Coyote Inc

question 73

Multiple Choice

Coyote Inc.operates three divisions.One division involves significant research and development,and thus has a high-risk cost of capital of 15%.The second division operates in business segments related to Coyote's core business,and this division has a cost of capital of 10% based upon its risk.Coyote's core business is the least risky segment,with a cost of capital of 8%.The firm's overall weighted average cost of capital of 11% has been used to evaluate capital budgeting projects for all three divisions.This approach will

• A) favor projects in the core business division because that division is the least risky.
• B) favor projects in the related businesses division because the cost of capital for this division is the closest to the firm's weighted average cost of capital.
• C) favor projects in the research and development division because the higher risk projects look more favorable if a lower cost of capital is used to evaluate them.
• D) not favor any division over the other because they all use the same company-wide weighted average cost of capital.

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Definitions:

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