CFIN
CFIN
6th Edition
ISBN: 9780357144039
Author: BESLEY
Publisher: CENGAGE L
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Chapter 8, Problem 7PROB
Summary Introduction

Expected rate of return is the anticipated profit or loss of an investment to be received by the investor. It is computed by expecting the probabilities of a maximum range of returns on an investment.

CFIN, Chapter 8, Problem 7PROB

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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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