Loose Leaf for Corporate Finance Format: Loose-leaf
Loose Leaf for Corporate Finance Format: Loose-leaf
12th Edition
ISBN: 9781260139716
Author: Ross
Publisher: Mcgraw Hill Publishers
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Chapter 7, Problem 3QAP
Summary Introduction

Adequate information:

Accounting break-even points = 95,800, 143,806 and 7,835

Unit prices are = 42 and 97

Unit variable costs are 30 and 64

Fixed costs= $820,000, $2,750,000 and $245,000

Depreciation =1,150,000 and 105,000

To calculate: The unknown variables

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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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