In May of this year Newcastle Mfg.? Company's capital investmentreview committee received two major investment proposals. One ofthe proposals 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

11% percent. In the? past, Newcastle has used a single firm widecost 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 companies typically have equity betas ofonly

1.2

Given the size of the two? proposals, Newcastle's managementfeels it can undertake only? one, so it wants to be sure that it istaking on the more promising investment. Given the importance ofgetting the cost of capital estimate as close to correct as?possible, the? firm's chief financial officer has asked you toprepare cost of capital estimates for each of the two divisions.The requisite information needed to accomplish your task?follows:

-The cost of debt financing is 77 percent before taxes of 34percent. 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. Treasurybonds is currently 5.3 ?percent, and the? market-risk premium hasaveraged 3.6 percent over the past several years.

-Both divisions adhere to target debt ratios of 30 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 themanufacturing and distribution divisions.

B.Which of the two projects should the firm undertake? (assumingit cannot do both due to labor and other nonfinancial? restraints)?Discuss