Acme Conglomerate Corporation Operates Three Divisions

question 31

Multiple Choice

Acme Conglomerate Corporation 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 Acme's core business,and this division has a cost of capital of 10% based upon its risk.Acme'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:

Potential Bottlenecks

Points within a process or system that slow down the overall operation due to limited capacity or resources.

Total Direct Labour Cost

The complete expense incurred for paying employees who directly work on the production of goods.

Direct Labour Hours

The number of hours worked directly on manufacturing a product or providing a service, used in costing and operational efficiency analysis.

Budgeted Balance Sheet

A financial statement that projects the financial position of a company at a future date, showing expected assets, liabilities, and equity balances.