Intermountain Resources is a multidivisional company. It has three divisions with the following betas and proportion of the firms total assets:
Division Beta Proportion of Assets
Natural gas pipelines 0.70 50%
Oil and gas production 1.20 30
Oil and gas exploration 1.50 20
The risk free rate is 7% and the market risk premium is 8%.
a. What is the firms weighted average beta?
b. What required equity rate of return should the firm use for average-risk projects in its natural gas pipeline division?
c. What required equity rate of return should the firm use for average risk projects in its oil and gas exploration division?