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:

Standard Deviation

A statistical measure that quantifies the amount of variation or dispersion of a set of data values from their mean.

Dividend Yield

The dividend per share divided by the price per share, indicating how much a company pays out in dividends each year relative to its stock price.

Capital Gain

The profit from the sale of assets or investments when the sale price exceeds the purchase price.

Geometric Average Return

The average rate of return of an investment calculated by multiplying n variables and then taking the n-th root.