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AB Corporation has two divisions, office paper and landscaping. The CFO is currently using the company’s overall WACC as the hurdle rate for all projects. AB has a company beta of 1.16 while the office paper division’s beta is 0.87 and the landscaping division’s beta is 1.3. Currently, the risk free rate is 2 percent and the market risk premium is 5 percent. The office paper division has identified two projects with expected returns of 7.5 percent and 8 percent. The landscaping division has identified two projects with expected returns of 8.2 percent and 8.6 percent. Draw a graph of the security market line. One the same graph, include a line for the company’s WACC and place an “x” in the appropriate position on the same graph for each of the four projects. Using the CFO’s criteria, which of the projects will be accepted? Which of the projects should NOT be accepted if analyzed properly?

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Financial Management, Finance

Category:- Financial Management
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