CORP FIN (LL)+CONNECT+PROCTORIO+180
CORP FIN (LL)+CONNECT+PROCTORIO+180
12th Edition
ISBN: 9781266120343
Author: Ross
Publisher: MCG
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Chapter 7, Problem 12QAP
Summary Introduction

To determine: The sensitivity analysis if quantity sold is changed on operating cash flows.

Introduction: Sensitivity analysis is the method where the sensitivity of the project’s cash flow is checked with the changes in one variable. For instance, if the quantity sold is increasing or decreasing then the impact on the cash flows is analyzed.

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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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