Duval Inc.uses only equity capital,and it has two equally-sized divisions.Division A's cost of capital is 10.0%,Division B's cost is 14.0%,and the corporate (composite)WACC is 12.0%.All of Division A's projects are equally risky,as are all of Division B's projects.However,the projects of Division A are less risky than those of Division B.Which of the following projects should the firm accept?
A) A Division B project with a 13% return.
B) A Division B project with a 12% return.
C) A Division A project with an 11% return.
D) A Division A project with a 9% return.
E) A Division B project with an 11% return.

Question

Quizplus · Accepted Answer

The correct answer is statement c.Division A should accept only projects with returns greater than 10%,and Division B should accept only projects with returns greater than 14%.Only statement c meets this criterion.

Duval IncUses Only Equity Capital,and It Has Two Equally-Sized Divisions