Global Goodness Foods has two divisions of equal size a snack food division and

Global goodness foods has two divisions of equal size

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18.Global Goodness Foods has two divisions of equal size: a snack food division and a beverage division. The company's CFO believes that stand-alone snack food companies typically have a WACC of 8%, while stand-alone beverage producers typically have a 12% WACC. He also believes that the snack food and beverage divisions have the same risk as their typical peers; consequently, the CFO estimates that the composite, or corporate, WACC is 10%. A consultant has suggested using an 8% hurdle rate for the snack food division and a 12% hurdle rate for the beverage division. However, the CFO disagrees, and he has assigned a 10% WACC to all projects in both divisions. Which of the following statements is CORRECT? a.The decision not to risk-adjust means that the company will accept too many projects in the snack food business and too few projects in the beverage business. This will lead to a reduction in its intrinsic value over time.b.The decision not to risk adjust means that the company will accept too many projects in the beverage business and too few projects in the snack food business. This may affect the firm’s capital structure but it will not affect its intrinsic value.
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c.The decision not to adjust for risk means that the company will accept too many projects in the beverage division and too few in the snack food division. This will lead to a reduction in the firm’s intrinsic value over time.d.While the decision to use just one WACC will result in its accepting more projectsin the beverage division and fewer projects in its snack food division than if it followed the consultant’s recommendation, this should not affect the firm’s intrinsic value.e.The decision not to adjust for risk means, in effect, that it is facoring the snack food division. Therefore, that division is likely to become a larger part of the consolidated company over time. 19. An increase in a firm’s marginal tax rate would lower the cost of debt used to calculate its WACC, other things held constant.
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