Using a firm's overall cost of capital to evaluate divisional projects can lead to the rejection of good investments in low-risk divisions and the acceptance of poor projects in high-risk divisions.

Question

Quizplus · Accepted Answer

The firm's overall cost of capital incorporates the risk of all divisions and may not accurately reflect the risk of individual divisions. Projects in low-risk divisions may have lower return requirements and therefore may be wrongly rejected while projects in high-risk divisions may appear to be more profitable than they actually are due to the higher return requirement, leading to their acceptance despite being poor investments.

Using a Firm's Overall Cost of Capital to Evaluate Divisional