Duval IncUses Only Equity Capital,and It Has Two Equally-Sized Divisions

question 63

Multiple Choice

Duval Inc.uses only equity capital,and it has two equally-sized divisions.Division A's cost of capital is 10.0%,Division B's cost is 14.0%,and the corporate (composite) WACC is 12.0%.All of Division A's projects are equally risky,as are all of Division B's projects.However,the projects of Division A are less risky than those of Division B.Which of the following projects should the firm accept?

• A) A Division B project with a 13% return.
• B) A Division B project with a 12% return.
• C) A Division A project with an 11% return.
• D) A Division A project with a 9% return.
• E) A Division B project with an 11% return.

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Definitions:

Wealth of Consumers

The total value of all assets owned by consumers minus any liabilities; it reflects the economic resources available to consumers.

Aggregate Supply Curve

A graphical representation of the relationship between the overall price level and the total output produced by an economy.

Aggregate Demand Curve

A graph showing the relationship between the total demand for goods and services and the overall price level in the economy, all else being equal.

Real GDP

Gross Domestic Product adjusted for inflation, providing a more accurate reflection of an economy’s size and growth rate.