Duval Inc. uses only equity capital, and it has two equally-sized divisions. Div
ID: 2655162 • Letter: D
Question
Duval 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 corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept?
a. A Division B project with a 13% return. b. A Division B project with a 12% return. c. A Division A project with an 11% return. d. A Division A project with a 9% return. why?Explanation / Answer
The correct answer is b. A Division B project with a 12% return
Because the return is equal to the composite WACC and is also less than its cost of capital, it will generate positive inflows and higher profits