A company has a WACC of 11%. It is in the business of selling fast food in North America. Now it has expansion plans to open up fast food restaurants in China. It expects to earn a return on this investment of 12%. Which of the following statements is true? A.It should for sure ahead for sure with the expansion, since the return is higher than the cost of capital. B.It should decrease its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China. C.It should convert its WACC to a Chinese cost of capital by multiplying the WACC times an exchange rate. D. It should increase its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China. E.The company should never consider a project of higher than normal risk.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
A company has a WACC of 11%. It is in the business of selling fast food in North America. Now it has expansion plans to open up fast food restaurants in China. It expects to earn a
A.It should for sure ahead for sure with the expansion, since the return is higher than the cost of capital.
B.It should decrease its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China.
C.It should convert its WACC to a Chinese cost of capital by multiplying the WACC times an exchange rate.
D. It should increase its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China.
E.The company should never consider a project of higher than normal risk.
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