Question

Conglomerated Industries' overall cost of capital (WACC) is 10%. Division HR is riskier than average, Division AR has average risk, and Division LR is less risky than average. Conglomerated adjusts for risk by adding or subtracting 2 percentage points. What is the risk-adjusted project cost of capital for a low-risk project in the HR division?

a. 6%
b. 14%
c. 8%
d. 12%
e. 10%

Answer 1

The risk-adjusted project cost of capital for a low-risk project in the HR division = 10% - 2% = 8%.

The correct answer is 8%

Step-by-step explanation:

Since the overall cost of capital is 10% and the project is less risky, the company needs to deduct 2% return from the average return of 10%.