Swizer Industries has two separate divisions.Division X has less risk so its projects are assigned a discount rate equal to the firm's WACC minus 0.5 percent.Division Y has more risk and its projects are assigned a rate equal to the firm's WACC plus 1 percent.The company has a debt-equity ratio of 0.45 and a tax rate of 35 percent.The cost of equity is 14.7 percent and the aftertax cost of debt is 5.1 percent.Presently,each division is considering a new project.Division Y's project provides a 12.3 percent rate of return and Division X's project provides an 11.64 percent return.Which projects,if any,should the company accept?

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WACC = (1/1.45)(0.147) + (0.45/1.45)(0.051) = 0.1172Division X: Required return = 0.1172 - 0.005 = 11.22 percentDivision X's return of 11.64 percent exceeds the required rate of 11.22 percent, so its project should be accepted.Division Y: Required return = 0.1172 + 0.01 = 12.72 percentDivision Y's return of 12.30 percent is less than the required rate of 12.72 percent, so its project should be rejected.

Swizer Industries Has Two Separate Divisions