Explain what would occur if EPC were to use a single corporate-wide WACC for evaluating investment opportunities in each of its lines of business? What would be the likely consequence for the company over time if this were to occur?

Case 5

Recommend weighted average costs of capital (i.e., WACCs) for EPC’s consumer
products, medical devices, and pharmaceuticals divisions respectively? (Remember to
unlever comparable company betas and to use average betas of the comparable
companies in calculating divisional WACCs. Then remember to relever the beta to
represent the target leverage ratio in market value terms.)

2. Recommend the types of investments that should be evaluated using EPC’s divisional
WACCs?

3. Explain what would occur if EPC were to use a single corporate-wide WACC for
evaluating investment opportunities in each of its lines of business? What would be the
likely consequence for the company over time if this were to occur?

4. Calculate EPC’s corporate-wide WACC. (Remember, EPC’s corporate-wide beta is
1.04. This beta is based on EPC’s historical market leverage ratio.)