Question

Boone Brothers remodels homes and replaces windows. Ace Builders constructs new homes. If Boone Brothers considers expanding into new home construction, it should evaluate the expansion project using which one of the following as the required return for the project?a. Higher of Boone Brothers' or Ace Builders' cost of capital.b. Ace Builders' cost of capital.c. Lower of Boone Brothers' or Ace Builders' cost of capital.d. Boone Brothers' cost of capital.e. Average of Boone Brothers' and Ace Builders' cost of capital.

Answer 1

Answer:

B) Ace Builders' cost of capital.

Explanation:

Boone Brothers currently operates in a business that is related to Ace Builders's business but it is not the same to be involved in part of a industry than being involved in the whole industry.

Therefore Boone Brothers should use any information they can get from Ace to try to evaluate their own expansion project. Not only can Ace's cost of capital be useful, several other information like total construction periods, resources needed for permits and authorizations, etc.