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Eile Edit View History Bookmarks Iools Help CengageBrain My Home x Aplia: Student Question C Chegg Study IGuided Solu x courses aplia.com/af/servlet/quiz?ctx syildiz-0005&quiz; action takeQuiz&quiz; probGuid QNAPcoAS01010000002e8c44a00a0000&ck; 1 1460847169792 0AAA0559014F7497449EC4 F30000 Search 7. Factors that affect the WACC equation Aa Aa Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that the firm cannot control? Check all that apply. The inflation rate Tax rate The firm's capital budgeting decision rules The impact of cost of capital on managerial decisions Consider the following case: Hintze Co. has two divisions, L and H. Division Lis the company's low-risk division and would have a WACC of 8% if it were operated as an independent company. Division His the company's high-risk division and would have a WACC of 14% if it were operated as an independent company. Because the two divisions are the same size, the company has a composite WACC of 11%. Division His considering a project with an expected return of 12%. Should Hintze Co. accept or reject the project? O Accept OR Reject on what grounds do you base your accept-reject decision? O Division H's project should be rejected, because its return is less than the risk-based cost of capital for the division O Division H's project should be accepted, because its return is greater than the risk-based cost of capital for the division O E Suggestions Session 59:19 Timeout 16/2016

Explanation / Answer

THE FACTORS THAT THE FIRM CAN NOT CONTRO ARE

THE CAPITAL BUDGETING DECESSION RULE ARE WITHIN THE CONTROL OF THE COMPANY OFFICIALS, THEY CAN MODIFY AS PER THEIR REQUIREMENTS.

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HINTZE CO. SHOULD REJECT THE PROJECT, AS THE WACC IS 14% AND THE PROJECT RETURN IS 12%, WHICH IS LESS THAN THE WACC.

DIVISION H'S PROJECT SHOULD BE REJECTED BECAUSE ITS RETURN IS LESS THAN THE RISK BASED COST OF CAPITAL FOR THE DIVISION.

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