Divisional cost of capital refers to the problem of estimating the required return for a project, for example, a division of a firm, when no data regarding the market price of risk for the division are available. Divisional cost of capital is the hurdle rate that, when used as the minimum required rate of return in evaluating projects, will ensure that shareholder wealth is increased by investing in positive net present value projects. Block (2003) notes that, ‘‘to the extent that divisions in a corporation have degrees of risk and financial characteristics that are different from the parent corporation, using the overall corporate hurdle rate is certain to lead to incorrect decisions and failure to maximize stockholder wealth’’ (p. 345). Bower and Jenks (1975) have demonstrated the potentially serious adverse effects of ignoring the differential risks of divisions when utilizing hurdle rates. The importance of estimating divisional cost of capital was made clear in aFinancial Management(see Ang, 1989) panel session featuring financial executives from several large firms. According to Jack A. Gunn, ‘‘We at Southwestern Bell find the idea and the notion of divisional cost of capital very appealing’’ (p. 20). Estimation of divisional cost of capital takes on added importance for firms that are subject to cost of capital regulation.