Question

Bloom and Co. has no debt or preferred stock, it uses only equity capital, and has...

Bloom and Co. has no debt or preferred stock, it uses only equity capital, and has two equally-sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept?

Question 12 options:

A Division project with a 12% return.

A Division Y project with an 11% return.

A Division project with a 9% return.

all of the above

none of the above

Homework Answers

Answer #1

Company should accept the project when return on project in particular division is greater than that division's cost of capital .

Hence ,A division X project with 12 % return should be accepted .

Explanation:-

A division Y project with 11% return should not be accepted because its cost of capital is 14 % which is greater than its return

And when a division is having 9 % return then project should not be accepted in case of both divisions because both division are having cost of capital greater than 9 %

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Duvall Inc. uses only equity capital and has two equally sized divisions. Division A’s cost of...
Duvall Inc. uses only equity capital and has two equally sized divisions. Division A’s cost of capital is 10%. Division B’s cost of capital is 14%. The WACC is 12%. All of Division A’s projects are equally risky, as are all of Division B’s projects. However, the projects of Division A are less risky than those of Division B. Which of the following would the company accept? Division B project with a return of 13% Division B project with a...
Bloom and Co. has no debt or preferred stock ⎯ it is an all-equity firm ⎯...
Bloom and Co. has no debt or preferred stock ⎯ it is an all-equity firm ⎯ and has a beta of 2.0. The CFO is evaluating a project with an expected return of 14%, before any risk adjustment. The current WACC of the company is 13%. The project being evaluated is riskier than an average project, in terms of both its beta risk and its total risk. Which of the following statements is correct? Why? The project should definitely be...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $2.65, its expected constant growth rate is 4%, and its common stock sells for $24. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 15%,...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. Its last dividend (D0) was $2.55, its expected constant growth rate is 4%, and its common stock sells for $22. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 11%,...
XYZ has a capital structure that is 35 % debt, 5 percent preferred stock, and 65...
XYZ has a capital structure that is 35 % debt, 5 percent preferred stock, and 65 %common stock. The pretax cost of debt is 8.25 %, the cost of preferred is 8%, and the cost of common stock is 117%. The tax rate is 36%. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $550,000 and annual cash inflows of $130,000, $400,000, and $550,000 over the next 3...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. Its last dividend (D0) was $2.85, its expected constant growth rate is 3%, and its common stock sells for $21. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 10%,...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $1.50, its expected constant growth rate is 5%, and its common stock sells for $22. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%,...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $1.65, its expected constant growth rate is 6%, and its common stock sells for $25. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 13%,...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at...
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $2.15, its expected constant growth rate is 4%, and its common stock sells for $21. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 13%,...
WACC Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts...
WACC Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $2.85, its expected constant growth rate is 5%, and its common stock sells for $30. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT