INA United has 2 companies of the same size, company I sells computers and company II in the restaurant business. The CFO of INA United believes that independent restaurants typically have a WACC of 8%, while independent computer companies typically have a WACC of 12%. He also believes that the two companies have the same risks as other competing companies. INA United estimates that the company's WACC is 10%. A consultant has suggested using an 8% hurdle rate for restaurant companies and a 12% hurdke rate for computer companies. However, the CFO of INA United disagreed, and set a 10% WACC for all projects in both companies. Which of the following statements is TRUE? a. INA United's CFO's decision not to use the risk-adjusted WACC according to the consultant's recommendation will result in him accepting more projects in computer companies and fewer projects in restaurants. This does not affect the intrinsic value of the company. b. INA United's CFO's decision not to adjust the amount of risk will benefit the restaurant. So restaurants are likely to become a bigger part of INA United over time. c. INA United's CFO's decision not to adjust the risk scale means the company will receive a lot of projects from computer companies and too few projects from restaurants. This will lead to a decrease in the intrinsic value of the company over time. d. INA United's CFO's decision not to adjust the risk scale means that the company will receive many projects from the restaurant business and too few projects from computer companies. This will cause a decrease in the intrinsic value of the company from time to time. e. INA United's CFO's decision not to adjust the risk scale meant that the company would receive too many projects from computer companies and too few projects from restaurants. This will affect the company's capital structure but will not affect its intrinsic value.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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INA United has 2 companies of the same size, company I sells computers and company II in the restaurant business. The CFO of INA United believes that independent restaurants typically have a WACC of 8%, while independent computer companies typically have a WACC of 12%. He also believes that the two companies have the same risks as other competing companies. INA United estimates that the company's WACC is 10%. A consultant has suggested using an 8% hurdle rate for restaurant companies and a 12% hurdke rate for computer companies. However, the CFO of INA United disagreed, and set a 10% WACC for all projects in both companies. Which of the following statements is TRUE? a. INA United's CFO's decision not to use the risk-adjusted WACC according to the consultant's recommendation will result in him accepting more projects in computer companies and fewer projects in restaurants. This does not affect the intrinsic value of the company. b. INA United's CFO's decision not to adjust the amount of risk will benefit the restaurant. So restaurants are likely to become a bigger part of INA United over time. c. INA United's CFO's decision not to adjust the risk scale means the company will receive a lot of projects from computer companies and too few projects from restaurants. This will lead to a decrease in the intrinsic value of the company over time. d. INA United's CFO's decision not to adjust the risk scale means that the company will receive many projects from the restaurant business and too few projects from computer companies. This will cause a decrease in the intrinsic value of the company from time to time. e. INA United's CFO's decision not to adjust the risk scale meant that the company would receive too many projects from computer companies and too few projects from restaurants. This will affect the company's capital structure but will not affect its intrinsic value.
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