Divisional Weighted Average Cost of Capital - Anheuser-Busch Companies, Inc.

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In 2006 Anheuser-Busch Companies, Inc (BUD) engaged in the production and distribution of beer worldwide, operating through four business segments: Domestic Beer, International Beer, Packaging, and Entertainment. The Domestic Beer segment offers beer under Budweiser, Michelob, Busch, and Natural brands in the United States in addition to a number of specialty beers including non-alcohol brews, malt liquors, and specialty mail beverages, as well as energy drinks. The International Beer segment markets and sells Budweiser and other brands outside the United States and operates breweries in the United Kingdom and China. In addition, the International Beer segment also negotiates and administers license and contract brewing agreements with various foreign brewers. The Packaging segment manufactures beverage cans and can lids for drink customers, buys and sells used aluminum beverage containers, and recycles aluminum containers. Finally, the Entertainment segment owns and operates theme parks.

In 2005 Anheuser-Busch reported the following segment revenues and net income:

  

($ millions)	Domestic Beer	International Beer	Packaging	Entertainment
2005
Gross Sales	$10,121.00	$864.00	$1,831.50	$904.40
Income before income taxes	2,293.40	70.10	120.40	215.10
Equity Income	-	147.10	-	-
Net Income	$1,421.90	$433.70	$74.60	$133.40

Assume that you have just been charged with the responsibility for evaluating the divisional cost of capital for each of the business segments.

a) Outline the general approach that you would take in evaluating the cost of capital for each of the business segments.

b) Should the fact that $1,156 million of the Packaging segment’s revenues come from internal sales to other Busch segments affect your analysis? If so, how?