Jackson 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 composite WACC is 12.0%.All of Division A's projects have the same risk,as do all of Division B's projects.However,the projects in Division A have less risk than those in Division B.Which of the following projects should Jackson accept?

Question

Quizplus · Accepted Answer

Jackson Inc. should choose a project with the lowest cost of capital, which is Division A project with an 11% return. This is because projects with lower risk should have a lower cost of capital, and the cost of capital for Division A is lower than for Division B. Therefore, even though the return on the Division B project with a 13% return is higher, it is not the best choice because it has a higher cost of capital. Similarly, the Division B project with a 12% return is not the best choice because it still has a higher cost of capital than the Division A project with an 11% return. The Division A project with a 9% return is also not the best choice because it has a lower return than the Division A project with an 11% return.