Required rate of return

CFA Level I
#1

Correct answer for the following is A. I thought D is correct to use WACC of target capital structure. Appreciate for any comments. ---------------------------- Graham Industries has two separate divisions: the Farm Equipment Division and the Household Products Division. Each division accounts for about 50 percent of the company’s revenues and assets. Managers now want to enter the toy industry. In assessing the attractiveness of investment projects in the toy industry, Graham should use a required rate of return based on: A. a required return computed for the toy industry. B. the required rate of return on the market portfolio. C. Graham’s current weighted-average cost of capital. D. a weighted-average required return computed for the farm equipment, household products, and toy industries.

#2

You only want to enter toy industry, therefore you only care about required return of toy industry WACC is not an acronym of “weighted-average required return”

#3

That would be the WARR?

#4

lawl

#5

Thanks for replies. Is there a scenario where WACC is used to as required rate of return in evaluating projects? I am trying to understand the concept. I need to review LOS to make sure I understood it correctly.

#6

WACC is always used to calculate the current NPV of a project.