Bloom and Co. has no debt or preferred stockσit uses only equity capital, and has two equally-sized divisions. Division X's cost of capital is 10.0%, Division Y's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division X's projects are equally risky, as are all of Division Y's projects. However, the projects of Division X are less risky than those of Division Y. Which of the following projects should the firm accept?
A) a division y project with a 12% return.
B) a division x project with an 11% return.
C) a division x project with a 9% return.
D) a division y project with an 11% return.
E) a division y project with a 13% return.

Question

Quizplus · Accepted Answer

The correct answer is statement b. Division X should accept only projects with returns greater than 10%, while Division Y should accept only projects with returns greater than 14%. Only statement b meets this criterion.