques that you could use to develop a rough estimate for each division’s cost of capital? Your initial response should be 200 to 250 words.

Text

Hickman, K. A., Byrd, J. W., & McPherson, M. (2013). Essentials of finance [Electronic version]. Retrieved from https://content.ashford.edu/

• Chapter 9: Risk and Return
• Chapter 10: Cost of Capital

Multimedia

Khan Academy. (2011). Investment and Consumption (Links to an external site.)Links to an external site.[Video file]. Retrieved from https://www.khanacademy.org/economics-finance-domain/macroeconomics/gdp-topic/GDP-components-tutorial/v/investment-and-consumption
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Preston Psych. (2012) What is financial risk (Links to an external site.)Links to an external site.[Video file]. Retrieved from https://www.youtube.com/watch?v=-4mXnFK0ecM
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Sykes, A. (Producer &Director). (2006). Evaluating business performance: Small business case studies [Video file]. Retrieved from the Films On Demand database.
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Recommended Resources

Articles

Chen, M. –H.  (2003). Risk and return: CAPM and CCAPM (Links to an external site.)Links to an external site.. Quarterly Review of Economics and Finance, 43(2), 369-393. Retrieved from http://jurnalilmiahmanajemen.files.wordpress.com/2011/03/risk-and-return.pdf

 Elton, E. J., & Gruber, M. J. (1997). Modern portfolio theory, 1950 to date (Links to an external site.)Links to an external site.. Journal of Banking & Finance, 21(11), 1743-1759. Retrieved from http://pages.stern.nyu.edu/~eelton/papers/97-dec.pdf

 Habib, A. (2006). Information risk and the cost of capital: Review of the empirical literature. Journal of Accounting Literature, 25, 127-168. Retrieved from the ProQuest database.

• The full-text version of this article can be accessed through the ProQuest database in the Ashford University Library.

Treynor, J. L. (1993). In defense of the CAPM. Financial Analysts Journal, 49(3), 11-11. Retrieved from the ProQuest database.

• The full-text version of this article can be accessed through the ProQuest database in the Ashford University Library.