The impact of a firm's cost of capital on managerial decisionsConsider the following case:Marston Manufacturing Company has two divisions, L and H. Division L is the company's low-risk division and would have a weightedaverage cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and wouldhave a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the samesize, the company has a composite weighted average cost of capital of 11%. Division L is considering a project with an expected returnof 9.5%.Should Marston Manufacturing Company accept or reject the project?O Reject the projectO Accept the projectOn what grounds do you base your accept-reject decision?O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division.O Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.

A project should be accepted if its expected return is higher than its WACC. The appropriate WACC to…

Should Marston Manufacturing Company accept or reject the project? O Reject the project O Accept the project On what grounds do you base your accept-reject decision? O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. O Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.

Should Marston Manufacturing Company accept or reject the project? O Reject the project O Accept the project On what grounds do you base your accept-reject decision? O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. O Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter11: Performance Evaluation And Decentralization

Section: Chapter Questions

Problem 32E: Use the following information for Exercises 11-31 and 11-32: Washington Company has two divisions:...

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The condensed income statement for the Consumer Products Division of Tri-State Industries Inc. is as follows (assuming no support department allocations): The manager of the Consumer Products Division is considering ways to increase the return on investment. a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that 143,750,000 of assets have been invested in the Consumer Products Division. b. If expenses could be reduced by 3,450,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division?
Use the following information for Exercises 11-31 and 11-32: Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last years results: Washingtons actual cost of capital was 12%. Exercise 11-32 Residual Income Refer to the information for Washington Company above. In addition, Washington Companys top management has set a minimum acceptable rate of return equal to 8%. Required: 1. Calculate the residual income for the Adams Division. 2. Calculate the residual income for the Jefferson Division.
Use the following information for Exercises 11-31 and 11-32: Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last years results: Washingtons actual cost of capital was 12%. Exercise 11-31 Economic Value Added Refer to the information for Washington Company above. Required: 1. Calculate the EVA for the Adams Division. 2. Calculate the EVA for the Jefferson Division. 3. CONCEPTUAL CONNECTION Is each division creating or destroying wealth? 4. CONCEPTUAL CONNECTION Describe generally the types of actions that Washingtons management team could take to increase Jefferson Divisions EVA?
The income statement comparison for Rush Delivery Company shows the income statement for the current and prior year. A. Determine the operating income (loss) (dollars) for each year. B. Determine the operating income (percentage) for each year. C. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the ROI. Was the decision to invest additional assets in the company successful? Explain. D. Assuming an 8% cost of capital, calculate the RI for each year. Explain how this compares to your findings in part C.
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 dividend payout ratio The impact of a firm’s 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 L is considering a project with an expected return of 9.5%. Should Acme Manufacturing Corporation accept or reject the project? Reject the project…
Marston Manufacturing Company 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 L is considering a project with an expected return of 9.5%. Should Marston Manufacturing Company accept or reject the project? Group of answer choices Reject the project since the expected return of the project is less than the WACC of the division Accept the project since the WACC of the division is greater than the expected return Reject the project since the WACC of the division is lower than the expected return of the project Accept the project since the expected return is greater than the WACC of…
The Central Division of Wellington Company has a return on investment (ROI) of 12.0%, using assets of $66,000. If the residual income was $2,640, what was the division's cost of capital? (Ignore tax.) Multiple Choice 8.0% None of these. 4.8% 12.0% 24.0%
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Subject: accounting ABC Corporation has divisions. One of the division is currently, making a profit of OMR 82,000 per year. On investment of OMR 500,000 and has a target return of 15%. The manager of a company is considering a new investment, which will require additional investment of OMR 100,000 and will generate additional profit of OMR 17,000 per year. Calculate whether or not the new investment is attractive to the company as a whole. Calculate the ROI of the division, with and without new investment and hence determine whether or not manager would decide to accept the new investment
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. Interest rates in the economy The performance of index funds, such as the S&P 500 The firm’s capital structure 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 H is considering a project with an expected return of 12%. Should Edinburgh Exports accept or reject the project? Reject…
The sales, income from operations, and invested assets for each division of Jackson Corporation are as follows: Sales Income from Operations Invested Assets Division E $4,100,000 $550,000 $2,400,000 Division F 4,700,000 760,000 2,500,000 Division G 7,200,000 860,000 2,800,000 (a) Using the Dupont ROI expanded expression, determine the profit margin, investment turnover, and rate of return on investment for each division. You must provide 3 answers for each division! Round all answers to two decimal places. (b) Which Division is the most profitable per dollar invested? (a) (b)