Suppose all investors are risk-averse and hold diversified portfolios. You are evaluating a new energy company that is going to use wind and will have two divisions: an electricity production unit and a sales unit. [Transportation of the electricity will be outsourced.] Your CEO and you are arguing about whether projects that emerge in the two units should have the same cost of capital (WACC), or whether the discount rates should be different. If different, what should be the relative magnitudes of the discount rates, that is, which unit, Production or Sales, should have the higher discount rate? Assume the discount rates of the two units are labeled as P and S, for the Production and Sales units, respectively. What do you think?
P is higher than S
P is lower than S
Please provide an explanation with the answer