Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 9, Problem 21SP
a)
Summary Introduction
To determine: The divisional cost of capital for the E&P divisions.
b)
Summary Introduction
To determine: The implications of using firm wide cost of capital to evaluate new investment proposal in estimated cost of capital.
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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?
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Stout Inc. uses only equity capital, and it has two equally-sized divisions. Division A’s cost of capital is 8.0%, Division B’s cost is 12.0%, and the corporate (composite) WACC is 10.0%. 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.
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b.
A Division B project with a 10% return
c.
A Division A project with a 7.0% return
d.
A Division A project with a 9.0% return
e.
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North Melbourne Holdings Ltd is a diversified industrial firm whose overall WACC is 11%. It is considering three independent projects, Projects A, B and C. Project A is in its textiles division, Project B is in its construction division and Project C is in its mining division. The expected returns from these projects are 7%, 8.9% and 12.4% respectively. The costs of capital for each division, based on the beta of firms in the respective industries, are 9.5%, 11.6% and 14.1% respectively. Which projects should the firm accept?
Chapter 9 Solutions
Foundations Of Finance
Ch. 9 - Define the term cost of capital.Ch. 9 - Prob. 2RQCh. 9 - Why do firms calculate their weighted average cost...Ch. 9 - Prob. 4RQCh. 9 - Prob. 5RQCh. 9 - Prob. 6RQCh. 9 - Prob. 7RQCh. 9 - Prob. 1SPCh. 9 - Prob. 2SPCh. 9 - (Cost of equity) In the spring of 2018, the Brille...
Ch. 9 - Prob. 4SPCh. 9 - Prob. 5SPCh. 9 - Prob. 6SPCh. 9 - Prob. 7SPCh. 9 - (Cost of internal equity) Pathos Co.s common stock...Ch. 9 - (Cost of equity) The common stock for the Bestsold...Ch. 9 - Prob. 10SPCh. 9 - Prob. 11SPCh. 9 - Prob. 12SPCh. 9 - a. Rework Problem 9-12 as follows: Assume an 8...Ch. 9 - (Capital structure weights) Wingate Metal...Ch. 9 - (Weighted average cost of capital) The capital...Ch. 9 - Prob. 17SPCh. 9 - Prob. 18SPCh. 9 - Prob. 19SPCh. 9 - (Divisional costs of capital and investment...Ch. 9 - Prob. 21SPCh. 9 - Prob. 2.1MCCh. 9 - If you were to evaluate divisional costs of...
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- Bloom and Co. has no debt or preferred stock, it uses only equity capital, and has two equally-sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept? answer choices A Division X project with an 11% return. A Division Y project with a 12% return. A Division X project with a 9% return. A Division Y project with an 11% return. A Division Y project with a 13% return.arrow_forwardManagement has determined that in order to upgrade the competitor to Megatronics standards, an additional $375,000 of invested capital would be needed. a. Compute the current ROI of the Northeast Division and the division's ROI if the competitor is acquired. b. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor? c. Compute the ROI of the competitor as it is now and after the intended upgrade. d. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be infavor of the acquisition of the competitor?e. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrad-ing. f. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division's residual income if the competitor is acquired.g. If divisional management…arrow_forwardManagers from different departments in Bensen Systems, a large multinational corporation, have offered seven projects for consideration by the corporate office. A staff member for the chief financial officer used key words to identify the projects and then listed them in order of projected rate of return as shown below. If the company wants to grow rapidly through high leverage and uses only 5% equity financing that has a cost of equity capital of 10% and 95% debt financing with a cost of debt capital of 19%, which projects should the company undertake? Project ID Projected ROR, % per year Inventory 30.0 Technology 28.4 Warehouse 21.9 Maintenance 19.5 Products 13.1 Energy 9.6 Shipping 8.2arrow_forward
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