The impact of a firms cost of capital on managerial decisions

Consider the following case:

International Imports has two divisions, L and H. Division L is the companys low-risk division and would have a weighted average cost of capital of 12% if it was operated as an independent company. Division H is the companys high-risk division and would have a weighted average cost of capital of 18% 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 15%. Division L is considering a project with an expected return of 13.5%.

Should International Imports accept or reject the project?

a. Accept the project

b. Reject the project

On what grounds do you base your acceptreject decision?

a. Division Ls project should be accepted, because its return is less than the risk-based cost of capital for the division.

b. Division Ls project should be accepted, since its return is greater than the risk-based cost of capital for the division.