(Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P). pipelines, and refining. Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach. For example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although LPT's management agrees, in principle at least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a Peta.lannines is the chief onerating officer for the E&P division and he is concerned that noinn to a sustam of divisional costs of capital mav. Pete's division invests capital in high-risk projects and should use an appropriate risk-based divisional cost of capital, Donna's division involves low-risk activities and her division should use its own risk-based company-wide cost of capital. Each division should use the cost of capital that reflects the risk level of the division (Select from the drop-down menus.) a. Pete Jennings is the chief operating officer for the E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder vilue. Do you agree with Pete? Why or why not? b. The pipeline division manager, Donna Selma, has long argued that charging her division the company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with Donna? Explain. Pete's division invests capital in high-risk projects and should use an appropriate risk-based divisional cost of capital. Donna's division involves low-risk activities and her division should use its own risk-based company-wide cost of capital. Each division should use the cost of capital that reflects the risk level of the division (Select from the drop-down menus.) WUGOLVITTICI Polyuru TVIVUIL static) nc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil monly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time thinking abc reach of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capita ges in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach much higher expected rate of return for exploration and production ventures than for pipeline investments. Altha nciple at least, that different operating divisions should face an opportunity cost of capital that reflects their indivia magreement about whether a move toward divisional costs of capital is a good idea based on practical atina officer for the F&P division and he is concerned that going to a svstem of divisional costs of canital mav igh-risk projects and should use an appropriate risk-based divisignal cost of capital, Donna's division inv should use its own risk-based company-wide cost of cap use the cost of capital that Select from the drop-down menus.) divisional company-wide the opportunity costs of capital for each of its divisions and used a company- investment projects. Recent changes in its businesses have made it abundar For example, investors demand a much higher expected rate of return for ex LPT's management agrees, in principle at least, that different operating divis risk characteristics, they are not in agreement about whether a move toward considerations. a Peta .lenninas is the chief operating officer for the F&P division and he is Pete's division invests capital in high-risk projects and should use an approp low-risk activities and her division should use its own risk-based company- the risk level of the division (Select from the drop-down menus.) division Click to select your company en click Check