A firm is financed 100% with equity. The fırm has two divisions. Division A is the production division. The division manager is proposing the firm accept Project A which has an IRR of 9.5%. The project has a beta of 0.7. Division B is the technology division. The manager of that division has proposed the firm accept Project B which has an IRR of 12.5% since it meets the firm's overall WACC. The project has a beta of 1.4. There is also a third project under consideration, Project C, which straddles both divisions and has a beta of 1.1 and an IRR of 11.6%. The current risk free rate is 5% and the market risk premium is 6%. The firm's overall beta is 1.1. None of the projects are mutually exclusive and all have normal cash flows. The firm's capital budget is not limited. Based on this information which, if any, of the projects should the firm accept? A only B only C only None of the above
A firm is financed 100% with equity. The fırm has two divisions. Division A is the production division. The division manager is proposing the firm accept Project A which has an IRR of 9.5%. The project has a beta of 0.7. Division B is the technology division. The manager of that division has proposed the firm accept Project B which has an IRR of 12.5% since it meets the firm's overall WACC. The project has a beta of 1.4. There is also a third project under consideration, Project C, which straddles both divisions and has a beta of 1.1 and an IRR of 11.6%. The current risk free rate is 5% and the market risk premium is 6%. The firm's overall beta is 1.1. None of the projects are mutually exclusive and all have normal cash flows. The firm's capital budget is not limited. Based on this information which, if any, of the projects should the firm accept? A only B only C only None of the above
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Not sure about #2
Transcribed Image Text:A firm must replace some of its aging manufacturing machinery. It is considering
buying one of two machines. Machine A will cost $25,000 and then cost $10,000
per year after-tax to operate for its three-year life. Machine B will cost $35,000
and cost $6,000 per year after-tax to operate for its five-year life. The firm's
required return on this type of investment is 12%. In either case, the machine will
be replaced at the end of its economic life for the foreseeable future. Based on
this information which should the firm choose?
A only
B only
Either A or B
Neither A nor B
Transcribed Image Text:A firm is financed 100% with equity. The firm has two divisions. Division A is the
production division. The division manager is proposing the firm accept Project A
which has an IRR of 9.5%. The project has a beta of 0.7. Division B is the
technology division. The manager of that division has proposed the firm accept
Project B which has an IRR of 12.5% since it meets the firm's overall WACC. The
project has a beta of 1.4. There is also a third project under consideration, Project
C, which straddles both divisions and has a beta of 1.1 and an IRR of 11.6%. The
current risk free rate is 5% and the market risk premium is 6%. The firm's overall
beta is 1.1. None of the projects are mutually exclusive and all have normal cash
flows. The firm's capital budget is not limited. Based on this information which, if
any, of the projects should the firm accept?
A only
B only
C only
None of the above
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