FOUNDATIONS OF FINANCE- MYFINANCELAB
FOUNDATIONS OF FINANCE- MYFINANCELAB
10th Edition
ISBN: 9780135160572
Author: KEOWN
Publisher: PEARSON
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Chapter 13, Problem 7SP

(Practical considerations in setting dividend policy) The board of directors of Kensington Enterprises has decided to pay cash dividends totaling $5 million in the first quarter of the year. This payment represents the initiation of a cash dividend for the first time in company history, and your company CFO has asked you to look into any restrictions or constraints the firm might face in carrying out the plan. Write a brief report outlining the types of restrictions Kensington might face.

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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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