Question

Jenner's is a multi-division firm that uses its overall WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to:

Answer 1

Answer: Prefer higher risk projects over lower risk projects.

Explanation:

The weighted average cost of capital refers to how the cost of capital for a firm is calculated whereby the category of capital is weighted.

Since the firm uses its overall WACC as the discount rate for all proposed projects and due to the fact that the divisions are in separate line of business and each division has its own risk, then a division within the firm will tend to prefer higher risk projects over lower risk projects.