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WACC

Brandon Inc. consists of 2 divisions of equal size, and Brandon is 100 percent equity financed. Division A cost of equity capital is 9.8 percent, while Division B cost of equity capital is 14 percent. Brandon's composite WACC is 11.9 percent. Assume that all Division A projects have the same risk and that all Division B projects have the same risk. However, the projects in Division A are not the same risk as those in Division B. Which of the following projects should Brandon accept?

a. Division A project with an 11 percent return.
b. Division B project with a 12 percent return.
c. Division B project with a 13 percent return.
d. Statements a and c are correct.
e. all are correct.

Why?

Solution Preview

Answer: a. Division A project with an 11 percent return.

Only projects with positive NPV should be selected. Projects will have a positive NPV only when the project has a ...

Solution Summary

Answer to a multiple choice question on WACC.

$2.19