ZuoTi.Pro
Question

6.     Ajax Inc. has 2 divisions and a cost of capital of 14%. The Safe Division...

6.     Ajax Inc. has 2 divisions and a cost of capital of 14%. The Safe Division has a cost of capital of 10% while the Risky Division has a cost of capital of 18%. The Risky Division has a new project that is guaranteed with no risk. The risk-free rate is 4%. What rate (required return) should they use in evaluating the guaranteed project?
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Even though the new project belongs to the division with risk, the project has no risk. In case of no risk, we should use the risk free rate of 4% to evaluate the guranteed project.

Hence, they should use the 4% rate of required return to evaluate the guranteed project.

Do let me know in the comment section in case of any doubt.

0 0
Add a comment
Know the answer?
Add Answer to:
6.     Ajax Inc. has 2 divisions and a cost of capital of 14%. The Safe Division...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of...

    Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept? A Division B project with a 13% return. A Division B...

  • Conglomo Inc. has a cost of capital of 1796. This is based on a risk-free rate...

    Conglomo Inc. has a cost of capital of 1796. This is based on a risk-free rate of 4%, a market risk premium of 1096 and the firm's average beta of 1.3. This is a breakdown of the firm's divisions: 1/3 is Automotive Retailer Beta = 2.0 1/3 is Computer Manufacturer Beta = 1.3 1/3 is Electric Utility Beta = 0.6 When evaluating a new electrical utility investment, what required return should Conglomo use? A. 1796 B. 1496 C. 10% D....

  • Combo Inc. is a big conglomerate with two divisions. One division (MIN) is in mining and...

    Combo Inc. is a big conglomerate with two divisions. One division (MIN) is in mining and another is in transportation (TRAN). MIN has a weighted average cost of capital (WACC) of 149. TRAN has a WACC of 10%. Which of the following statements is correct? O A. Combo's WACC will be greater than 149 B. Combo should use 10% for evaluating all projects OC. Combo should use 149 for evaluating all projects D. Combo should use a different WACC for...

  • 7. Factors that affect the cost of capital equation Each of the following factors affects the...

    7. Factors that affect the cost of capital equation 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 effect of the tax rate on the cost of debt in the weighted average cost of capital equation The firm's dividend payout ratio The impact of a firm's cost of capital on managerial decisions Consider the...

  • Albright Properties Inc. (API) has three divisions: Division Beta Proportion of Firm’s Assets Property management 1.0...

    Albright Properties Inc. (API) has three divisions: Division Beta Proportion of Firm’s Assets Property management 1.0 30% Land resources 1.5 40 Financial services — 30 The leveraged beta for API is 1.1. API has a consolidated capital structure consisting of 50 percent debt and 50 percent equity. The Financial Services Division’s capital structure is 80 percent debt and 20 percent equity. API is planning to finance new projects in that division with a capital structure of 90 percent debt and...

  • Assignment 10 - The Cost of Capital Each of the following factors affects the weighted average...

    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...

  • Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of...

    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 O The effect of the tax rate on the cost of debt in the weighted average cost of capital equation The firm's capital budgeting decision rules The impact of cost of capital on managerial decisions Consider the following case: Edinburgh Exports has two divisions, L and...

  • Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of...

    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. Tax rate The inflation rate The firm's capital structure The impact of cost of capital on managerial decisions Consider the following case: Anderson Animations Corporation (AAC) 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...

  • 8. Factors that affect the cost of capital equation Each of the following factors affects the...

    8. Factors that affect the cost of capital equation 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. Tax rate The inflation rate от The firm's capital budgeting decision rules The impact of a firm's cost of capital on managerial decisions Consider the following case: Lancashire Railway Company (LRC) has two divisions, L and H. Division L is the company's low-risk...

  • 1. Sunshine Inc. has two equally-sized divisions. Division A has a beta of 0.8 and Division...

    1. Sunshine Inc. has two equally-sized divisions. Division A has a beta of 0.8 and Division B has a beta of 1.2. The company is 100% equity financed. The risk-free rate is 6% and the market risk premium is 5%. Sunshine assigns different hurdle rates to each division based on each division's market risk. Which of the following statements is CORRECT? Sunshine's composite WACC is 10%. b. Division B has a lower WACC than Division A. C. If the same...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT