Web Appendix 12D: Techniques for Measuring Beta Risk
Copyright Cengage Learning. Powered by Cognero.
Page 1
1. Which of the following methods involves calculating an average beta for comparable firms and using that beta to
determine a project’s beta?
a. Risk premium method
b. Pure play method
c. Accounting beta method
d. CAPM method
2. Northern Conglomerate has two divisions, Division A and Division B. Northern looks at competing pure-play firms to
estimate the betas of each of the two divisions. After this analysis, Northern concludes that Division A has a beta of 0.8
and Division B has a beta of 1.6. The two divisions are the same size. The risk-free rate is 5.00% and the market risk
premium is 7.00%. Assume that Northern is 100% equity financed. What is the overall composite WACC for Northern
Conglomerate? Do not round your intermediate calculations.
a. 12.73%
b. 14.07%
c. 13.40%
d. 10.05%
e. 15.41%
