Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within 3 years.

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599 viewsJanuary 7, 2017

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Darshita 6.14K January 7, 2017 0 Comments

Suppose your firm wanted to expand into a new line of business quickly, and that management anticipated that the new line of business would constitute over 80 percent of your firm’s operations within 3 years. If the expansion was going to be financed partially with debt, would it still make sense to use the firm’s existing cost of debt, or should you compute a new rate of return for debt based on the new line of business?

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score 0 · Answer 1 · 2017-01-07T03:06:59+00:00

Given that the new line of business will comprise so much of the firm’s operations, it probably isn’t appropriate to count on the current, existing operations to pay off the debt. Therefore, the fir should probably compute a new required rate of return for this firm’s debt.

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