Question

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?1. A Division B project with a 13% return.2. A Division B project with a 12% return.3. A Division A project with an 11% return.4. A Division A project with a 9% return.5.A Division B project with an 11% return.

Answer 1

Answer:

The answer is 3. A Division A project with an 11%.

Explanation:

The projects Duval Inc. should accept is the projects generating an expected return higher than its Cost of Capital.

Because all of Division A’s projects are equally risky, as are all of Division B's projects, each project of Division A will have Cost of capital of 10.0% and each project of Division B will have a Cost of capital of 14%.

For 5 projects given, only project described in (3) has expected return higher than its cost of capital ( 11% in comparison to 10%).

As a result, (3) is the correct answer.