The Swiss House is a maker of high quality chocolates. The company is considerin

Question

The Swiss House is a maker of high quality chocolates. The company is considering opening retail outlets. Mgt feels that retailing involves a different set of risks than it's current production operations and is therefore concerned about using the company's WACC as the required return for the project. Given this concern, The Swiss House should: A) still use it's own WACC as the projects required rate of return

B) use the pure play approach

C) use the overall market rate of return as the projects required rate

D) Use the average of it's WACC and the market rate of return as the projects required rate

Explanation / Answer

B) use the pure play approach , because WACC would be better if the considerable project falls in the company existing activity .Here, opening a retail outlets is different from manufacturing the product. So, existing WACC is not a better choice to cope up with the risks

In this cash, Pure play approach would be better because it will determine the amount / level of systematic risk through beta , and WACC will be used as discounted cash flow.

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