APM September/December 2023 – problem 3b- ROI

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September 4, 2024 at 12:11 pm #710759
quytuan
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APM September/December 2023 – problem 3b ask for” evaluate the three divisions’ performance using the two divisional performance indicators, return on investment (ROI) and residual income (RI)”.
In the published answer, the notional capital charge of industrial is 9%, which is the estimation by the chief financial officer (CFO) based on Industrial’s notional cost of capital as 9% years ago.
I want to ask if that the cost of capital at office and industrial can be 11%?, which is the weighted cost of capital of ruard as these two divisions account for a total of 80% of the total revenue of ruard. Ruard has weighted average cost of capital (WACC) of 11%. I think it is difficultt to find realistic notional capital charge here
Thanks!
September 5, 2024 at 12:07 pm #710824
Ken Garrett
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Different divisions are likely to have different risk characteristics and this will influence each division’s cost of capital so it’s probably better to use divisional cost of capital rather than a weighted average.
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