Cranberry Corp. has two divisions of equal size: a computer manufacturing divisi

Question

Cranberry Corp. has two divisions of equal size: a computer manufacturing division and a data
processing division. Its CFO believes that stand-alone data processor companies typically have
a WACC of 8%, while stand-alone computer manufacturers typically have a 12% WACC. He also
believes that the data processing and manufacturing divisions have the same risk as their typical
peers. Consequently, he estimates that the composite, or corporate, WACC is 10%. A
consultant has suggested using an 8% hurdle rate for the data processing division and a 12%
hurdle rate for the manufacturing division. However, the CFO disagrees, and he has assigned a
10% WACC to all projects in both divisions. Which of the following statements is CORRECT?
a. While the decision to use just one WACC will result in its accepting more projects in the
manufacturing division and fewer projects in its data processing division than if it followed the
consultant

Explanation / Answer

d

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