ABC plc is a relatively smal

Anonymous
timer Asked: Apr 16th, 2016

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ABC plc is a relatively small company with only one SBU. It manufactures wire grilles for the consumer market for cooker manufactures and for export. Following a thorough investigation by the finance department and the heads of the customer lines some facts emerged about the returns expected in each of the customer sectors. The consumer sector uses £1m of the firm’s capital and is expected to produce a return of 18 per cent on this capital, for the next five years, after which it will return the same as it risk-adjusted cost of capital (WAAC),15 per cent. The cooker sales sector uses £2m of capital and will return 14 per cent per annum for seven years when its planning horizon end. Its WACC is 16 per cant. The export sector has a positive performance spread of 2 per cent over WACC for the next six years. The required rate of return is 17 per cant. From Year 7 the performance spread becomes zero. This division uses £1.5m of capital.

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