6. 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 The firm's capital budgeting decision rules The impact of cost of capital on managerial decisions Consider the following case: Acme Manufacturing Corporation 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 H is considering a project with an expected return of 12%. Should Acme Manufacturing Corporation accept or reject the project? O Accept the project O 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. O Division H's project should be rejected since its return is less than the risk-based cost of capital for the division.
6. 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 The firm's capital budgeting decision rules The impact of cost of capital on managerial decisions Consider the following case: Acme Manufacturing Corporation 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 H is considering a project with an expected return of 12%. Should Acme Manufacturing Corporation accept or reject the project? O Accept the project O 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. O Division H's project should be rejected since its return is less than the risk-based cost of capital for the division.
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 5P
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Question
Transcribed Image Text:6. 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
The firm's capital budgeting decision rules
The impact of cost of capital on managerial decisions
Consider the following case:
Acme Manufacturing Corporation 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 H is considering a project with an expected return
of 12%.
Should Acme Manufacturing Corporation accept or reject the project?
Accept the project
O Reject the project
On what grounds do you base your accept-reject decision?
Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division.
O Division H's project should be rejected since its return is less than the risk-based cost of capital for the division.
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