McFann Co. has two divisions, L and H. Division L is the company\'s low-risk div
ID: 2383413 • Letter: M
Question
McFann Co. has two divisions, L and H. Division L is the company's low-risk division and would have a WACC of 8% if it were operated as an independent company. Division H is the company's high-risk division and would have a WACC of 14% if it were operated as an independent company. Because the two divisons are the same size, the company has a composite WACC of 11%. Division H is considered a project with an expected return of 12%. Should McFann Co. accept or reject the prject?
A. Accept
B. Reject
On what grounds do you base your accept-reject decision?
A. Division H's project should be accepted, because its return is greater than the risk-based cost of capital for the divison.
B. Division H's project should be rejected, because its return is less than the risk-based cost of capital for the division.
Explanation / Answer
Answer: B Reject
Division H's project should be rejected, because its return is less than the risk-based cost of capital for the division.