Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?
A)Managers in different divisions may use different methods to calculate the WACC.
B)The expected return of the new project may be incorrect.
C)If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.
D)None of these answers is correct.

Question

Quizplus · Accepted Answer

If new projects are assigned to the wrong division, the divisional cost of capital approach may cause problems because the risk of that division may be significantly different than the risk of the project. This implies that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be. This would lead to incorrect investment decisions and potentially lower profitability for the company. The other options are not directly related to the divisional cost of capital approach causing problems if new projects are assigned to the wrong division.

Which of the Following Is a Reason Why the Divisional