posted by Andy on .
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
Which set of projects would maximize shareholder wealth? Why?
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%
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