Verano Inc. has two business divisions long dash a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 12 % and the waste water clean-up business has a cost of equity capital of 8 %. Verano has 50% of its revenue from software and the rest from the waste water business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business?

Question

Krista Duarte

Business

30 June, 14:26

Verano Inc. has two business divisions long dash a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 12 % and the waste water clean-up business has a cost of equity capital of 8 %. Verano has 50% of its revenue from software and the rest from the waste water business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business?

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Answers (1)

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Nathalie · Answer 1

appropriate cost of capital to evaluate the business is 8%

Explanation:

given data

cost of equity capital = 12 %

revenue from software = 50%

cost of equity capital = 8 %

to find out

the appropriate cost of capital

solution

we know that

Cost of capital = cost of capital in same industry or cost of capital in the related division

so here cost of capital equal to business is 8% so that Cost of capital will be 8%

hence the appropriate cost of capital to evaluate the business is 8%