3. An objective approach to calculating divisional WACCs would be done by A simp

Question

3. An objective approach to calculating divisional WACCs would be done by A simply considering the project?s risk relative to the firm's lines of business and adjusting upward or .downward to account for subjective opinions of project risk. B. computing the average beta for the firm, the firm's CAPM formula, and the firm's WACC. C. computing the average beta per division, using these figures for each division in the CAPM formula,. and then constructing divisional WACCs. D . simply averaging out all the WACCs for all the firm's projects.

Explanation / Answer

ANS C

An objective approach to calculating divisional WACCs would be to compute the average beta per division, use these figures in the CAPM formula to calculate iE for each division, and then, in turn, use divisional estimates of iE to construct divisional WACCs. Though the objective approach would usually be more precise, resulting in fewer incorrect accept/reject decisions, the subjective approach is more frequently used because it is easier to implement.

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