Q#1 (Chapter 9). A diversified company has decided to use its overall firm WACC as a performance benchmark for rating its divisional managers and to decide whether new projects from its three divisions should be funded for investment capital. The firm WACC is 10%. The divisional WACCs for its high risk, average risk, and low risk divisions are 16%, 10%, and 8%, respectively.

Please explain:

(a) What will happen to the firm's overall risk and market value if the firm WACC (10%) is used to evaluate projects and managers of high risk division

(b) What will happen to the firm's overall risk and market value if the firm WACC (10%) is used to evaluate projects and managers of low risk division

(c) How would managers of high-risk and low-risk divisions react to using firm WACC as a performance benchmark for managers and divisional investment projects.

Remember that WACC can be interpreted as a hurdle rate or the minimum acceptable return (see divisional cost of capital discussion on pages 396-399 of your book).

Limit your answers to twenty (20) sentences.