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7. Factors that affect the cost of capital equation Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that a firm can control? Check all that apply. The firm's capital structure O Tax rates Interest rates in the economy The firm's capital budgeting decision rules The impact of cost of capital on managerial decisions Consider the following case: Acme Manufacturing Corporation has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 12% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 18% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 15%. Division H is considering a project with an expected return of 16%. Should Acme Manufacturing Corporation accept or reject the project? Reject the project Accept the project On what grounds do you base your accept-reject decision? O Division H's project should be rejected since its return is less than the risk-based cost of capital for the division. O Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division

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