Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 29.2, Problem 2CC
Summary Introduction

To discuss: The meaning of board to be captured.

Introduction:

Corporate is a particular legal entity that separate from its owners. In this form of business, the owners specify certain governing rules to undertake the business in a contract known as the articles of incorporation. The company’s “board of directors” is appointed by the organization shareholders and the directors mostly take the decisions regarding finance and business activities.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division 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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