Bloom and Co.has no debt or preferred stock- it uses only equity capital,and has two equally-sized divisions.Division X's cost of capital is 10.0%,Division Y's cost is 14.0%,and the corporate (composite)WACC is 12.0%.All of Division X's projects are equally risky,as are all of Division Y's projects.However,the projects of Division X are less risky than those of Division Y.Which of the following projects should the firm accept?
A) A Division Y project with a 12% return.
B) A Division X project with an 11% return.
C) A Division X project with a 9% return.
D) A Division Y project with an 11% return.
E) A Division Y project with a 13% return.

Question

Quizplus · Accepted Answer

The correct answer is statement b.Division X should accept only projects with returns greater than 10%,while Division Y should accept only projects with returns greater than 14%.Only statement b meets this criterion.