INA United has 2 companies of the same size, company I sells computers and company II in the restaurant business. The CFO of INA United believes that independent restaurants typically have a WACC of 8%, while independent computer companies typically have a WACC of 12%. He also believes that the two companies have the same risks as other competing companies. INA United estimates that the company's WACC is 10%. A consultant has suggested using an 8% hurdle rate for restaurant companies and a 12% hurdke rate for computer companies. However, the CFO of INA United disagreed, and set a 10% WACC for all projects in both companies. Which of the following statements is TRUE? a. INA United's CFO's decision not to use the risk-adjusted WACC according to the consultant's recommendation will result in him accepting more projects in computer companies and fewer projects in restaurants. This does not affect the intrinsic value of the company. b. INA United's CFO's decision not to adjust the amount of risk will benefit the restaurant. So restaurants are likely to become a bigger part of INA United over time. c. INA United's CFO's decision not to adjust the risk scale means the company will receive a lot of projects from computer companies and too few projects from restaurants. This will lead to a decrease in the intrinsic value of the company over time. d. INA United's CFO's decision not to adjust the risk scale means that the company will receive many projects from the restaurant business and too few projects from computer companies. This will cause a decrease in the intrinsic value of the company from time to time. e. INA United's CFO's decision not to adjust the risk scale meant that the company would receive too many projects from computer companies and too few projects from restaurants. This will affect the company's capital structure but will not affect its intrinsic value.
INA United has 2 companies of the same size, company I sells computers and company II in the restaurant business. The CFO of INA United believes that independent restaurants typically have a WACC of 8%, while independent computer companies typically have a WACC of 12%. He also believes that the two companies have the same risks as other competing companies. INA United estimates that the company's WACC is 10%. A consultant has suggested using an 8% hurdle rate for restaurant companies and a 12% hurdke rate for computer companies. However, the CFO of INA United disagreed, and set a 10% WACC for all projects in both companies. Which of the following statements is TRUE? a. INA United's CFO's decision not to use the risk-adjusted WACC according to the consultant's recommendation will result in him accepting more projects in computer companies and fewer projects in restaurants. This does not affect the intrinsic value of the company. b. INA United's CFO's decision not to adjust the amount of risk will benefit the restaurant. So restaurants are likely to become a bigger part of INA United over time. c. INA United's CFO's decision not to adjust the risk scale means the company will receive a lot of projects from computer companies and too few projects from restaurants. This will lead to a decrease in the intrinsic value of the company over time. d. INA United's CFO's decision not to adjust the risk scale means that the company will receive many projects from the restaurant business and too few projects from computer companies. This will cause a decrease in the intrinsic value of the company from time to time. e. INA United's CFO's decision not to adjust the risk scale meant that the company would receive too many projects from computer companies and too few projects from restaurants. This will affect the company's capital structure but will not affect its intrinsic value.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
INA United has 2 companies of the same size, company I sells computers and company II in the restaurant business. The CFO of INA United believes that independent restaurants typically have a WACC of 8%, while independent computer companies typically have a WACC of 12%. He also believes that the two companies have the same risks as other competing companies. INA United estimates that the company's WACC is 10%. A consultant has suggested using an 8% hurdle rate for restaurant companies and a 12% hurdke rate for computer companies. However, the CFO of INA United disagreed, and set a 10% WACC for all projects in both companies. Which of the following statements is TRUE?
a. INA United's CFO's decision not to use the risk-adjusted WACC according to the consultant's recommendation will result in him accepting more projects in computer companies and fewer projects in restaurants. This does not affect the intrinsic value of the company.
b. INA United's CFO's decision not to adjust the amount of risk will benefit the restaurant. So restaurants are likely to become a bigger part of INA United over time.
c. INA United's CFO's decision not to adjust the risk scale means the company will receive a lot of projects from computer companies and too few projects from restaurants. This will lead to a decrease in the intrinsic value of the company over time.
d. INA United's CFO's decision not to adjust the risk scale means that the company will receive many projects from the restaurant business and too few projects from computer companies. This will cause a decrease in the intrinsic value of the company from time to time.
e. INA United's CFO's decision not to adjust the risk scale meant that the company would receive too many projects from computer companies and too few projects from restaurants. This will affect the company's capital structure but will not affect its intrinsic value.
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