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 Division B project with a 13% return. A Division B project with a 12% return. A Division A project with an 11% return. A Division A project with a 9% return. A Division B project with an 11% return.

Question

Business

Aylin Zavala

10 September, 00:31

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 Division B project with a 13% return. A Division B project with a 12% return. A Division A project with an 11% return. A Division A project with a 9% return. A Division B project with an 11% return.

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Answers (1)

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Heaven Duffy · Answer 1

A Division A project with an 11%

Explanation:

The project should be analize with the cost of capital for each division, as it is a know values it is a better choise than WACC.

For that reason, going for project of less than 14% (13% or 11%) in division b will be destroying capital

While the project in Division A for 11% means it will generate economic value to the firm as the cost is 10% and return 11%