Question

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?

Answer 1

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

Step-by-step 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%