Bazman Inc. has a wires division that is classified as an Investment Centre. Below is some...

  

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Bazman Inc. has a wires division that is classified as an Investment Centre. Below is some information on this division: (in millions) Revenue COGS Depreciation Wires $3,050 $2,100 $250 Interest Expense $60 Other Income $80 Income before Taxes $720 Average Operating Assets $4,200 Debt $960 Shareholders' Equity $3,354 The wires division faces a tax rate of 22%. Assume Cost of Equity for the wires division is 10.5%. a) Compute the Return on Investment (ROI) of the wires division. b) Compute the Cost of capital of the wires division. (2 points) (2 points) c) The manager of the wires division is considering a potential investment of $500 million that is expected to generate additional operating income of $60 million in perpetuity. Will the manager invest if evaluated based on (i) ROI; (ii) Residual Income? (2 points) Bazman Inc. has a wires division that is classified as an Investment Centre. Below is some information on this division: (in millions) Revenue COGS Depreciation Wires $3,050 $2,100 $250 Interest Expense $60 Other Income $80 Income before Taxes $720 Average Operating Assets $4,200 Debt $960 Shareholders' Equity $3,354 The wires division faces a tax rate of 22%. Assume Cost of Equity for the wires division is 10.5%. a) Compute the Return on Investment (ROI) of the wires division. b) Compute the Cost of capital of the wires division. (2 points) (2 points) c) The manager of the wires division is considering a potential investment of $500 million that is expected to generate additional operating income of $60 million in perpetuity. Will the manager invest if evaluated based on (i) ROI; (ii) Residual Income? (2 points)

Answer rating: 100% (QA)

ANSWER Investment Decision The ... View the full answer