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 internal rates of return equal to approximately 12 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 1.2. Given the size of the two proposals, Newcastle's management feels 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:

bullet The cost of debt financing is 9 percent before taxes of 32 percent. You may assume this cost of debt is after any flotation costs the firm might incur.

bullet The risk-free rate of interest on long-term U.S. Treasury bonds is currently 6.7 percent, and the market-risk premium has averaged 3.1 percent over the past several years.

bullet Both divisions adhere to target debt ratios of 30 percent.

bullet 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?

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4:02 PM Fri Feb 15 50% . a mathxl.com Blu Discussion.Larry Bird... Course Ho... cancel cbs.. CBS All Do Ho. BUS 3513 30 Business Finance Quincy Mock 2/15/19 1:22 PM Homework: Chapter 9 Homework Save Score: 0 of 1 pt 3 of 3 (1 complete) Hw Score: 0%, 0 of 3 pts X Problem 9-20 (similar to) Question Help * (Divisional costs of capital and investment decisions) in May of this year Newcastle Mg. Company's capital investment review comminee received two major nvestment proposals. One of the proposals was put forth by the fiem's domestic manufacturing division, and the other came from the fim's distribution company Both proposals promise internal rates of return equal to approximately 12 percent. In the past Newcastle has used a single firm wide cost of capital to evaluate new However, managers have long recognized that the manufacturing division is significantly more risky than the distnbution 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 1.2. Given the size of the two proposals Newcaste's management feels it can undertake only one, so it wants to be sure that it is taking on te more promising investment. Given the importance of getting the cost of capital estmate as close to correct as possble. Pe firm's chief finaroal oficer has ked you to prepare cost of capital estrates for each of the two divisions. The requisite information needed to accomplish your task follows The cost of debt finanong 9percent before taxes of 32 percent You may assume this cost of debt is after any flotation costs the firm might nar The risk-free rate of interest on longterm u s. Treasury bonds is arenty 6 7 percent, and the market-risk premium has averaged 3.1 percent over the past several years Both divisions adhere to target debt ratios of 30 percent a. What is the divisional cost of capital for the manufacturing division? %(Round to two decimal places.) Enter your answer in the answer box and then click Check Answer. Clear All Check