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6 July, 17:09

Edinburgh Exports 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 Edinburgh Co. accept or reject the prject?

A. Accept

B. Reject

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

A. Division H's project should be accepted, because its return is greater than the risk-based cost of capital for the divison.

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

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  1. 6 July, 17:22
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    Part 1. B Reject

    Part 2. Division H's project should be rejected, because its return is less than the risk-based cost of capital for the division.

    Explanation:

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