World Corporation 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 β_P = 1.1,β_E = 1.8,while the beta for the overall firm is 1.3.The publishing division has proposed three projects with these internal rates of return: P₁ = 13.2 percent; P₂ = 12.4 percent; and P₃ = 9.8 percent.The entertainment division has presented their three projects: E₁ = 16.4 percent; E₂ = 17.8 percent; and E₃ = 14.7 percent.The risk-free rate is 4 percent and the market risk premium is 8 percent.Identify which projects will be accepted if the firm applies its overall beta to all projects.Then identify which projects will be accepted if the division betas are properly applied.

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The Answer of World Corporation 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 β_P = 1.1,β_E = 1.8,while the beta for the overall firm is 1.3.The publishing division has proposed three projects with these internal rates of return: P₁ = 13.2 percent; P₂ = 12.4 percent; and P₃ = 9.8 percent.The entertainment division has presented their three projects: E₁ = 16.4 percent; E₂ = 17.8 percent; and E₃ = 14.7 percent.The risk-free rate is 4 percent and the market risk premium is 8 percent.Identify which projects will be accepted if the firm applies its overall beta to all projects.Then identify which projects will be accepted if the division betas are properly applied.

World Corporation Has Traditionally Employed a Firm-Wide Discount Rate for Capital