Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?
A) Managers in different divisions may use different methods to calculate the WACC.
B) The expected return of the new project may be incorrect.
C) If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.
D) None of the options are correct.

Question

Quizplus · Accepted Answer

Assigning a project to the wrong division can result in significant differences in risk levels between the project and the division. If the project is evaluated using the divisional cost of capital approach, it may result in an inappropriate cost of capital, which can lead to incorrect investment decisions. Managers in different divisions using different methods to calculate the WACC can also be a problem, but it is not the most significant issue with the divisional cost of capital approach in this scenario. The expected return of the new project being incorrect is a general investment analysis issue and is not specifically related to the divisional cost of capital approach. Therefore, option C is the best choice.

Which of the Following Is a Reason Why the Divisional