Each of the following factors affects the weighted average cost of capital (WACC) equation. Which…

Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that the firm cannot control? Check all that apply. Interest rates in the economy The firm’s capital structure The performance of index funds such as the S&P 500 Consider the following case: Moreschi 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

Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that the firm cannot control? Check all that apply. Interest rates in the economy The firm’s capital structure The performance of index funds such as the S&P 500 Consider the following case: Moreschi 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 Moreschi Co. accept or reject the project? Reject Accept On what grounds do you base your accept-reject decision? Division H’s project should be accepted, because its return is greater than the risk-based cost of capital for the division. Division H’s project should be rejected, because its return is less than the risk-based cost of capital for the division.

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