Why should firms that own and operate multiple businesses that have different risk characteristics use business-specific,or divisional costs of capital?
A) Not all divisions have equal risk and the firm might accept projects whose returns are higher than are deemed appropriate.
B) Not all business divisions have equal risk and the firm will likely become less risky in the future.
C) Not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved.
D) Use of the same weighted average cost of capital for all divisions may result in too much money being allocated to the least risky division.

Question

Quizplus · Accepted Answer

Using a single cost of capital for all divisions can lead to accepting projects with returns that do not adequately compensate for their risk, especially in divisions with higher risk.

Why Should Firms That Own and Operate Multiple Businesses That