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Which of the following projects should the firm accept?

2. Bloom and Co. has no debt or preferred stockit uses only equity capital, and has two equally- sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept?

a. A Division Y project with a 12% return.
b. A Division X project with an 11% return.
c. A Division X project with a 9% return.
d. A Division Y project with an 11% return.
e. A Division Y project with a 13% return.

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Solution:

b. A Division X project with an 11% return.

Reason: The 11% return is higher than the Division X's cost of capital ...

Solution Summary

The solution explains the projects that can be accepted and rejected.

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