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Some companies are incapable of using one WACC benchmark for every project. It could cause the...

Some companies are incapable of using one WACC benchmark for every project. It could cause the company to wrongly accept/reject certain projects. Describe an example of a company which should use multiple rates of return for the capital budgeting decisions and why.

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Answer #1

When a company is in more that one business line, it shall use different WACC for each line of business.

For example Samsung is into mobile phones selling. It also has a division that is into construction business. It has other businesses too. However its market reputation in mobile manufacturing is very good, with demand for its good high. henc ethe WACC for this business shall reduce as lenders will lend easily. Hence cost of capital shall be lower.
Now although Samsung is a good company in construction business too. However construction business is much riskier with large outlays and more probability of loss. Hence cost of capital shall be higher for this division

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