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 30% Oil and gas production 1.00 30 Oil and gas exploration 1.20 40 The risk-free rate is 10 percent, and the market risk premium is 6 percent.
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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 | 30% |
| Oil and gas production | 1.00 | 30 |
| Oil and gas exploration | 1.20 | 40 |
The risk-free rate is 10 percent, and the market risk premium is 6 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.
%
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- Q-2. (a) A company has a 12% WACC. One of its core divisions is considering two mutually exclusive investments with the net cash flows given below. The division’s beta is βDIV = 1.6, risk free rate is kRF = 7% and risk-premium on the market is RPM = 6% vi. What is each project’s profitability index?vii. What is difference between mutually exclusive and independent projects?viii. List the characteristics of a good capital budgeting technique.ix. Briefly explain the acceptance and rejection criteria for each technique regarding mutually exclusive and independent projects.Mid-States is a multi-divisional utility company. Mid-States has fourdivisions with the following betas and proportions of the firm's totalassets:Division Beta % of AssetsElectric & Gas 0.75 45Bus transportation 1.21 20Real estate 2.80 25Recreation 1.85 10The risk-free rate is 2 percent and the return on the stock market as awhole is 15%. If Mid-States is considering a residential development,what should the firm use as its cost of equity in evaluating this project?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 0.5, 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, the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 7 percent) is 14 percent 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. WACCs Division A 9.75 % Division B % Division C % Division D %
- Q-2. (a) A company has a 12% WACC. One of its core divisions is considering two mutually exclusive investments with the net cash flows given below. The division’s beta is βDIV = 1.6, risk free rate is kRF = 7% and risk-premium on the market is RPM = 6% Given the information above, you are required to answer the followings:i. What is each project’s Payback and discounted payback periods and interpret these numbers?ii. What is each project’s NPV?iii. What is each project’s IRR?iv. What is each project’s MIRR?v. From your answers to Parts a, b, c and d, which project would be selected?vi. What is each project’s profitability index?vii. What is difference between mutually exclusive and independent projects?viii. List the characteristics of a good capital budgeting technique.ix. Briefly explain the acceptance and rejection criteria for each technique regarding mutually exclusive and independent projects. (b) Kindly Provide brief answers to the following:i. What is the difference between…Q-2. (a) A company has a 12% WACC. One of its core divisions is considering two mutually exclusive investments with the net cash flows given below. The division’s beta is βDIV = 1.6, risk free rate is kRF = 7% and risk-premium on the market is RPM = 6% i. What is each project’s Payback and discounted payback periods and interpret these numbers?ii. What is each project’s NPV?iii. What is each project’s IRR?iv. What is each project’s MIRR?v. From your answers to Parts a, b, c and d, which project would be selected?vi. What is each project’s profitability index?vii. What is difference between mutually exclusive and independent projects?viii. List the characteristics of a good capital budgeting technique.ix. Briefly explain the acceptance and rejection criteria for each technique regarding mutually exclusive and independent projects.Assume that your company is made up of two divisions. Division 1 comprises 40 percent of the company while Division 2 makes up 60 percent of the company. The levered beta for the company as a whole is equal to 1.20 and the company's debt/value ratio is 50 percent (you may assume that appropriate values for Division 1 and 2 are also 50 percent). If the risk-free rate is 3.0 percent, the market risk premium is 6.00 percent, the marginal tax rate is 40 percent, and the before-tax cost of debt is 8.00 percent then, as you can calculate, the WACC for the company is 7.50 percent. As you can also calculate, using the Hamada equations, the unlevered beta for the company as a whole is 0.75. Now assume that other "pure" companies equivalent to Division 2 have an average unlevered beta of 0.61. Using this proxy for Division 2's unlevered beta, you should be able to determine (back out) the unlevered beta for Division 1, re-lever both betas, calculate the corresponding cost of equity, and then…
- 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.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 0.7, 1.3, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 25 percent debt and 75 percent equity, the current cost of equity (based on an average firm beta of 1.1 and a current risk-free rate of 3 percent) is 13 percent and the after-tax yield on the company's bonds is 8 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, 1.1, 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?d) Calculate the firm’s weighted average cost of capital (WACC) e) XYZAB Limited has a Research and Development division operating independently to produce cutting-edge products. This division has its own target capital structure of 30% debt and 70% equity as well as a beta of 1.5 and cost of debt of 14%. Given a market risk premium of 8%, a risk-free rate of 6%, what WACC should the division use to discount its cashflows?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?