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 1.6, whereas distribution companies typically have equity betas of only 1.3. 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: The cost of debt financing is 7 percent before a marginal tax rate of 27 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 6.7 percent, and the market-risk premium has averaged 4.4 percent over the past several years. Both divisions adhere to target debt ratios of 40 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.)

Bus Financampus Hannah ertiner 04/05/21 210 PM Homework: Chapter 9 Homework Score: 0.33 of 1 pt 7 of complete HW Score: 74,07%, 6.67 of 9 pts % Problem 9-20 (similar to) Divion coats of capital and investmere decisions) In May of this year, Newcastle My Company's capital investment review comme received two major investment proposals One of the propose was put forth by the frescomte manufacturing division, and the other came from the firm's distrution company Bon proposals prominentum on nested capital to approximately 13 percent. In the past, Newcastle has used asem wide cost of capital terve Investments However, managers have long recognized that the manufacturing division is significanty more risky than the distribution division in the comparatie firm in the manufacturing division have equy belief about whereas estruten sering the cost of capital cineas close to correct as possible, the 's chief Financial officer has and you to prepare cost of capital estimates for each of the two division. The regate tomation des accorolh your un fotos The cent of Geet tnancing a 12 percent before a marginal tax rate of 24 percent. You may assume this cont of debt an after any fotaion conte the fightingut The rest of interest entong term U.S. Treasury bondels curandy 61 percent, and the marketcak praw has aged 4.5 percent over the past several year Both visione adhere to target detention of 60 percent The firm has sufficient internal penerated funds such at no new look wil have to be cold to raise ty trading Estimate the divisional costs of capital for the manufacturing and distribution division h Which of the two projects should the firm undertako asuming it cannot do both do to labor and other financial retrato What is the divisional cost of capital for the manufacturing division Nound to ho decimal po Enter your aww in the rower box and then click Check