Company slow growth of profits and dividends

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Reference no: EM133186190

We, Executives of the F and H company, are reviewing complaints from the investors about the company's slow growth of profits and dividends.

Unlike those doubters, we have confidence in the long-run demand for mechanical encabulators, despite competing digital products. We are, therefore, determined to invest to maintain our share of the overall encabulator market.

F&H has a rigorous CAPEX approval process, and we are confident of returns around 8% on investment. That's a far better return than F&H earns on its cash holdings. The CFO went on to explain that F&H invested excess cash in short-term U.S. government securities, which are almost entirely risk-free but offered only a 4% rate of return.

a. Is a forecasted 8% return in the encabulator business necessarily better than a 4% safe return on short-term U.S. government securities? Justify why or why not?

b. Is F and H's opportunity cost of capital 4%?

c. How in principle should the CFO determine the cost of capital?

Reference no: EM133186190

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