8. Factors that affect the WACC equation Aa Aa E Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm's control? Check all that apply. O 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 case: Edinburgh Exports has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should Edinburgh Exports accept or reject the project? Reject the project Accept the project On what grounds do you base your accept-reject decision? O 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. 8. Factors that affect the WACC equation Aa Aa E Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm's control? Check all that apply. Interest rates in the economy The performance of index funds, such as the S&P 500 The firm's capital budgeting decision rules The impact of cost of capital on managerial decisions Consider the following case: Acme Manufacturing Corporation has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division H is considering a project with an expected return of 12%. Should Acme Manufacturing Corporation accept or reject the project? Reject the project Accept the project On what grounds do you base your accept-reject decision? Division H's project should be rejected since its return is less than the risk-based cost of capital for the division. Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division. O
