pply. lowing factors affects the weighted Interest rates in the economy The market risk premium increases The firm's capital structure The firm's capital budgeting decision rules The impact of a firm's cost of capital on managerial decisions Consider the following case: Lancashire Railway Company (LRC) 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 verage cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should Lancashire Railway Company (LRC) accept or reject the project? Accept the project O Reject the project On what grounds do you base your accept-reject decision? O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.
pply. lowing factors affects the weighted Interest rates in the economy The market risk premium increases The firm's capital structure The firm's capital budgeting decision rules The impact of a firm's cost of capital on managerial decisions Consider the following case: Lancashire Railway Company (LRC) 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 verage cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should Lancashire Railway Company (LRC) accept or reject the project? Accept the project O Reject the project On what grounds do you base your accept-reject decision? O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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.
Interest rates in the economy
The market risk premium increases
The firm's capital structure
The firm's capital budgeting decision rules
The impact of a firm's cost of capital on managerial decisions
Consider the following case:
Lancashire Railway Company (LRC) 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 L is considering a project with an expected return of 9.5%.
Should Lancashire Railway Company (LRC) accept or reject the project?
Accept the project
Reject the project
On what grounds do you base your accept-reject decision?
Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division.
Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.
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