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:

Flexibility

The ability of an entity or system to adapt to changes, variability, or uncertainties in its operational environment.

Indirect Interest Costs

Expenses related to obtaining financing (such as legal, administrative, and underwriting fees) that do not directly involve the payment of interest.

Combination Leases

Combines some aspects of both operating and financial leases. For example, a financial lease that contains a cancellation clause—normally associated with operating leases—is a combination lease.

Operating Leases

Leasing agreements for assets where the lessor retains ownership, and the lessee uses the asset for a specified period.