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Acme Manufacturing Corporation has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of
Acme Manufacturing Corporation has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division H is considering a project with an expected return of 12%. Should Acme Manufacturing Corporation accept or reject the project? Reject the project Accept the project On what grounds do you base your accept-reject decision? Division H's project should be rejected since its return is less than the risk-based cost of capital for the division. Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division.
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