Question

b. Positive within-fum extervies c. Negative within-fum externatives. d. Opportunity costs. e. Sunk costs. Duval Inc. Uses only equity capital and it has two equally des Division A's cost of capital is 100% Division B's cost is 140, corporate composite) WACC is 12.0%. All of Division A's projects are equally hisky, as are all of Division ' S e cts. However, the projects of Division w CSS nsky than those of Division B Which of the following projects should the firm accept? c. Division B Project with d. Division A project with a 13% retur a. Division B project with a 13% retum. b. Division B project with a 12% return. C. Division A project with an 11% return. d. Division A project with a 9% return. e. Division B project with an 11% return. The correlation between stocks A and B is 1. The correlation between stocks B and Cis-1. The correlation between stocks A and C... a. Must be 1. b. Must be 0. c. Must be - 1. d. We would need to know additional information to answer this question. xii. If two projects are mutually exclusive... a. neither should be accepted. b. you will always end up making the same accept/reject decisions whether you use the payback criterion or the discounted payback criterion. c. you will always end up making the same accept reject decisions whether you use the NPV criterion or the IRR criterion. d. they have the same NPV. e. none of the above.

Answer 1

X.

Given,

Division A's cost of capital = 10%

Division B's cost of capital = 14%

Solution :-

Since Division A projects are less risky than Division B projects, the company should only choose Division B. projects if the return from Division B exceeds its cost. In case of options (a), (b) and (e) the return from Division B is 13%, 12% and 11 % respectively, which is lower than its cost, ... 14%, so options (a, b) and (6) should not be chosen. However, if the return of Division A exceeds its cost, it can be chosen. In case of Option (C), Division A's detuon is 11 % which exceeds its cost i. e, 10%. Thus, Option (() should be chosen.

So, the answer is option (c) Division A project with an 11 % return.