An Organization's Required Rate of Return Is 13

question 119

Multiple Choice

An organization's required rate of return is 13%. The ROI of Divisions A and B, respectively, is 10% and 15%. Each Division is considering a project that will have a 12% rate of return. If residual income is used to evaluate divisions, which of the following statements is true?

• A) Both divisions will accept the project
• B) Both divisions will reject the project
• C) Division A will accept, and Division B will reject, the project
• D) Division A will reject, and Division B will accept, the project

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Definitions:

WACC

The Weighted Average Cost of Capital (WACC) refers to the average rate of return a company is expected to pay to its security holders to finance its assets.

Debt Ratio

The debt ratio is a financial metric that measures the extent of a company’s leverage, calculated by dividing total liabilities by total assets.

Cost of Debt

The effective rate that a company pays on its current debt, included in capital structure calculations to assess overall cost of capital.

Cost of Equity

The return that investors expect for investing in a company's equity, representing the compensation for the risk taken.