chief financial officer has asked you to prepare cost of capital estimates for each of the two divisions. The requisite information needed to accomplish your task follows:

The cost of debt financing is $7$ percent before a marginal tax rate of $28$ percent. You may assume this cost of debt is after any flotation costs the firm might incur.

The risk$-$free rate of interest on long$-$term U$.$S$.$ Treasury bonds is currently $6\mathrm{.}1$ percent, and the market$-$risk premium has averaged $3\mathrm{.}7$ percent over the past several years.

Both divisions adhere to target debt ratios of $50$ percent

The firm has sufficient internally generated funds such that no new stock will have to be sold to raise equity financing.

a$.$ Estimate the divisional costs of capital for the manufacturing and distribution divisions.

b$.$ Which of the two projects should the firm undertake $($assuming it cannot do both due to labor and other nonfinancial restraints$)?$ Discuss.

a$.$ What is the divisional cost of capital for the manufacturing division?

$\%($Round to two decimal places.$)$

What is the divisional cost of capital for the distribution division?

$6($Round to two decimal places.$)$

b$.$ Which of the two projects should the firm undertake $($assuming it cannot do both due to labor and other non financial restraints$)?($Select the best choice below.$)$

A$.$ Distribution project because the cost of capital is lower and thus the project's net present value $($NPV$)$ is higher.

B$.$ Either project because their internal rates of return $($IRR$)$ are equal.

C$.$ Manufacturing project because the cost of capital is higher and thus the project's net present value $($NPV$)$ is higher.

D$.$ Manufacturing project because its divisional cost of capital is higher than that of distribution division.