Each of the following factors affects the weighted average cost of capital (WACC

Question

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 Tax rate The firm's dividend payout ratio The inflation rate The impact of a firm's cost of capital on managerial decisions Consider the following case: National Petroleum Refiners Corporation (NPR) 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 8% 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% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division L is considering a project with an expected return of 9.5%. Should National Petroleum Refiners Corporation (NPR) accept or reject the project? O Reject the project O 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

- A and C - Tax rate and Inflation rate are not in control of the firm.

- Accept the project. Since the expected rate is 9.5%, which is higher than the cost of capital of 8%

- Option A - Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the division.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.