Question: (Divisional cost of capital) Socar Corporation is an integrated oil company which is based in Baku, Azerbaijan, which has large operations in nearby regions. For a long period of time Socar used to be the main one in South Caucasus who provided oil products, so they never used to spend a lot afford on capital costs and used 15 percent for all regional investment projects. However, due to latest developments on oil prices the regional manager argued to raise it up to 20 percent, since the company investors face increased risks. He calculated 20 percent as the highest required rate of return for the most risky region. The financial manager has another point of view; she argues that even due to unfavorable developments for Socar, 20 percent is too high for all regions and company needs to introduce various capital costs for the regions.
a. Discuss Company's current position regarding capital cost, do you agree with Regional Manager? Is not a good idea to raise capital costs, so company may attract investors?
b. What you think regarding the position of Financial Manager? Is not too costly to have different capital costs?