Problem
Mini-Case: Chestnut Foods
This case is similar to the last mini-case; you will be computing the cost of capital. However, this case has a unique twist; Chestnut foods does not just have one type of business; as you read, the case will highlight at least two "divisions." This adds a unique flair to the typical cost of capital problem because food products and food instruments have different risk profiles. This is not unique to Chestnut; this happens in several businesses. Imagine Boeing, they manufacture commercial aircraft, and they make military aircraft.
• Should Chestnut foods handle its cost of capital as two separate divisions? Give your reasoning for why or why not.
• Meyer gives estimates of a hurdle rate. A hurdle rate is the same as the WACC estimate for the firm. Is Meyer's risk-adjusted hurdle rate too steep?
• Compute the cost of capital for Chestnut Foods under the following two assumptions.
o As if the firm only had one WACC
o As if the firm had multiple because of its divisions (You need at least 2 WACC calculations).
• Describe the risks and problems when a firm has multiple divisions and only uses one hurdle rate.
The response should include a reference list. Using one-inch margins, Times New Roman 12 pnt font, double-space and APA style of writing and citations.