WACC and decision making: Which of the projects should Basu accept?
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Basu Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the composite WACC is 12.0%. All of Division A's projects have the same risk, and all Division B projects are also equally risky. However, the projects in Division A do not have the same risk as those in Division B.
Which of the following projects should Basu accept?
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Solution Summary
The solution anaylsis two equally-sized divisions using WACC.
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The WACC represents the rate at which projects will start generating shareholder's value. It is the weighted average cost of capital though and if a company is treated as a portfolio of projects, then the WACC is a reflection of all activities and risks inherent in the company's businesses. Furthermore, the WACC is not constant over time. Among other factors, the WACC ...
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