Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currentlyhas four divisions, A through D, with average betas for each division of 0.5, 1.0, 1.2, and 1.5, respectively.Assume all current and future projects will be financed with 50 percent debt and 50 percent equity, thecurrent cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7 percent) is 14percent and the after-tax yield on the company's bonds is 9 percent.What will the WACCs be for each division?Note: Round your answers to 2 decimal places.WACCsDivision A9.75 %Division B%Division C%Division D%

DivisionWACCDivision A9.75%Division B11.50%Division C12.20%Division D13.25%Explanation:Step 1:…

Answered: Suppose your firm has decided to use a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 18P

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Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.1, 1.3, and 1.5, respectively. If all current and future projects will be financed with 25 percent debt and 75 percent equity, and if the current cost of equity (based on an average firm beta of 1.2 and a current risk-free rate of 4 percent) is 12 percent and the after-tax yield on the company's bonds is 9 percent, what will the WACC's be for each division?
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.8, 1.2, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 30 percent debt and 70 percent equity, the current cost of equity (based on an average firm beta of 1.1 and a current risk-free rate of 6 percent) is 13 percent and the after-tax yield on the company’s bonds is 11 percent.What will the WACCs be for each division? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) WACCs Division A % Division B % Division C % Division D %
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.3, 1.4, and 1.5, respectively. Assume all current and future projects will be financed with 35 percent debt and 65 percent equity, the current cost of equity (based on an average firm beta of 1.3 and a current risk-free rate of 4 percent) is 15 percent and the after-tax yield on the company’s bonds is 9 percent. What will the WACCs be for each division? Note: Do not round intermediate calculations. Round your final answers to 2 decimal places.
A plan sponsor is considering two U.K. investment managers, Birmingham Asset Management and Figleaf Equities, for the same mandate. Birmingham will produce on average an annual value-added return of 1.7 percent over the benchmark, with variability of the excess returns of 2.20 percent. Figleaf is expected to produce a higher annual value-added return of 4,1 percent, but with variability of excess returns around 11 percent.Calculate the information ratio for each and explain which manager offers the best record of performance.
Intermountain Resources is a multidivisional company. It has three divisions with the following betas and proportion of the firm’s total assets: Division Beta Proportion of Assets Natural gas pipelines 0.60 40% Oil and gas production 0.90 30 Oil and gas exploration 1.30 30 The risk-free rate is 10 percent, and the market risk premium is 9 percent. What is the firm’s weighted average beta? Round your answer to two decimal places. What required equity rate of return should the firm use for average-risk projects in its natural gas pipeline division? Round your answer to one decimal place. % What required equity rate of return should the firm use for average-risk projects in its oil and gas exploration division? Round your answer to one decimal place. %
You have estimated the NOPLAT for each of the divisions in a three-division firm at $20 million, $30 million, and $50 million, respectively, for Divisions A, B, and C. Using these figures, you assume that Divisions A, B, and C contribute 20, 30, and 50 percent, respectively, to overall firm value. Is this an appropriate valuation technique? Why or why not?
Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects: Expected Project Risk Return A High 15% B Average 12% C High 11% D Low 9% E Low 6% Which set of projects would maximize shareholder wealth? Group of answer choices 1. A, B, C, D, and E. 2. A, B, and C. 3. A, B, and D. 4. A and B. 5. A, B, C, and D.
EBS Plc, an all equity-financed firm, has three strategic business units. The polythene division has capital of £8m and is expected to produce annual returns of 11% for the next five years. Thereafter it will produce annual returns equal to the required rate of return for this risk level of 14%. The paper division has an investment level of £12m and a planning horizon of 10 years. During the planning horizon it will produce a return of 22% compared with a risk-adjusted required rate of return of 15%. The cottondivision uses £2m of capital, has a planning horizon of seven years and a required rate of return of 16% compared with the anticipated actual rate of 17% over the first seven years.I. Calculate the value of the firm.II. Draw a value-creation and performance spread chart.III. Discuss the advantages and disadvantages in using the Total Shareholder Return (TSR) and Wealth Added Index (WAI) to judge managerial performance.
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and the expected market rate of return is 11%. Your company has a beta of 0.75, and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be A. 15%. B. 9.25%. C. 4%. D. 11%. E. 0.75%
As the general manager of a firm, you are presented with an investment proposal from one of your divisions. Its net present value, if discounted at the cost of capital for your firm (which is 15 percent), is $ 1 00,000, and its internal rate of return is 20 percent. (a) What are the economic interpretations of the net present value and internal rate of return figures? In other words, what do they mean? (b) What, if any, additional information would you like to have before approving the project?
The Emu Manufacturing Company is considering five independent investment opportunities. The required investment outlays and expected internal rates of return (IRR) for these investments are shown below. The firm's cost of capital is 14% and its target optimal capital structure is a debt ratio of 30%. Internally generated funds totalling $900,000 are available for all investment opportunities. (i) Based on the IRR method, which investment(s) should be accepted? (ii) If the company were to undertake all acceptable investments, what amount should be paid out in dividends according to the residual dividend policy? (iii) What would be the amount of external finance required if the company were to undertake all acceptable investments?
Venus Projects LLC takes on various projects to increase their revenues or cut down costs. A great new business idea may require, for example, investing in the development of a new product or new Projects. Venus Projects LLC can accept any project which has an Internal Rate of Return above 10%. In capital budgeting, senior leaders like to know the estimated return on such investments. The internal rate of return is one method that allows them to compare and rank projects based on their projected yield. The investment with the highest internal rate of return is usually preferred. Calculate Internal Rate of Return (IRR) from the following Information Round off the final Answer Initial Investment = 95000 Salvage Value = 5000 The Life of Machine is 5 Years The Cash Flows after Depreciation and Tax (CFAT) are as follows Year 1 - 29500 Year 2 - 23100 Year 3 -25000 Year 4 -22700 Year 5 -24700 You can choose the Lower rate as 8 % and Higher rate as 12% . a. 17% and accept the…

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