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March 28, 2017

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1. Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average projects at 10%, and high-risk projects at 12%. The company is considering the following projects:

Risk Expected Return
High 15%
Average 12
High 11
Low 9
Low 6

Which set of projects would maximize shareholder wealth? Why?

  • Corporate Finance - ,

    The answer is all about the risk, not the percentages.

    In other words, there are only three projects that exceed the minimum WACC required based on the risk criteria:
    15% because it exceeds the high risk WACC of 12%
    12% because it meets and exceeds the average WACC of 10%
    and the 9% because it exceeds the low WACC of 8%

  • Corporate Finance - ,

    bgfxbv

  • Corporate Finance - ,

    PROJECT RISK RETURN
    A High 15%
    B Average 12
    C High 11
    D Low 9
    E Low 6

    so the projects A, B, and D will maximize the shareholder wealth

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