Question

Kurt, who is a divisional manager, continually brags that his division’s required return for its projects is 1 percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt’s division?
A.Kurt tends to overestimate the projected cash inflows on his projects.
B.Kurt tends to underestimate the variable costs of his projects.
C.Kurt has the most efficiently managed division.
D.Kurt’s division is less risky than the other divisions.
E.Kurt’s projects are generally financed with debt while the other divisions’ projects are financed with equity.

Answer 1

Answer:

D. Kurt’s division is less risky than the other divisions.

Explanation:

Based on the information provided within the question it can be said that the most likely reason is that Kurt’s division is less risky than the other divisions. Just as the saying goes "the greater the risk, the greater the reward", the same goes for the opposite, the lower the risk that a division has to undertake the lower the percent for the required return.