Swizer Industries Has Two Separate Divisions

question 51

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 0.5 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 .45 and a tax rate of 35 percent. The cost of equity is 14.7 percent and the aftertax cost of debt is 5.1 percent. Presently, each division is considering a new project. Division Y's project provides a 12.3 percent rate of return and division X's project provides an 11.64 percent return. Which projects, 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:

Oil Imported

The total volume of crude oil and petroleum products that a country acquires from foreign sources to meet its energy and fuel needs.

Dividends

Payments by a corporation of all or part of its profit to its stockholders (the corporate owners).

Direct Investment

Describes the process of acquiring a controlling interest in foreign assets, such as a company or property, with the aim of managing the investment directly.

Japanese Company

A business entity registered and operating in Japan, often characterized by its management style and hierarchical structure.