Acme Manufacturing Corportaion has two divisions, L and ha. Division L is the company's low-risk division and would have weighted average cost of captial of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the the two divisions are the same size, the company has a composit weighted average cost of captial of 11%. Division H is considering a project with an expected return of 12%.
1) Should Acme manufacturing Corporation accept or reject the project?
a) Reject the Project
b) Accept the Project
2) On what grounds do you base your accept-reject decison?
A) Division h's project should be accepted, as it return is greater than the risk-based cost of capital for the division.
B) Division h's project should be rejected since its return is less than the risk-based cost of capital for the division.