Enlightened Approach to WACC

Reducing the weighted average cost of capital (WACC) increases a company’s value. Remember, a firm is just a portfolio of projects; some projects have a positive NPV, and some have a negative NPV when evaluated using the WACC. Yet sometimes using the WACC to evaluate projects can be misleading and naive. Answer to the following: Under what circumstances would it be appropriate for a firm to use different costs of capital for its different operating divisions? If the overall corporate WACC were used for all divisions, what do you see as the issues and biases of such a practice? How would you estimate different costs of capital for the different divisions? Define two different methods to accomplish individual operating division costs of capital, and explain why your recommended methods would be effective.

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