Chapter 10 Home Grades Personalized Reviews DiscussionCourse Materials The Cost

Question

Chapter 10 Home Grades Personalized Reviews DiscussionCourse Materials The Cost of Capital Graded Assignment | Read Chapter 10 | Back to Assignment Due Sunday 07.01.18 at 11:45 PM Attempts: 7. Factors that affect the WACC equation Each of the foilowing factors affects the weighted average cost of capital (WACC) equation. Which of the following Keep the Highest: 4/S factors are outside a firm's control? Check all that apply. The firm's capital budgeting decision rules Tax rate The inflation rate The impact of a firm's cost of capital on managerial decisions Consider the following case: Anderson Animations Corporation (AAC) has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 89% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% it was operated as an independent company. Because the two divisions are the same size, the company has a composite welghted average cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should Anderson Animations Corporation (AAC) accept or reject the project? O Reject the project Accept the project On what grounds do you base your accept-reject decision? O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division O Division L's project should be accepted, because its return is less than the risk-based cost of capital for the division

Explanation / Answer

Tax rate and inflation rates are outside the control of the company. Tax rate is determined by the government of the country in which company operates in and inflation depends on the market dynamics which is outside the control of the company.

Hence tax rate and inflation rates are the answer.

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