Should Marston Manufacturing Company accept or reject the project? O Reject the project O Accept 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. O Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division.
Should Marston Manufacturing Company accept or reject the project? O Reject the project O Accept 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. O 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:The impact of a firm's cost of capital on managerial decisions
Consider the following case:
Marston Manufacturing Company 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 Marston Manufacturing Company accept or reject the project?
O Reject the project
O Accept 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.
O 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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