Attempts: 8. Factors that affect the WACC equation Each of the following factors

Question

Attempts: 8. Factors that affect the WACC equation Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that Average: IS Aa Aa the firm cannot control? Check all that apply. The inflation rate The firm's capital budgeting decision rules Tax rate The impact of cost of capital on managerial decisions Consider the following case: Subba Co. has two divisions, L and H. Division L is the company's low-risk division and would have a WACC of 8% if it were operated as an independent company. Division H is 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 H is considering a project with an expected return of 12%. Should Subba Co. accept or reject the project? O Reject O Accept

Explanation / Answer

Answer:

8) The factors that a firm can not control are inflation & Tax rate, because are driven by economic and political factors and not with in the control of any specific firm.

9)

Subba Co. should reject the project.

It is on the ground that:

The return of the new project is division "H" is less than the risk based cost of capital of the division H.

The expected return of new project under division H is 12% which is less than the risk based cost of capital of 14% of that division.

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