CFIN -STUDENT EDITION-ACCESS >CUSTOM<
CFIN -STUDENT EDITION-ACCESS >CUSTOM<
6th Edition
ISBN: 9780357752951
Author: BESLEY
Publisher: CENGAGE C
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Chapter 10, Problem 8PROB
Summary Introduction

Net income: Net income is amount remaining after deducting all expenses including the taxes. Net income is also called as Net profit.

Supplemental operating cash flows: Supplemental operating cash flows is also called as cash flow from operations. This are cash flows which are generated from the companies operating activities.

CCC is considering replacing of old machine with new one. Depreciation of old machine is $40,000 and new machine is $35,000. Operating income is $90,000 and tax rate is 40%.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?
Scenario three: If a portfolio has a positive investment in every asset, can the expected return on a portfolio be greater than that of every asset in the portfolio? Can it be less than that of every asset in the portfolio? If you answer yes to one of both of these questions, explain and give an example for your answer(s). Please Provide a Reference
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