Which of the Following Is a Reason Why the Divisional

question 58

Multiple Choice

Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?

• A) Managers in different divisions may use different methods to calculate the WACC.
• B) The expected return of the new project may be incorrect.
• C) If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.
• D) None of the options are correct.

---

Definitions:

Beta

A measure of how much risk or volatility from the market a stock can be expected to be exposed to compared to the overall market.

Economic States

Economic States refer to the conditions or phases of an economy at a given time, which can include growth, recession, depression, and recovery.

Cyclical Stock

A stock whose price is affected by macroeconomic changes in the overall economy, often correlated with economic cycles of expansion and recession.

Expected Return

The anticipated return on an investment, calculated as a weighted-average of all possible returns, based on their probabilities.