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Should marston company accept or reject project

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Question - The impact of cost of capital on managerial decisions

Consider the following case: Marston Manufacturing Company has two divisions, L and H. Division L is the company's low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company's high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division H is considering a project with an expected return of 12%.

Should Marston Manufacturing Company accept or reject the project?

a. Reject the project

b. Accept the project

On what grounds do you base your accept-reject decision?

a. Division H's project should be rejected since its return is less than the risk-based cost of capital for the division.

b. Division H's project should be accepted, as its return is greater than the risk-based cost of capital for the division.

Reference no: EM132758773

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