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Sagot :
A company-wide rate would be determined from the average risk of the whole firm.
If a multidivisional firm uses a company-wide cutoff rate, this rate will be too high for low-risk divisions and too low for high-risk divisions. The firm will accept only bad high-risk projects and reject good low-risk projects.
It is therefore become necessary to estimate divisional cutoff rates which will reflect the risk of each division. In addition to this because this process involves political rivalries within the firm the approach of company wide rate is used to justify ,these rates must be as comprehensible as possible.
This issue is concerned with any firm with two or more divisions that differ in risk from each other. As each division considers different investment opportunities, it must use a cost of capital to evaluate the effects of expected cash flows in differing time periods. This interest rate is also called a "cutoff" rate.
To know more about cost of capital here:
https://brainly.com/question/15521018
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