Why Should Firms That Own and Operate Multiple Businesses That

question 91

Multiple Choice

Why should firms that own and operate multiple businesses that have different risk characteristics use business-specific,or divisional costs of capital?

• A) Not all divisions have equal risk and the firm might accept projects whose returns are higher than are deemed appropriate.
• B) Not all business divisions have equal risk and the firm will likely become less risky in the future.
• C) Not all lines of business have equal risk and it is likely that the firm will accept projects whose returns are unacceptably low in relation to the risk involved.
• D) Use of the same weighted average cost of capital for all divisions may result in too much money being allocated to the least risky division.

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Definitions:

European Union

A political and economic union of 27 European countries that are located primarily in Europe, aimed at promoting integration, freedom of movement, and common policies.

World Trade Agreement

A legally binding agreement between two or more countries designed to lower trade barriers and foster international trade.

International Trade

The exchange of goods and services across international borders, influenced by comparative advantages, exchange rates, and global economic policies.

Netherlands

A country in Northwestern Europe known for its flat landscape, canals, tulip fields, windmills, and cycling routes.