- Divisional costs of capital and Investment decisions) in May of this year, Newcastle Mig Company's capital investment review committee received two major investment proposals. One of the proposal was put forth by the firm's domestic manufacturing division, and the other came from the firm's distribution company. Both proposals promineretum on invested capital to approximately 14 percent. In the past, Newcastle has used a single firm wide cost of capital to evaluate new investments However, managers have long recognized that the manufacturing division is significantly more risky than the distribution division. In fact, comparable firms in the manufacturing division have equity botas of about 1.7, whereas distribution companies typically have equity bates of only 13. Given the size of the two proposal, Newcastle's management fools can undertake only one, so wants to be sure that it is taking on the more promising investment Given the importance of getting the cost of capital estimate as close to correct as possible, ther's chief financial officer has asked you to prepare cout of capital estate for each of the two divisions. The requisite information needed to accomplish your task follows: The cost of debt nancing la 9 percent before a marginal tax rate of 22 percent. You may assume this cost of debt is after any flotation costs the firm might nour . The risk free rate of interest on long to US Treasury bonds is currently 5.6 percent, and the market-risk premium has averaged 4.6 percent over the past several years Both divisions adhere to target debt nations of 70 percent The firm has suficient internally generated funds such that no new lock will have to be told to raise quity financing a. Estimate the divisional costs of capital for the manufacturing and distribution division b. Which of the two projects should the firm undertake (suming econot do both due to labor and other nonfinancial restrainta] Discus a. What is the divisional cost of capital for the manufacturing diviti? (Round to two decimal places) What is the divisional cost of capital for the distribution division? CM (Pound to two decimal place) b. Which of the two projects should the firm undertako (assoming a carnot do bo dun to whor and other non francial restrainta?? (led the best choice below) OA Manufacturing project because the divisional cost of capital in higher than that of distribution on Other project because there are from (IRR) are equal Od Oribution project because the cost of capital is tower and thus the project's not present value is her OD. Manufacturing project because the cost of capital is her and thus the projects representa (Divlow costs of capital and investment declina) in May of this year, Newcastle Mly Company's capital investment review commit received two major novestment proposals. One of the proposal was put forth by the for's domestie manufacturing division, and the other came from the firm's distribution company. Both proposal promise aroumon invested capital to approximately 14 percent. In the past, Newcastle has used a single firm wide cost of capital to evaluate new investments However, managers have long recognised that the manufacturing division is gowly more roky Ihan the distribution division, in fact, comparablo firms in the manufacturing Vision have equity butas of about 1.7, whereas distribution companies typically have equity betan of only 13. Given the size of the two proposals Newcastle's management is to undertake any one, so I wants to be sure that it is taking on the more promising investment Oiven the importance of getting the cost of capital estimate as close to correct spot the chief and looked you to prepare con of capital clima for each of the two divisions. The requisite information needed to accomplish your task follows: The cost of debt finanong is 9 percent before a marginal tax rate of 22 percent. You may assume this cost of cott is after any fotation costs the firm might nou The risk tree rate of interest on long-term US Treasury bonde la curenty 5.6 percent, and the market premium has averaged 48 percent owe the past several years . Both divisions adhere to target debt ratio of 70 percent The firm has sufficient inomaly generated funds such ut no new stock will have to be sold to use equity financing a. Estimate the divisional costs of capital for the manufacturing and dirbution division b. Which of the two projecte should the foundertake lessoming it cannot do both due to labor and other nonfinder a. What is the divisional cost of capital for the manufacturing division? Em (Round to, tuo decimal places) What is the divisional cost of capital for the distribution division? 0% (Round to two decimal places) b. Which of the two projects should the frm undertake (assuming Runot do both due to labor and other non financial restraints? (Sered the best choice below A Manufacturing project because sin cost of capital is higher than that of distribution con O B. Ether project because their internal rates of retum (IRR) are equal DC Distribution project because the cost of capital is lower and thus the projects net present value (PB) is higher OD. Manufacturing project because the cost of capital is higher and thus the project's not procent value (NPV) is higher (Divisional costs of capital and investment decisions) In May of this year, Newcastle Mfg. Company's capital investment review committee received two major investment proposals. One of the proposals was put forth by the firm's domestic manufacturing division, and the other came from the firm's distribution company. Both proposals promise a return on invested capital to approximately 14 percent. In the past, Newcastle has used a single firm-wide cost of capital to evaluate new investments. However, managers have long recognized that the manufacturing division is significantly more risky than the distribution division. In fact, comparable firms in the manufacturing division have equity betas of about 1.7, whereas distribution companies typically have equity betas of only 1.3. Given the size of the two proposals, Newcastle's management fools it can undertake only one, so it wants to be sure that it is taking on the more promising investment. Given the importance of getting the cost of capital estimate as close to correct as possible, the firm's 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 9 percent before a marginal tax rate of 22 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 5.6 percent, and the market-risk premium has averaged 4,8 percent over the past several years. . Both divisions adhere to target debt ratios of 70 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