Need cite Question 1 & 3
Divisional Cost of Capital – Divisional Betas
1.Why do we have to concern ourselves with divisional betas? After answering that question, perhaps others will discuss the two techniques mentioned in our text that can be used to estimate divisional betas.
Divisional Beta (example). Here’s an example. In the mid-1980s I worked for Gencorp, a $1billion+ conglomerate with interests in tire manufacturing, motion picture studios, plastics and chemical manufacturing, bottling companies, automotive manufacturing and defense contracting. Gencorp owned Penn Racquet Sports, the maker of Penn tennis balls and racquetballs. Penn tennis balls controlled approximately 40% of the U.S. tennis ball market while Wilson Sporting Goods controlled an additional 40% of the market.
2. What problems can you identify in trying to value the proper divisional cost of capital to use for Penn Racquet Sports (assuming we are using the CAPM approach)?
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3. After reading about Miller & Modigliani’s work, briefly summarize the empirical evidence and what this implies for financial managers.
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