Duval Inc Uses Only Equity Capital, and It Has Two Equally-Sized

question 17

Multiple Choice

Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of Division B's projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept?

• A) A Division B project with a 13% return.
• B) A Division B project with a 12% return.
• C) A Division A project with an 11% return.
• D) A Division A project with a 9% return.
• E) A Division B project with an 11% return.

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Definitions:

Intended Beneficiary

A third party to a contract whom the contracting parties intended to benefit directly from their contact.

Prenuptial Agreement

A contract entered into prior to marriage specifying the distribution of assets in the event of divorce or death.

Ownership Rights

The legal rights to use, control, and dispose of property or assets.

Post Hoc Ergo Propter Hoc

A logical fallacy that occurs when it is assumed that because one event followed another, the first event caused the second.