Instructions: 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? If the overall company weighted average cost of capital (WACC) were used as the hurdle rate for all divisions, would more conservative or riskier divisions get a greater share of capital? Explain your reasoning. What are two techniques that you could use to develop a rough estimate for each division's cost of capital? Your initial response should be 200 to 250 words.
Question:
My business Nicki Appleseed Inc. needs to upgrade office building which will cost $40,000. In order for us to fund this project my company will have common stock for $20,000 with an expected return of 8%, I will also issue preferred stock of $10,000 with an expected return of 14% as well as bonds for $10,000 that I will pay 5% interest on. What is the weighted average cost of capital for the investment?