PRIN.OF CORPORATE FINANCE
PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 16, Problem 23PS

Dividend clienteles Mr. Milquetoast admires Warren Buffett and believes that Berkshire Hathaway is a good investment. He wants to invest $100,000 in Berkshire Hathaway B shares but hesitates because Berkshire Hathaway has never paid a dividend. He needs to generate $5,000 per year in cash for living expenses. What should Mr. Milquetoast do?

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?
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Dividend explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Wy7R-Gqfb6c;License: Standard Youtube License