6. Consider Starlight Sandwich Shops, a company with two divisions a bakery operation and a chain...

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6. Consider Starlight Sandwich Shops, a company with two divisions a bakery operation and a chain of cafes. The bakery division is low-risk and has a 10% WACC. The cafe division is riskier and has a 14% WACC. Each division is approximately the same size, so Starlight's overall cost of capital is 12%. The bakery manager has a project with an 11% expected rate of return, and the cafe division manager has a project with a 13% expected return. a. Should these projects be accepted or rejected? (4 marks) b. If the company uses that 12% cost of capital to evaluate all projects for the next 10 years, what are the possible consequences? (6 marks) 6. Consider Starlight Sandwich Shops, a company with two divisions a bakery operation and a chain of cafes. The bakery division is low-risk and has a 10% WACC. The cafe division is riskier and has a 14% WACC. Each division is approximately the same size, so Starlight's overall cost of capital is 12%. The bakery manager has a project with an 11% expected rate of return, and the cafe division manager has a project with a 13% expected return. a. Should these projects be accepted or rejected? (4 marks) b. If the company uses that 12% cost of capital to evaluate all projects for the next 10 years, what are the possible consequences? (6 marks)

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a The 11 expected return for the bakery project should be accepted as it is highe... View the full answer