Verano Inc. has two business divisions - a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 11% and the waste water clean-up business has a cost of equity capital of 6%. 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

Business

Camryn Zhang

4 November, 04:47

Verano Inc. has two business divisions - a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 11% and the waste water clean-up business has a cost of equity capital of 6%. 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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Tania · Answer 1

Verano Inc. should use its cost of equity capitakl for waste water business = 6%

Explanation:

The appropriate cost of capital to evaluate the business should be for the same business. Here Verano is considering a purchase of another company in the waste water business using equity financing so the cost of equity of the waste water business should be considered for evaluation of the Proposal.