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 are correct.

Question

Quizplus · Accepted Answer

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. This can lead to incorrect evaluation and decision-making. Managers using different methods to calculate the WACC (Option A) and incorrect expected return (Option B) can also cause problems, but they are not specific to the divisional cost of capital approach.

Which of the Following Is a Reason Why the Divisional