A Firm Has Three Divisions

question 356

Multiple Choice

A firm has three divisions. A capital budgeting request has just come through for Division C showing a positive NPV at the firm's overall WACC. The financial manager of the firm knows that Division C is the riskiest of the three divisions. The financial manager should:

• A) Deny the request since it was computed in error.
• B) approve the request since it has a positive NPV
• C) Ask that the NPV be recomputed at a cost of capital appropriate for the division.
• D) approve the request if neither of the other two divisions have any capital budgeting projects with positive NPVs.
• E) Subjectively reduce the NPV to reflect the difference in risk and then accept the project if NPV is still positive.

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Definitions:

Practical Problems

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Ethical Imperatives

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