Which of the Following Is a Reason Why the Divisional

question 111

Multiple Choice

Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?

• A) Managers in different divisions may use different methods to calculate the WACC.
• B) The expected return of the new project may be incorrect.
• C) If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.
• D) None of these choices are correct.

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Definitions:

Crowding Out

A decrease in investment that results from government borrowing.

Accelerator Effects

The phenomenon where an increase in national income leads to a proportionally larger increase in investment spending, magnifying the initial rise in income.

Automatic Stabilizer

Economic policies and programs, such as unemployment insurance and taxation, that automatically adjust to counteract economic fluctuations without the need for government intervention.

Money Market

A section of the financial market where short-term financial assets with high liquidity are traded.