Preston Industries Has Two Separate Divisions

question 89

Multiple Choice

Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should:

• A) allocate more funds to Division A since it is the largest of the two divisions.
• B) fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values.
• C) allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital.
• D) assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values.
• E) fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B.

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