Copake Wood Products has two separate divisions, each in a separate line of busi

Question

Copake Wood Products has two separate divisions, each in a separate line of business. The Commercial Division is the largest division and represents 75 percent of the firm's overall sales. The Commercial Division is also the riskier of the two divisions. The Residential Division is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should fund the highest net present value projects from each division based on an allocation of 75 percent of the funds to the Commercial Division and 25 percent of the funds to the Residential Division allocate more funds to the Commercial Division since it is the larger of the two divisions assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values fund all of the Residential Division's projects first since they tend to be less risky and then allocate the remaining funds to the Commercial Division's projects that have the highest net present values. allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital

Explanation / Answer

The correct answer : Allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital.

The weighted average cost of capital is the appropriate discount rate for computing the net present values of the projects under consideration. The project with the highest net present value should be invested in, as that would lead to maximization of stockholder wealth.

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