ng bld-572827nbNodeld 207595027 55165130174650501190349062 18eISBN-9781305635975
ID: 2788399 • Letter: N
Question
ng bld-572827nbNodeld 207595027 55165130174650501190349062 18eISBN-97813056359751uparentid 207595366 MINDTAP Assignment 10- The Cost of Capital 0 Due Tomorrow at 11 PM CST Consider the following case: Lancashire Railway Company (LRC) 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 896 ER was operated as an independent company. Division his the company's high-risk division and would have a weighted average cost of capital on4%-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 9s%. Should Lancashire Railway Company (LRC) 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, because its return is less than the risk-based cost of capital for the division O Division L's project should be accepted, since its return is greater than the risk-based cost of capital for the divisionExplanation / Answer
1.) Lanschire Railway Corporation should Accept the Project
2.) Project should be accepted because it expected return is greater than the risk-based cost of capital for the division
As a rule, a division should accept the project where the returns are higher than the cost of capital for itself. In this case, though the expected returns are less than the overall cost of capital for the organization, but it is still generating value for the L division. Hence, the project must be selected.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.