In January 1996, the chief financial officer must fashion a response to the raider, who argues that a major segment of the business of the company should be sold, because it does not earn a satisfactory rate of return (ROR). Case talks about the debate within the company over the use of a single rate obstacle to evaluate all segments of the company compared to the risk-adjusted system with a complex. The tasks the students are to resolve the dispute, estimate the weighted average cost of capital (WACC) for the two business segments, and to respond to the raider. Because the case was prepared as part of the introduction to evaluate the rate of return required by investors, it would be best to follow one or two class sessions estimation techniques WACC. Although the numerical calculations needed light, some details about the use of risk-adjusted rates of obstacles will take time for the beginner to absorb. The case can be used to pursue a variety of learning objectives, including (1) expanding the risk of return (for example, mean, variance) analysis of corporate finance, (2) survey classical arguments for and against the use of risk-adjusted hurdle rate systems, and (3) assess assumptions and limitations of the risk of obstruction rates, (4) Assessing segment WACCs, and (5) with regard to possible institutional barriers to the implementation of risk-adjusted hurdle rates "Hide
. by Robert F. Bruner Source: Darden School of Business 15 pages. Publication Date: January 10, 1997. Prod. #: UV2408-PDF-ENG
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