A company has two divisions, A and B. Division A is the company's low risk division and would have a WACC of 8% if it were operated as an independent company. Division B is the company's high risk division and would have a WACC of 14% if it were operated as an independent company. Because the two divisions are the same size, the company has composite of WACC of 11%. Division B is considering a new project with an expected return of 12%.
1. Should company accept or reject the project?
Accept or Reject
2. On what grounds do you base you accept or reject decision?
A. Division B's project should be rejected, because its return is less thant the risk based cost of capital for the division.
B. Division B's project should be accepted, because its return is greater than the risk based-based cost of capital for the division.