please answer a and b
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 proposals was put forth by the 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 than the distribution division. In fact, comparable firms in the manufacturing division have equily be as of about 1.7. whereas bution companies typically have quity beas of only 1.1. Given the the proposals. Newcastles Management is it can undertake only one wants to be sure that it is taking on the more promising investment. Given the portance of ging the cost of catal a dos to come as possible. The chefranciaofficer has asked you to prepare cost of capital estimates for each of the two divisions. The request formation tied to accomplish your askows The cost of debt financing is 8 percent before a marginal taxate of 23 percent. You may me this cost of t he n otion cost the fim mightinut The risk-free rate of interest on long term US Treasury bonds is currently 5.2 percent and the marketisk premiumhus averaged 49 percent over the past several years Both divisions adhere to target debt tos of 50 percent The firm has certintomally ge n ds such that no new lock will have to be d one equity finanong What is the divisional cost of capital for the manufacturing division? Round to two decimal places) has used anglem wide cost of capital ev e nts However, managers have long recognized that the manufacturing di s easty more than the distribution division in fact, comparable firms in the manufacturing division have equity butas of about 1.7, whereas distrution companies typically have equity betas of only 1.1. Given the size of the two proposals Newcastle's manager feels can undertake only one so it wants to be sure that it is taking on the more promising investment. Over 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 coal states for each of the two divisions. The site information need to accomplish your task fokos The cost of debt financing is 8 percent before a marginal tax of 23 percent. You may sumis cost of debtswer any fotation cost the firm might nour The free rate of interest on long term US Treasury bonds is currently 5.2 percent, and the market-risk premium has averaged 4.9 percent over the past several years Both divisions adhere to target debt rabios of 50 percent The firm has sufficient intemly generated funds such that new to will have to be s tore france a. Estimate the divisional cost of capital for the manufacturing and writion divisions b. Which of the two proposaould them undertake assuming it cannot do both due to and other facial restraints? Dass .. What is the divisional cost of capital for the manufacturing division Round to two decimal places)
