Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Question
Chapter 9, Problem 21SP
a)
Summary Introduction
To determine: The divisional cost of capital for the E&P divisions.
b)
Summary Introduction
To determine: The implications of using firm wide cost of capital to evaluate new investment proposal in estimated cost of capital.
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(Divisional costs of capital and investment decisions) Saddle River Operating Company (SROC) is a Dallas-based independent oil and gas firm. In the past, the firm's managers have used a single firm-wide cost of
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comparable to SROC's E&P division have equity betas of about 1.8, whereas distribution companies typically have equity betas of only 0.8. Given the importance of getting the cost of capital estimate as close to
correct as possible, the firm's chief financial officer has asked you to prepare cost of capital estimates for each of the two divisions. The requisite information needed to accomplish your task is presented here:
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A firm’s cost of capital is often a reflection of its activities and funding needs. Consider the case of Wizard Company, and answer the following questions:
Wizard Co. currently has only a real estate division and uses only equity capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.3. The risk-free rate is 4.4%, and the market risk premium is 6.2%.
This means that the firm’s real estate division will have a cost of capital of:
10.12%
12.46%
3.08%
8.80%
The consulting division is expected to have a beta of 2.1, because it will be riskier than the firm’s real estate division.
This means that the firm’s consulting division will have a cost of capital of:
19.92%
18.77%
17.42%
18.37%
The distribution division will have less risk than the firm’s real estate division, so its beta is expected to be 0.5.
This means that the distribution division’s cost of…
Dunbar Inc has an overall (composite) WACC of 10%, which reflects the cost of capital for its
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considering the following projects:
Project
A
Risk
BCDE
High
Average
High
Low
Low
Which projects should the firm accept to maximize shareholder wealth?
Expected Return
O a. A, B, C, and D
O b. A, B, and D
O c. A, B, and C
O d. A, B, C, D, and E
15%
12
11
9
Chapter 9 Solutions
Foundations Of Finance
Ch. 9 - Define the term cost of capital.Ch. 9 - Prob. 2RQCh. 9 - Why do firms calculate their weighted average cost...Ch. 9 - Prob. 4RQCh. 9 - Prob. 5RQCh. 9 - Prob. 6RQCh. 9 - Prob. 7RQCh. 9 - Prob. 1SPCh. 9 - Prob. 2SPCh. 9 - (Cost of equity) In the spring of 2018, the Brille...
Ch. 9 - Prob. 4SPCh. 9 - Prob. 5SPCh. 9 - Prob. 6SPCh. 9 - Prob. 7SPCh. 9 - (Cost of internal equity) Pathos Co.s common stock...Ch. 9 - (Cost of equity) The common stock for the Bestsold...Ch. 9 - Prob. 10SPCh. 9 - Prob. 11SPCh. 9 - Prob. 12SPCh. 9 - a. Rework Problem 9-12 as follows: Assume an 8...Ch. 9 - (Capital structure weights) Wingate Metal...Ch. 9 - (Weighted average cost of capital) The capital...Ch. 9 - Prob. 17SPCh. 9 - Prob. 18SPCh. 9 - Prob. 19SPCh. 9 - (Divisional costs of capital and investment...Ch. 9 - Prob. 21SPCh. 9 - Prob. 2.1MCCh. 9 - If you were to evaluate divisional costs of...
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