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?

When calculating the weighted cost of capital (WACC) for a company with multiple operating divisions, it is important to factor in each individual division’s cost of debt and equity. As an example, the WACC for each division should be adjusted to reflect their differences. To calculate the total WACC, you can use the formula: WACC = Cost of Debt + Proportional Debt.

Using different cost-of-capital techniques between divisions can also cause problems. Firstly, it could lead to discrepancies within how projects or investments are evaluated as certain departments may appear more profitable than others based on their respective costs — even if they are actually yielding similar results in terms of return on investment. It could also lead to confusion among upper management as well as tension within the team if different ways of measuring value are used.

Finaly, using different metrics to evaluate performance makes it more difficult to see the actual progress that has been made. It is then harder for you make informed decisions on future strategies or how additional resources can be used. In general, there are advantages to using different cost of capital based on the specific situation. However, this must be weighed up against possible downsides so everyone receives a fair treatment.