EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Chapter 29.5, Problem 1CC
Summary Introduction

To discuss: The requirement of the Sarbanes–Oxley Act of 2002.

Introduction:

Sarbanes–Oxley Act is an act that was enacted in the year 2002 by Country U’s congress mainly to avoid the occurrence of misconduct. Its main aim is to protect the investors from the corporate abuse.

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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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