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. The general level of stock prices The effect of the tax rate on the cost of debt in the weighted average cost of capital equation The firm’s dividend payout ratio The impact of a firm’s cost of capital on managerial decisions Consider the following case: International Imports (I2) 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 International Imports (I2) accept or reject the project? Accept the project Reject the project On what grounds do you base your accept–reject decision? Division L’s project should be accepted, because its return is less than the risk-based cost of capital for the division. Division L’s project should be accepted, since its return is greater than the risk-based cost of capital for the division.

Answer 1

The general level of stock prices

The effect of the tax rate on the cost of debt in the weighted average cost of capital equation

The project should be accepted.

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

Step-by-step explanation:

The company can determinate their payout ratio and the cost of capital of their equity the rest of the option are determined by either the market or the government.

It should be accepted as the return is based on the division which WACC is 8% therefore, it will make a good use of the capital as is above the expected capital cost