Question
2. Eyes of the World Corporation has traditionally employed a firm wide discount rate for capital budgeting purposes. However, its two divisions publishing and entertainment
2. Eyes of the World Corporation has traditionally employed a firm wide discount rate for capital budgeting purposes. However, its two divisions publishing and entertainment - have different degrees of risk given by P = 1.0, E = 2.0, and the beta for the overall firm is 1.3. The firm is considering the following capital expenditures:
| Proposed Project | Initial Investment | IRR | |
| P1 | $1M | .130 | |
| Publishing | P2 | $3M | .121 |
| P3 | $2M | .090 | |
| Entertainment | E1 | $4M | .160 |
| E2 E3 | $6M $5M | .170 .140 |
Which projects would the firm accept if it uses the opportunity cost of capital for the entire company? Which projects would it accept if it estimates cost of capital separately for each division? Use 6% as the risk-free rate and 12% as the expected return on the market.
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