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Chapter 19, Problem 3P
Summary Introduction

To determine: The projected interest payments and the amount of the projected interest tax shield.

Introduction:

The business plan is a necessary tool for the firm to analyze and take decisions on the current and future events. The firm must concentrate on the investments, capital structure, and operations to improve its potentials and future growth of the business.

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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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