Homework: Financial Problem
We, Executives of the F & H company, are reviewing complaints from the investors about the company's slow growth of profits and dividends.
Unlike those doubters, we have confidence in the long-run demand for mechanical encabulators, despite competing digital products. We are, therefore, determined to invest to maintain our share of the overall encabulator market.
F&H has a rigorous CAPEX approval process, and we are confident of returns around 8% on investment. That's a far better return than F&H earns on its cash holdings. The CFO went on to explain that F&H invested excess cash in short-term U.S. government securities, which are almost entirely risk-free but offered only a 4% rate of return.
Answer the following questions in detail, provide examples whenever applicable, support your argument with citing peer-reviewed sources.
1) Is a forecasted 8% return in the encabulator business necessarily better than a 4% safe return on short-term U.S. government securities? Justify why or why not?
2) Is F&H's opportunity cost of capital 4%?
3) How in principle should the CFO determine the cost of capital?
Format your homework according to the following formatting requirements:
(1) The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
(2) The response also includes a cover page containing the title of the homework, the student's name, the course title, and the date. The cover page is not included in the required page length.
(3) Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.