Eyes of the World plc has traditionally employed a firm wide discount rate for capital budgeting purposes.However,its two divisions - publishing and entertainment - have different degrees of risk given by ßP = 1.0,ßE = 2.0,and the beta for the overall firm is 1.3.The firm is considering the following capital expenditures:

Which projects would the firm accept if it uses the opportunity cost of capital for the entire company?
Which projects would it accept if it estimates cost of capital separately for each division?
Use 6% as the risk-free rate and 12% as the expected return on the market.

Question

Eyes of the World plc has traditionally employed a firm wide discount rate for capital budgeting purposes.However,its two divisions - publishing and entertainment - have different degrees of risk given by ßP = 1.0,ßE = 2.0,and the beta for the overall firm is 1.3.The firm is considering the following capital expenditures:
 
Which projects would the firm accept if it uses the opportunity cost of capital for the entire company?
 Which projects would it accept if it estimates cost of capital separately for each division?
 Use 6% as the risk-free rate and 12% as the expected return on the market.

Quizplus · Accepted Answer

The Answer of Eyes of the World plc has traditionally employed a firm wide discount rate for capital budgeting purposes.However,its two divisions - publishing and entertainment - have different degrees of risk given by ßP = 1.0,ßE = 2.0,and the beta for the overall firm is 1.3.The firm is considering the following capital expenditures:
 
Which projects would the firm accept if it uses the opportunity cost of capital for the entire company?
 Which projects would it accept if it estimates cost of capital separately for each division?
 Use 6% as the risk-free rate and 12% as the expected return on the market.

Eyes of the World Plc Has Traditionally Employed a Firm