Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 14, Problem 10CRCT
Divisional Cost of Capital [LO5] Under what circumstances would it be appropriate for a firm to use different costs of capital for its different operating divisions? If the overall firm WACC were used as the hurdle rate for all divisions, would the riskier divisions or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?
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Chapter 14 Solutions
Fundamentals of Corporate Finance
Ch. 14.1 - What is the primary determinant of the cost of...Ch. 14.1 - What is the relationship between the required...Ch. 14.2 - What do we mean when we say that a corporations...Ch. 14.2 - Prob. 14.2BCQCh. 14.3 - Why is the coupon rate a bad estimate of a firms...Ch. 14.3 - How can the cost of debt be calculated?Ch. 14.3 - How can the cost of preferred stock be calculated?Ch. 14.4 - Prob. 14.4ACQCh. 14.4 - Prob. 14.4BCQCh. 14.4 - Under what conditions is it correct to use the...
Ch. 14.5 - Prob. 14.5ACQCh. 14.5 - Prob. 14.5BCQCh. 14.6 - Prob. 14.6ACQCh. 14.6 - Why do you think we might prefer to use a ratio...Ch. 14.7 - What are flotation costs?Ch. 14.7 - How are flotation costs included in an NPV...Ch. 14 - A firm has paid dividends of 1.02, 1.10, 1.25, and...Ch. 14 - Prob. 14.3CTFCh. 14 - Why is the tax rate applied to the cost of debt...Ch. 14 - What approach to a projects costs of capital...Ch. 14 - What is the flotation cost of equity for a firm...Ch. 14 - WACC [LO3] On the most basic level, if a firms...Ch. 14 - Book Values versus Market Values [LO3] In...Ch. 14 - Project Risk [LO5] If you can borrow all the money...Ch. 14 - Prob. 4CRCTCh. 14 - DCF Cost of Equity Estimation [LO1] What are the...Ch. 14 - SML Cost of Equity Estimation [LO1] What are the...Ch. 14 - Prob. 7CRCTCh. 14 - Cost of Capital [LO5] Suppose Tom OBedlam,...Ch. 14 - Company Risk versus Project Risk [LO5] Both Dow...Ch. 14 - Divisional Cost of Capital [LO5] Under what...Ch. 14 - Calculating Cost of Equity [LO1] The Absolute Zero...Ch. 14 - Calculating Cost of Equity [LO1] The Graber...Ch. 14 - Calculating Cost of Equity [LO1] Stock in Daenerys...Ch. 14 - Estimating the DCF Growth Rate [LO1] Suppose...Ch. 14 - Prob. 5QPCh. 14 - Calculating Cost of Debt [LO2] Drogo, Inc., is...Ch. 14 - Calculating Cost of Debt [LO2] Jiminys Cricket...Ch. 14 - Prob. 8QPCh. 14 - Calculating WACC [LO3] Mullineaux Corporation has...Ch. 14 - Taxes and WACC [LO3] Lannister Manufacturing has a...Ch. 14 - Finding the Target Capital Structure [LO3] Famas...Ch. 14 - Book Value versus Market Value [LO3] Dinklage...Ch. 14 - Calculating the WACC [LO3] In Problem 12, suppose...Ch. 14 - WACC [LO3] Fyre, Inc., has a target debtequity...Ch. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - SML and WACC [LO1] An all-equity firm is...Ch. 14 - Calculating Flotation Costs [LO4] Suppose your...Ch. 14 - Calculating Flotation Costs [LO4] Caughlin Company...Ch. 14 - WACC and NPV [LO3, 5] Scanlin, Inc., is...Ch. 14 - Flotation Costs [LO4] Pardon Me, Inc., recently...Ch. 14 - Calculating the Cost of Debt [LO2] Ying Import has...Ch. 14 - Calculating the Cost of Equity [LO1] Epley...Ch. 14 - Adjusted Cash Flow from Assets [LO3] Ward Corp. is...Ch. 14 - Adjusted Cash Flow from Assets [LO3] In the...Ch. 14 - Prob. 26QPCh. 14 - Prob. 27QPCh. 14 - Flotation Costs and NPV [LO3, 4] Photochronograph...Ch. 14 - Flotation Costs [LO4] Sheaves Corp. has a...Ch. 14 - Project Evaluation [LO3, 4] This is a...Ch. 14 - Prob. 31QPCh. 14 - Prob. 1MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Prob. 3MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Cost of Capital for Swan Motors You have recently...
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- If two mutually exclusive projects were being compared, would a high cost of capital favorthe longer-term or the shorter-term project? Why? If the cost of capital declined, would thatlead firms to invest more in longer-term projects or shorter-term projects? Would a decline(or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects?Explain.arrow_forward4. What does hard capital rationing mean? A Capital is limited at more than one point in time B Divisions have been limited in their investments by head office C Capital rationing is a complex and difficult calculation D Limited external funds are available for investmentarrow_forward3. I need help with multiple choice finance home work question Which of the following statements is incorrect? If a firm's target average accounting return is less than that calculated for a given project then the project should be accepted. If the NPV of a project is positive, it should be accepted. If a project has a payback which is faster than the company requires the project should be accepted. If the cost of capital is greater than the IRR, the project should be accepted. If a project has a profitability index greater than one the project should be accepted.arrow_forward
- How does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forward1. The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing A. a labor union. B. a major investment. C. time or resource constraints. D. the election of a new board of directors. 2. Which rate-based decision statistic measures the rate of return, including the cost of capital for a project? A. Profitability Index, PI B. Net Present Value, NPV C. Internal Rate of Return, IRR D. Modified Internal Rate of Return, MIRR 3. When looking at these types of projects, one must consider any cash flows that arise from installing the new equipment. A. new B. cost-cutting C. incremental D. replacement E. all of the above. 4. Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive project? A. payback period B. net present value C. discounted payback period D. modified internal rate of return 5. The approach to convert an infinite series of asset…arrow_forwardWhat is the connection between capital budgeting decisions and the enterprise’s cost of capital? Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?arrow_forward
- 1) What is the company's WACC? 2) Should the company take the projects? Assume that the projects have the same risk as an average project for your firm. 3) If one project is depended on the other in a way that the company can only take both projects, should it take it?arrow_forward6. Factors that affect the cost of capital equation 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. Tax rate The inflation rate The firm's capital budgeting decision rules The impact of 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 H is considering a project with an expected return of 12%. Should Acme Manufacturing Corporation accept or reject the project? Accept the…arrow_forwardVery often organisations are required to take decisions which are expected to affect them over a comparatively long stretch of time. Capital budgeting is a process of evaluating investments and huge expenses in order to obtain the best returns on investment. An organization is often faced with the challenges of selecting between two projects/investments or the buy vs replace decision. Ideally, an organization would like to invest in all profitable projects but due to the limitation on the availability of capital, an organization has to choose between different projects/investments. In light of the above excerpt, discuss the objectives of Capital Budgeting and the various techniques of Capital Budgeting giving suitable examplesarrow_forward
- Discuss the connection between capital budgeting decisions and the enterprise’s cost of capital. Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?arrow_forwardHow does using the return on investment facilitate comparability between divisions of decentralized companies?arrow_forward
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