the cost of debt of each of the divisions equaled the firm’s cost of debt as a whole.
Ben had started his career with MOLE right after graduating from UCLA 20 years ago and had been
involved in financing some of its most successful films.
Over the past 20 years, as he rose through the
company, he was amazed at how it had grown and changed.
The acquisition of the CEG group had just
made MOLE large enough that it could potentially compete with the really big Media companies.
Ben had recently taken a week long Finance course at Georgetown University's Executive Training
Program. His professor had described the concepts of WACC and divisional cost of capital for evaluating
investment projects. MOLE was currently at its target capital structure and had traditionally used a
discount rate of 14% for all its investment projects. However, Ben was wondering if the arbitrarily chosen
14% discount rate could be replaced by more rigorously estimated discount rates for MOLE as whole and
each of its two divisions.
Ben asked his staff to provide him with information to examine cost of capital.
As Ben paged through the
), he saw the recent MBA associate that he had hired last fall from Georgetown
University. The associate was bright and appeared to be well acquainted with the latest in financial theory.
A smile broke on Ben's face - here was someone
who could help him resolve these issues …
According to Miriam-
Webster’s online dictionary (
), MOLE has many
definitions including: a pigmented spot on the human body; a burrowing insectivore with tiny eyes, concealed ears, and soft fur;
the base unit of amount of pure substance in the International System of Units that includes the same number of elementary
entities as there are atoms in exactly 12 grams of the isotope carbon 12 (you may recall that the number of molecules in a mole
is Avagadro’s const
ant which is roughly 6.02 x 10
); and others.
Granted it has nothing to do with finance, but hey, reading
footnotes can be informative.
You’re doing great…keep going.