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?