Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / Each of the following factors affects the weighted average cost of capital (WACC) equation

Each of the following factors affects the weighted average cost of capital (WACC) equation

Finance

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. O Interest rates in the economy The performance of index funds, such as the S&P 500 The firm's capital structure The impact of cost of capital on managerial decisions Consider the following case: Edinburgh Exports 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 Edinburgh Exports accept or reject the project? O Reject the project O Accept the project
On what grounds do you base your accept-reject decision? Division H's project should be rejected since its return is less than the risk-based cost of capital for the division. Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division.

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

1. Factors which are outside the control of the firm are-

(A) interest rates in economy is one of the uncontrollable factors

(B) performance of standard and poor 500 is not within the control of the organisation as it is moving according to the market consensus.

2. (A) REJECT THE PROJECT - because the internal rate of return is lower than the weighted average cost of capital of the division.

3. (B) DIVISION H PROJECT SHOULD BE REJECTED SINCE ITS RETURN IS LESS THAN RISK BASED COST OF CAPITAL FOR THE DIVISION.

Related Questions