?(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 13 percent. In the? past, Newcastle has used a singlefirm wide cost of capital to evaluate new investments.??
?However, managers have long recognized that the manufacturingdivision is significantly more risky than the distributiondivision. In? fact, comparable firms in the manufacturing divisionhave equity betas of about 1.7?, whereas distribution companiestypically have equity betas of only 1.3. Given the size of the two?proposals, Newcastle's management feels it can undertake only? one,so it wants 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:
• The cost of debt financing is 11 percent before taxes of 36percent. You may assume this cost of debt is after any flotationcosts the firm might incur.
• The? risk-free rate of interest on? long-term U.S. Treasury bondsis currently 5.8 ?percent, and the? market-risk premium hasaveraged 4.5 percent over the past several years.
• Both divisions adhere to target debt ratios of 70 percent.
• The firm has sufficient internally generated funds such that nonew stock will have to be sold to raise equity financing.
a. Estimate the divisional costs of capital for the manufacturingand distribution divisions.
b. Which of the two projects should the firm undertake? (assumingit cannot do both due to labor and other nonfinancial? restraints)?Discuss.

a. What is the divisional cost of capital for the manufacturing?division?

_____%

What is the divisional cost of capital for the distribution?division?

_____%

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). Manufacturing project because its divisional cost ofcapital is higher than that of distribution division.
(B). Manufacturing project because the cost of capital is higherand thus the? project's net present value ?(NPV?) is higher.
(C). Distribution project because the cost of capital is lower andthus the? project's net present value ?(NPV?) is higher.
(D). Either project because their internal rates of return ?(IRR?)are equa