Swizer Industries Has Two Separate Divisions

question 68

Multiple Choice

Swizer Industries has two separate divisions.Division X has less risk so its projects are assigned a discount rate equal to the firm's WACC minus .75 percent.Division Y has more risk and its projects are assigned a rate equal to the firm's WACC plus 1 percent.The company has a debt-equity ratio of .48 and a tax rate of 34 percent.The cost of equity is 15.4 percent and the aftertax cost of debt is 5.4 percent.Presently, each division is considering a new project.Division Y's project provides a return of 12.9percent while Division X's project is expected to earn 11.5 percent.Which project(s) , if any, should the company accept?

• A)Accept both X and Y
• B)Accept X and reject Y
• C)Reject X and accept Y
• D)Reject both X and Y
• E)The answer cannot be determined based on the information provided.

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Definitions:

Price Elasticity

An evaluation of consumers' reaction in terms of the quantity of a good they demand when its price changes, indicating their price sensitivity.

Quantity Supplied

The amount of a good or service that producers are willing and able to sell at a specific price over a given period of time.

Price Rise

An increase in the cost of goods or services, often influenced by factors like supply and demand, inflation, or production costs.

Supply Elasticity

The degree to which the supply of a commodity reacts to shifts in its market price.