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1. Why is Van Muur soliciting control of Chestnut?
2. Do you agree with Meyer’s dinner conversation assertions?
a. Estimate a risk‐adjusted cost of capital for the two business units and comment on whether Meyer’s graph is accurate (case Figure 1). In estimating the cost of capital,
please consider WACC estimates based on the comparable companies.
b. How does the choice of a constant versus risk‐adjusted hurdle rate affect your
evaluation of Chestnut’s two divisions?
3. Do you support Pederson’s proposal?
a. In light of the recent developments, is her investment and identity proposal more
relevant?
b. What recommendations should Pederson make to respond to Van Muur?
Questions:
Should hurdle rate for project selection reflect WACC?
Should WACC and FCF reflect inflation adjustment?
Should the cost of debt and cost of equity reflect the risk appropriate for business risk and financial risk?
Should the equity and debt reflect appropriate market‐value‐based weightings?
Should the WACC be the same for all divisions, i.e., one company‐wide WACC be used?
Should the WACC be based on projects, or be the same for all projects within a division?
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