New rate of return for debt based on new line of business

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Suppose your firm wanted to expand into a new line of business quickly through an existing division of the firm, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within three years. If the expansion was going to be financed partially with debt, would it still make sense to use the firm’s existing cost of debt, or should you compute a new rate of return for debt based on the new line of business? Explain why the divisional cost of capital approach may cause problems if the development of this line of business was assigned to the wrong division within the firm.

Reference no: EM13814062

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