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A diversified company has decided to use its overall firm WACC as a performance benchmark for rating its divisional managers and to decide whether new projects from its three divisions should be funded for investment capital. The firm WACC is 12%. The divisional WACCs for its high risk, average risk, and low risk divisions are 18%, 12%, and 8%, respectively.
Please explain:
(a) What will happen to the firm's overall risk and market value if the firm WACC (12%) is used to evaluate projects and managers of high risk division;
(b) What will happen to the firm's overall risk and market value if the firm WACC (12%) is used to evaluate projects and managers of low risk division; and
(c) How would managers of high-risk and low-risk divisions react to using firm WACC as a performance benchmark for managers and divisional investment projects. Remember that WACC can be interpreted as a hurdle rate or the minimum acceptable return.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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