13. Duval Inc. uses only equity capital, and it has two equally-sized divisions.

Question

13. Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept?

a. A Division B project with a 12% return. b. A Division B project with a 13% return. c. A Division B project with an 11% return. d. A Division A project with a 9% return. e. A Division A project with an 11% return.

Explanation / Answer

WACC is 12%

Cost of Capital of Division A is 10%

Cost of Capital of division B is 14%

Since Division A's Projects are less risky than Division B's Project , the Division A project with an 11% return should be accepted as it gives return above its average cost and is even overall less risky than project B

The answer is e.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.