Fundamentals of Corporate Finance
Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 17, Problem 5M
Summary Introduction

Case study:

E incorporation is a small company founded by Person T and Person J. They are the manufacturers of integral circuits to capitalize on the complex mixed-signal design technology. Recently, the company decided to include motherboards, PC peripheral devices, and other digital consumer electronics.

In addition to T and J, Person N who provided the capital of the company, became the third primary owner. Each of them owns 25% of 1 million shares outstanding. The employees of the company and other investors are part of the shareholders, and own the remaining shares.

The company designed the new computer motherboards, which are more effective and less expensive to manufacture; but the cost incurred to design is very high and the owners are unwilling to bring other owners. Thus, ETI sold the design to an outside firm at the rate of after-tax payment of $30 million.

Characters in the case:

Company E: Manufacturers of integral circuits.

Person T: The electronic engineer and founder of the company E.

Person J: The electronic engineer and founder of the company E.

Person N: The new owner of the Company E.

To discuss: Whether the company can pay dividend or upgrade or expand its manufacturing capacities.

Adequate information:

The given solved equation:

Po=E1(1b)RSROE×b

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Students have asked these similar questions
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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Fundamentals of Corporate Finance

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