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Suppose all investors are risk-averse and hold diversified portfolios. You are evaluating a new drug company that is going to have two divisions: an R&D unit and a Sales unit. Your CEO and you are arguing about whether the two units should have the same cost of capital (WACC), or whether the discount rates should be different. If different, what should be the relative magnitudes of the discount rates, that is, which unit R&D or Sales should have the higher discount rate. Assume the discount rates of the two units are labeled as R (for R&D) and S (for Sales), respectively. What do you think?

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