EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Chapter 19, Problem 7P
Summary Introduction

To determine: The free cash flow of I Company.

Introduction:

Free cash flow indicates the amount of cash a firm has after spending on all capital expenditures. Free cash flow to equity indicates the amount available to the equity shareholders of a company after all the expenses.

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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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