7. Lee Corp. has traditionally employed a firm-wide (or enterprise-wide) discount rate for capital-budg- eting purposes. However, its two divisions (publishing ("Pub") and entertainment ('Ent")) have differ- ent degrees of market risk given by BpUB = 1.0, BENT = 1.8. The asset beta for the overall firm (i.e., for the "inverted L") is 1.2. Use 5% as the risk-free rate and 12% as the expected return on the market. The firm is considering the following projects: IRR Project Project IRR Publ 0.145 Entl 0.180 Pub2 0.127 Ent2 0.166 Pub3 0.090 Ent3 0.137 (Parts a and b are worth 1.5 points each; part c is worth 3 points.) a. Recall the IRR decision rule from Lesson 5 (Chapter 7). Which projects would the firm accept if it uses the firm-level cost of capital to evaluate every project? b. Which projects would it accept if it estimates cost of capital separately for each division? c. Identify project-specific wrong decisions that Lee Corporation will make if only using a firm-wide cost of capital for all decisions, and explain the dangers of any wrong decisions. [Hint: For the "dan- gers" part, remember the interplay (from Lesson 5 (Chapter 7)) between internal rate of return vs. re- quired rate of return and net present value vs. zero.] 7. Lee Corp. has traditionally employed a firm-wide (or enterprise-wide) discount rate for capital-budg- eting purposes. However, its two divisions (publishing ("Pub") and entertainment ('Ent")) have differ- ent degrees of market risk given by BpUB = 1.0, BENT = 1.8. The asset beta for the overall firm (i.e., for the "inverted L") is 1.2. Use 5% as the risk-free rate and 12% as the expected return on the market. The firm is considering the following projects: IRR Project Project IRR Publ 0.145 Entl 0.180 Pub2 0.127 Ent2 0.166 Pub3 0.090 Ent3 0.137 (Parts a and b are worth 1.5 points each; part c is worth 3 points.) a. Recall the IRR decision rule from Lesson 5 (Chapter 7). Which projects would the firm accept if it uses the firm-level cost of capital to evaluate every project? b. Which projects would it accept if it estimates cost of capital separately for each division? c. Identify project-specific wrong decisions that Lee Corporation will make if only using a firm-wide cost of capital for all decisions, and explain the dangers of any wrong decisions. [Hint: For the "dan- gers" part, remember the interplay (from Lesson 5 (Chapter 7)) between internal rate of return vs. re- quired rate of return and net present value vs. zero.]