(Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
(Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach. For example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although LPT's management agrees, in principle at least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a. Pete Jennings is the chief operating officer for the E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder value. Do you agree with Pete? Why or why not? b. The pipeline division manager, Donna Selma, has long argued that charging her division the company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with Donna? Explain. Pete's division invests capital in high-risk projects and should use an appropriate risk-based own risk-based cost of capital. Each division should use the cost of capital cost of capital. Donna's division involves low-risk activities and her division should use its divisional company-wide f the (Select from the drop-down menus.) (Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach. For example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although LPT's management agrees, in principle at least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a. Pete Jennings is the chief operating officer for the E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder value. Do you agree with Pete? Why or why not? b. The pipeline division manager, Donna Selma, has long argued that charging her division the company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with Donna? Explain. Pete's division invests capital in high-risk projects and should use an appropriate risk-based own risk-based cost of capital. Each division should use the cost of capital that reflects the risk level of the cost of capital. Donna's division involves low-risk activities and her division should use its (Select from the drop-down menus.) divisional company-wide (Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach. For example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although LPT's management agrees, in principle at least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a. Pete Jennings is the chief operating officer for the E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder value. Do you agree with Pete? Why or why not? b. The pipeline division manager, Donna Selma, has long argued that charging her division the company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with Donna? Explain. Pete's division invests capital in high-risk projects and should use an appropriate risk-based own risk-based cost of capital. Each division should use the cost of capital that reflects the risk level of the cost of capital. Donna's division involves low-risk activities and her division should use its (Select from the drop-down menus.) division company (Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach. For example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although LPT's management agrees, in principle at least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a. Pete Jennings is the chief operating officer for the E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder value. Do you agree with Pete? Why or why not? b. The pipeline division manager, Donna Selma, has long argued that charging her division the company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with Donna? Explain. Pete's division invests capital in high-risk projects and should use an appropriate risk-based own risk-based cost of capital. Each division should use the cost of capital cost of capital. Donna's division involves low-risk activities and her division should use its divisional company-wide f the (Select from the drop-down menus.) (Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach. For example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although LPT's management agrees, in principle at least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a. Pete Jennings is the chief operating officer for the E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder value. Do you agree with Pete? Why or why not? b. The pipeline division manager, Donna Selma, has long argued that charging her division the company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with Donna? Explain. Pete's division invests capital in high-risk projects and should use an appropriate risk-based own risk-based cost of capital. Each division should use the cost of capital that reflects the risk level of the cost of capital. Donna's division involves low-risk activities and her division should use its (Select from the drop-down menus.) divisional company-wide (Divisional costs of capital) LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to LPT's management that this is not a reasonable approach. For example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although LPT's management agrees, in principle at least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a. Pete Jennings is the chief operating officer for the E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder value. Do you agree with Pete? Why or why not? b. The pipeline division manager, Donna Selma, has long argued that charging her division the company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with Donna? Explain. Pete's division invests capital in high-risk projects and should use an appropriate risk-based own risk-based cost of capital. Each division should use the cost of capital that reflects the risk level of the cost of capital. Donna's division involves low-risk activities and her division should use its (Select from the drop-down menus.) division company
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
15. Show that the frequency of revolution of the electron in the Bohr model hydrogen atom is given by v = 2|E|/hn where E is the total energy of the electron. 16. Show that for all Bohr orbits the...
-
During the first month of operations, ABC Company incurred the following costs in ordering and receiving merchandise for resale. No inventory was sold. List price, $100, 200 units purchased Volume...
-
A company with potentially dilutive share options is preparing its financial statements under IFRS. Compared to the U.S. GAAP financial statements, would its EPS be higher or lower under IFRS?
-
We are separating methanol and water in a staged distillation column at total reflux to determine Murphree efficiency. Pressure is \(101.3 \mathrm{kPa}\). The column has a 2.0 -in. head of liquid on...
-
At the beginning of the tax year, Melodie's basis in the MIP LLC was $60,000, including Melodie's $40,000 share of the LLC's liabilities. At the end of the year, MIP distributed to Melodie cash of...
-
Of course, ethical behavior can be viewed differently from person to person. Despite this disparity, we endeavor to avoid having to intervene in such behaviors as opposed to preventing such behavior....
-
What is Love?
-
Solve. Check for extraneous roots. l o g 3 x 2 - 3 x 2 = l o g 3 2
-
Using the MSFT financial statements, calculate the variance for the balances listed below (some are clearly stated and some you might have to calculate). Cost of services Selling, general,...
-
Scenario: Thomas is a 20-year-old man who lives in a small quiet neighborhood in downtown Toronto. Thomas has autism spectrum disorder, he can not verbally express himself and has limited...
-
What should Jack do here? Would your decision be different if: (a) Most other computer manufacturers also imported a fraction of their components without paying customs...
-
Shown here are annual financial data for a merchandising company and a manufacturing company. Music World Retail Wave - Board Manufacturing Beginning inventory Merchandise $ 1 3 5 , 0 0 0 Finished...
-
On 1 Jan 2018, A Ltd acquired all the outstanding shares of B Ltd when the equity of B Ltd consisted of share capital (10,000 shares) of $10,000 and retained earnings of $5,000. Details of the...
-
For the following exercises, find the area of the triangle. Round to the nearest hundredth. 22 50 36
-
Mary Scott has the following details for the year to 31 December 2012. Required: Draw up Mary Scotts income statement (trading and profit and loss account) for the year ended 31 December 2012....
-
In a psychology experiment on conditioning, an experimenter places mice and rats into two types of conditioning boxes, I and II. Each mouse spends 20 minutes per day and each rat spends 40 minutes...
-
Find the complete solution set of the problem: \[ \begin{aligned} & \text { maximize: } f=4000 x_{1}+4000 x_{2} \end{aligned} \]...
Study smarter with the SolutionInn App