Question

Bloom and Co. has no debt or preferred stock it uses only equity capital, and has two equally sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept?
a. A Division Y project with a 12% return.
b. A Division X project with an 11% return.
c. A Division X project with a 9% return.
d. A Division Y project with an 11% return.
e. A Division Y project with a 13% return.

Answer 1

Answer:

b. A Division X project with an 11% return.

Explanation:

The firm should accept A Division X project with an 11% return. This is because the return of 11% is greater than the cost of capital of 10% for Division X.

Return > cost of capital