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QUESTION

Divisions of a corporation are not usually formed based explicitly on differences in risk between the projects in different divisions.

Divisions of a corporation are not usually formed based explicitly on differences in risk between the projects in different divisions. Rather, they are normally formed along product-type or geographic differences. Explain how this division scheme may still result in divisions that do differ among themselves by average risk. Also explain why calculating divisional WACCs in such a situation will still improve decision making over simply using a firm wide WACC for project acceptance or rejection.

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