7. Factors that alfect the cost of capital equation Each of the following factors affects the weighted average cost of capital (WAcC) efuation. Which of the following factors are outside a firmi' control? Ghock ail that appy. Tax rate The inflation rate The firm's dividend payout ratio The impact of a firm's cost of capital on managerial decisions Consider the following cases Wellington Industries has two divisions, L and H. Division L is the companyts low-risk divisi on and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the compary's high-risk division and would have a weighted zverage cost of capiral of 14% if it was operated as an independent company, Recause the two divisions are the same size, the comaany has a composite weighted average cost of capital of 11%. Division L. is considering a project with an expected retum of 9.5%. The impact of a firm's cost of capital on managerial decisions Consider the following case: Wellington Industries has two divisions, L and H. Division L is the company's low-risk division and would have a weinted average casse of capital of 8% if it was operated as an independent company, Dlvision H is the company's high-risk division and would have a weichted average cost of capital of 14% if it was operated as an iodependent company. Because the two divisions are the same size, the cempany has a composite weighted average cost of capital of 110 . Division L is considering a project with an expected return of 9.5h. Should Wellington Industries accept or reject the project? Accept the project Reject the project. On what grounds do you base your accept-refect decision? Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division. Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division