FUND.OF CORP.FINANCE PKG. F/BU >C<
FUND.OF CORP.FINANCE PKG. F/BU >C<
16th Edition
ISBN: 9781323165997
Author: Berk
Publisher: PEARSON C
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Chapter 2, Problem 4P

Consider the following potential events that might have occurred to Global on December 30, 2016. For each one, indicate which line items in Global's balance sheet would be affected and by how much. Also indicate the change to Global's book value of equity.

  1. Global used $20 million of its available cash to repay $20 million of its long-term debt.
  2. A warehouse fire destroyed $5 million worth of uninsured inventory.
  3. Global used $5 million in cash and $5 million in new long-term debt to purchase a $10 million building.
  4. A large customer owing $3 million for products it already received declared bankruptcy, leaving no possibility that Global would ever receive payment.
  5. Global's engineers discover a new manufacturing process that will cut the cost of its flagship product by more than 50%.

1. A key competitor announces a radical new pricing policy that will drastically undercut Global's prices.

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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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IAS 10 Events After the Reporting Period; Author: Silvia of CPDbox;https://www.youtube.com/watch?v=ijYZlb1_ZyQ;License: Standard Youtube License