Weighted Average Cost of Capital Assignment | Homework For You
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that a firm can control? Check all that apply.
The firm’s capital structure
Tax rates
The firm’s dividend payout ratio
The firm’s capital budgeting decision rules
The impact of cost of capital on managerial decisions
Consider the following case:
International Imports (I2) 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 International Imports (I2) accept or reject the project?
Reject the project
Accept the project
On what grounds do you base your accept–reject decision?
Division H’s project should be accepted, as its return is greater than the risk-based cost of capital for the division.
Division H’s project should be rejected since its return is less than the risk-based cost of capital for the division. Get Finance homework help today
