Determine which projects should the company accept

Reference no: EM132001542

Question: Miller Industrial Tools has two separate divisions. Division X produces custom work on a pre-paid basis only for long-term customers and therefore, is subject to less risk than division Y. The company has assigned a discount rate equal to the firm's WACC minus 1.5 percent to division X and a rate equal to the firm's WACC plus 2 percent to division Y. The company has a debt-equity ratio of .40 and a tax rate of 32 percent. The cost of equity is 11.4 percent and the aftertax cost of debt is 4.8 percent. Presently, each division is considering a new project. Division Y's project provides a 10.2 percent rate of return and division X's project provides a 6.4 percent return. Which projects, if any, should the company accept?

Reference no: EM132001542

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