7. Kish Consolidated has two divisions of equal size: a computer division and a

Question

7. Kish Consolidated has two divisions of equal size: a computer division and a restaurant division. Its CFO believes that stand-alone restaurant companies typically have a WACC of 8%, while stand-alone computer companies typically have a 12% WACC. Consequently, Kish estimates that its composite, or corporate, WACC is 10%. If Kish uses the 10% WACC for all projects in both divisions, then which of the following would occur?

a. Kish would accept too many projects in the computer division and not enough projects in its restaurant division resulting in lost value to shareholders.

b. Kish would accept too many projects in the restaurant division and not enough projects in its computer division resulting in lost value to shareholders.

c. Kish would be maximizing shareholder wealth by accepting only those projects which exceed their corporate WACC

d. None of the above

6. The firm has the following projects available to them:

Project IRR Cost

A 18% $5,000,000

B 16% $4,000,000

C 14% $3,000,000

D 12% $2,000,000

E 10% $1,000,000

It can raise the following amounts at different costs of capital.

WACC Amount Raised

9% $10,000,000

11% $12,000,000

13% $15,000,000

Which set of projects would maximize shareholder wealth?

a. A and B.

b. A, B, and C.

c. A, B, and D.

d. A, B, C, and D.

Explanation / Answer

7. Kish Consolidated has two divisions of equal size: a computer division and a

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