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Bookmarks People Window Help xM Welcome to Chegg - derricka uid QNAPCOA8010100000041ca26a00a000 x Aplia: Student QuestionxC Home xC Home Chegg.com s://courses.aplia.com/af/servlet/quiz?quiz action takeQuiz&quiz; probG Graded Assignment Attempts: Keep the Highest:/5 7. Factors that affect the WACC equation Aa Aa a Each of the following factors affects the weighted average cost of capital (WACC) equation. which of the following factors are outside a firm's control? Check all that apply. The general level of stock prices The effect of the tax rate on the cost of debt in the weighted average cost of capital The firm's dividend payout ratio equation The impact of cost of capital on managerial decisions Consider the following case: Marston Manufacturing Company has two divisions, L and H. Division L is the company's low-risk divísion and would have a weighted average cost of capital of 8% if it was operated as an independent company company's high-risk division and would have a independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division H is considering a project with an expected return of 12% . Division H is the weighted average cost of capital of 14% if it was operated as an Should Marston Manufacturing Company accept or reject the project? O Reject the project O Accept the project On what grounds do you base your accept-reject decision? Division H's project should division. be rejected since its return is less than the risk-based cost of capital for the O Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division.

Explanation / Answer

1:General level of stock prices: This is beyond the control of a firm since it is driven by the general economy and investor expectations.

Effect of tax rate on cost of debt: This is within the firm's control since the firm can manipulate the amount of debt in its capital structure and thus the tax impact on debt.

Firms dividend payout ratio: This is within the firm's control since the firm can decide how much dividend should be paid and how much profits should be retained.

2:Reject

(For considering the decision for the project specific to a division, the cost of capital of that division is considered. This is because it represents the risk involved in that particular division or stream of work. Since expected return is 12% which is lesser than the cost of capital 14%, the project should be rejected)

3.Division H’s project should be rejected since the return is less than the risk based cost of capital

(The WACC averages out the risk factors for both divisions whereas the risk specific to the project should be taken into account which is represented by 14% required rate of return. Since expected return is 12% which is lesser than the cost of capital 14%, the project should be rejected)

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