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docker41 [41]
3 years ago
14

Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y

has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. When allocating funds, the firm should probably:
Business
2 answers:
Cloud [144]3 years ago
5 0

Answer:

D) assign the highest cost of capital to Division Z because it is most likely the riskiest of the three divisions.

Explanation:

When a corporation's business units clearly have differentiated risks associated to their activities, the corporation can assign different capital structures to each division and if possible calculate their own weighted average cost of capital (WACC).

One of the basic premises in business, is that investors are risk adverse. This means that investors will require higher returns from riskier investments. WACC has two main components: shareholder equity and debt (either loans, bonds, preferred stock). Debt should cost the same for every division, but shareholder equity shouldn't.

It is the same reason why a subsidiary that operates in Australia has a lower WACC than a subsidiary operating in South America, and that one has a lower WACC than a subsidiary operating in Africa. Higher risk always demands higher returns.

blagie [28]3 years ago
4 0

Answer:

D.

Explanation:

Based on the scenario being described within the question it can be said that when allocating funds, the firm should probably assign the highest cost of capital to division Z because it is most likely the riskiest of the three divisions. This is because Division Z focuses on research and development which means that they might not actually discover or create something that can bring value to the company and is therefore highly risky.

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Assess the trade-offs that investors face when making investment decisions, and provide one example of such a trade-off.
polet [3.4K]

A common trade-off that investors face when making investment decisions is the risk-return trade-off.

A trade-off simply means the situational decision where an economic entity loses one quantity in order to gain something else.

A common trade-off that investors face when making investment decisions is the risk-return trade-off. It should be noted that higher risks are usually associated with more probability of higher return. Also, a lower risk has a greater probability of lower return but it's safer.

In this case, investors are usually faced with making a decision of whether to go for a safer investment or to go for one with more risk that will yield more returns.

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7 0
3 years ago
Parker Inc. is obligated to pay its creditors $33,333 very soon. If the market value of the firm's assets equals $49,700, calcul
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Answer:

The market value of shareholders’ equity is $16,367

Explanation:

In this question, we are asked to calculate the residual value owed to shareholders.

We proceed as follows:

Firstly, we identify the following;

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Market value of shareholders equity = Market value of assets - Amount payable to creditors = $49,700 - $33,333 = $16,367

3 0
3 years ago
Domingo Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the f
kakasveta [241]

Answer:

2,800 units

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= Beginning inventory units + units started - transferred units to the second processing department

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