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 budgeting decision rules 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 Accept the project On what grounds do you base your accept-reject decision? ○ Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. ○ Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.
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 budgeting decision rules 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 Accept the project On what grounds do you base your accept-reject decision? ○ Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. ○ Division L's project should be accepted, because 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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Transcribed Image Text: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 budgeting decision rules
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
Accept the project
On what grounds do you base your accept-reject decision?
○ Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division.
○ Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.
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