Due on Tomorrow at 11:59 PM PST Consider the following case: International Impor

Question

Due on Tomorrow at 11:59 PM PST Consider the following case: International Imports (12) has two divisions i and H. Division u is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division H is considering a project with an expected return of 12%, Should International Imports (12) accept or reject the project O Accept the project O Reject the project On what grounds do you base your accept-reject decision? Division H's project should be rejected since its return is less than the risk-based cost of capital for the division. Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division.

Explanation / Answer

1. International Imports should not accept this project. The reason is quite simple. The project is to be taken by Division H, which has a WACC of 14%, whereas the project has an expected return of only 12%. A project should only be accepted, if its return exceeds the cost of capital, which is not the case here. Hence, the project should be rejected.

2. Option 1 is correct as discussed in above answer.

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