?(Divisional costs of capital and investment decisions?) In May of this year Newcastle Mfg.? Company's capital...

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?(Divisional costs of capital and investment decisions?) In Mayof this year Newcastle Mfg.? Company's capital investment reviewcommittee received two major investment proposals. One of theproposals was put forth by the? firm's domestic manufacturing?division, and the other came from the? firm's distribution company.Both proposals promise internal rates of return equal toapproximately 14 percent. In the? past, Newcastle has used a singlefirm wide cost of capital to evaluate new investments.?? ?However,managers have long recognized that the manufacturing division issignificantly more risky than the distribution division. In? fact,comparable firms in the manufacturing division have equity betas ofabout 1.6?, whereas distribution companies typically have equitybetas of only 1.2. Given the size of the two? proposals,Newcastle's management feels it can undertake only? one, so itwants to be sure that it is taking on the more promisinginvestment. Given the importance of getting the cost of capitalestimate as close to correct as? possible, the? firm's chieffinancial officer has asked you to prepare cost of capitalestimates for each of the two divisions. The requisite informationneeded to accomplish your task? follows: bullet The cost of debtfinancing is 8 percent before taxes of 35 percent. You may assumethis cost of debt is after any flotation costs the firm mightincur. bullet The? risk-free rate of interest on? long-term U.S.Treasury bonds is currently 5.9 ?percent, and the? market-riskpremium has averaged 4.9 percent over the past several years.bullet Both divisions adhere to target debt ratios of 40 percent.bullet The firm has sufficient internally generated funds such thatno new stock will have to be sold to raise equity financing.
a. What is the divisional cost of capital for the manufacturing?division? % ?(Round to two decimal? places.)
What is the divisional cost of capital for the distribution?division? __?% ?(Round to two decimal? places.)
b. Which of the two projects should the firm undertake?(assuming it cannot do both due to labor and other non financial?restraints)????(Select the best choice? below.)
A. Either project because their internal rates of return ?(IRR?)are equal.
B. Manufacturing project because the cost of capital is higherand thus the? project's net present value ?(NPV?) is higher.
C. Manufacturing project because its divisional cost of capitalis higher than that of distribution division.
D. Distribution project because the cost of capital is lower andthus the? project's net present value ?(NPV?) is higher.

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?(Divisional costs of capital and investment decisions?) In Mayof this year Newcastle Mfg.? Company's capital investment reviewcommittee received two major investment proposals. One of theproposals was put forth by the? firm's domestic manufacturing?division, and the other came from the? firm's distribution company.Both proposals promise internal rates of return equal toapproximately 14 percent. In the? past, Newcastle has used a singlefirm wide cost of capital to evaluate new investments.?? ?However,managers have long recognized that the manufacturing division issignificantly more risky than the distribution division. In? fact,comparable firms in the manufacturing division have equity betas ofabout 1.6?, whereas distribution companies typically have equitybetas of only 1.2. Given the size of the two? proposals,Newcastle's management feels it can undertake only? one, so itwants to be sure that it is taking on the more promisinginvestment. Given the importance of getting the cost of capitalestimate as close to correct as? possible, the? firm's chieffinancial officer has asked you to prepare cost of capitalestimates for each of the two divisions. The requisite informationneeded to accomplish your task? follows: bullet The cost of debtfinancing is 8 percent before taxes of 35 percent. You may assumethis cost of debt is after any flotation costs the firm mightincur. bullet The? risk-free rate of interest on? long-term U.S.Treasury bonds is currently 5.9 ?percent, and the? market-riskpremium has averaged 4.9 percent over the past several years.bullet Both divisions adhere to target debt ratios of 40 percent.bullet The firm has sufficient internally generated funds such thatno new stock will have to be sold to raise equity financing.a. What is the divisional cost of capital for the manufacturing?division? ____% ?(Round to two decimal? places.)What is the divisional cost of capital for the distribution?division? ______?% ?(Round to two decimal? places.)b. Which of the two projects should the firm undertake?(assuming it cannot do both due to labor and other non financial?restraints)????(Select the best choice? below.)A. Either project because their internal rates of return ?(IRR?)are equal.B. Manufacturing project because the cost of capital is higherand thus the? project's net present value ?(NPV?) is higher.C. Manufacturing project because its divisional cost of capitalis higher than that of distribution division.D. Distribution project because the cost of capital is lower andthus the? project's net present value ?(NPV?) is higher.