CORPORATE FINANCE--CONNECT ACCESS CARD
CORPORATE FINANCE--CONNECT ACCESS CARD
12th Edition
ISBN: 9781264331062
Author: Ross
Publisher: MCG CUSTOM
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Chapter 12, Problem 7QAP

a

Summary Introduction

Adequate information:

Beta of factor 1 β1 = 0.84

Beta of factor 2 β2 = 1.69

Expected return of the stocks ERS = 11%

To compute: Return on portfolio

Introduction: Return on portfolio refers to the sum total of returns earned on individual securities such as stocks, bonds, etc.

b

Summary Introduction

Adequate information:

Beta of factor 1 β1 = 0.84

Beta of factor 2 β2 = 1.69

Expected return of the stocks ERS = 11%

To compute: Return on portfolio

Introduction: Return on portfolio refers to the sum total of returns earned on individual securities such as stocks, bonds, etc.

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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?
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