Tyrion Corporation, an all equity-financed company, has traditionally employed a firm-wide discount rate for capital-budgeting purposes. However, its two divisions publishing and entertainment have different degrees of market risk given by PUB = 0.8, ENT = 1.2. The beta for the overall firm is 1.0. Use 3% as the risk-free rate and 9% as the expected return on the market. The firm is considering the following projects:

Proposed Project /IRR

Publishing 1 0.140

Publishing 2 0.125

Publishing 3 0.090

Entertainment 1 0.150

Entertainment 2 0.100

Entertainment 3 0.080

a. Which projects would the firm accept if it uses the opportunity cost of capital for the entire company?

b. Which projects would it accept if it estimates and uses a cost of capital separately for each division?

c. If Tyrion Corporation only uses the firm-wide cost of capital for all decisions, what will happen to the riskiness of the firm, compared to if it used appropriate divisional costs of capital?