Peter's Pet Foods has a WACC of 12.5 percent and is considering manufacturing pet toys. Tim's Toys specializes in pet toys and has a WACC of 10.5 percent. What discount rate should Peter's Pet Foods use to evaluate this investment?

The risk-free rate.

10.5 percent because that is appropriate given the risk of the project

11.5 percent because after investment Peter's will be a combination of the two businesses

A weighted average of 12.5 and 10.5 with the weights based on the proportion in each business

12.5 percent because that is the appropriate rate for the company