Reference no: EM132488605

Point 1: The cost of debt financing is 8 percent before taxes of 36 percent.? However, if the? E&P division were to borrow based on its projects? alone, the cost of debt would probably be 9.4 ?percent, and the pipeline division could borrow at 6.1 percent. You may assume these costs of debt are after any flotation costs the firm might incur.

Point 2: The? risk-free rate of interest on? long-term U.S. Treasury bonds is currently 4.8 ?percent, and the? market-risk premium has averaged 6.4 percent over the past several years.

Point 3: The? E&P division adheres to a target debt ratio of 30 ?percent, whereas the pipeline division utilizes 60 percent borrowed funds.

Point 4: The firm has sufficient internally generated funds such that no new stock will have to be sold to raise equity financing.

Question a. What is the divisional cost of capital for the? E&P division?

Question b. What is the divisional cost of capital for the pipeline? division?

Question c. ?"The dramatic difference in the two divisional costs of capital underscores the importance of analyzing the capital costs corresponding to divisions of very different? risk."   

Is the above statement true or? false