Question

Assignment 10 - The Cost of Capital Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm's control? Check all that apply. The general level of stock prices The firm's capital budgeting decision rules The effect of the tax rate on the cost of debt in the weighted average cost of capital equation The impact of cost of capital on managerial decisions Consider the following case: Edinburgh Exports has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division His considering a project with an expected return of 12%. Should Edinburgh Exports accept or reject the project? Accept the project Reject the project On what grounds do you base your accept-reject decision? O Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division. Division H's project should be rejected since its return is less than the risk-based cost of capital for the division. •

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut A = = = V 11 B- A A Wrap Text Merge & Center - General $ -% , Number Σ AutoSum : A Fill Sort & . Conditional Format sell Insert Delete Format 2 Clear Sort & Find & Find & Font Alignment Styles Cells Editing Calibri E Copy Paste Format Painter B I U Clipboard LB425 KR KSKT 406 407 408 409 KU KV KW KX K Y KZ LA LB LC LD LE LF LG 410 411 412 413 414 415 416 417 ANS 1 FIRM CAN NOT CONTROL THE GENERAL LEVEL OF STOCK PRICES EFFECT OF TAX RATE ON COST OF DEBT IN WACC EQUATION ANS 2 REJECT THE PROJECT RETURN (12%) IS LOWER THAN ITS OWN WACC (14%) 418 419 420 ANS 3 DIVISION H'S PROJECT SHOULD BE REJECTED BECAUSE ITS RETURN IS LESS THAN RISK BASED COST OF CAPITAL FOR THE DIVISION 421 422 423 424 425 426 H convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: CF135 cap stru WACC BOJ 120% RESI el O Rea ELEB * * QENG 30-10-2019