Calculating divisional WACCs

1. Calculating divisional WACCs • Use the same formula for WACC, but inputs are now division-specific • How do we calculate beta for each division? • Divisions/segments are not publicly traded so we don’t observe a beta for each division • We can use Hamada’s equation (i.e., the unlevered and relevered betas)

2. Calculating divisional betas • Start with the betas of comparable publicly traded companies • Unlever each beta using each comparable company’s capital structure • The unlevered beta represents business risk • Take the average business risk and relever to reflect the division’s capital structure • Things to think about: • What is a “comparable” company? Look at the variability of the unlevered betas • What capital structure should you use for each division?

3. Calculating the WACC for the Petrochemicals division • We can think of the corporate beta as a weighted average of the divisional betas • So to get the beta for the Petrochemical division, we can use the corporate WACC, and the betas for the other two divisions • What corporate beta should you use?