Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the manufacturing and distribution divisions tend to be low-risk projects, because these divisions are well established and have predictable demand. The company started its retail and consulting divisions within the last year, and it is unknown if these divisions will be profitable. The company knew that opening these new divisions would be risky, but its management believes the divisions have the potential to be extremely profitable under favorable market conditions. The company is currently using its WACC to evaluate new projects for all divisions.
If Yatta Net International does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time?
a. The firm will reject too many relatively safe projects.
b. The firm will become less risky.
c. The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company.
Answers: 2
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Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects...
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