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?

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%

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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

To determine which set of projects would maximize shareholder wealth for Langston Labs, we need to compare the expected returns of the projects to their corresponding weighted average cost of capital (WACC).

First, let's calculate the weighted average cost of capital (WACC) for Langston Labs using the given information:
- Low-risk projects have a WACC of 8%
- Average projects have a WACC of 10%
- High-risk projects have a WACC of 12%

Next, we'll compare each project's expected return to its respective WACC to determine if the project's return is higher or lower than the cost of capital. This will enable us to determine the potential impact on shareholder wealth.

Project 1: Risk Level - High, Expected Return - 15%
Since the expected return of 15% is higher than the high-risk WACC of 12%, this project has the potential to generate a higher return and positively impact shareholder wealth.

Project 2: Risk Level - Average, Expected Return - 12%
The expected return of 12% matches the average project's WACC of 10%. This project neither adds nor subtracts value from shareholder wealth.

Project 3: Risk Level - High, Expected Return - 11%
Similar to Project 1, the expected return of 11% is higher than the high-risk WACC of 12%, indicating a positive impact on shareholder wealth.

Project 4: Risk Level - Low, Expected Return - 9%
The expected return of 9% is lower than the low-risk WACC of 8%, suggesting that this project may not generate sufficient returns to maximize shareholder wealth.

Project 5: Risk Level - Low, Expected Return - 6%
Similar to Project 4, the expected return of 6% is lower than the low-risk WACC of 8%, indicating potential negative impact on shareholder wealth.

Based on the analysis, projects 1, 3, and 2 (in descending order of expected return) would maximize shareholder wealth. These projects have expected returns higher or equal to the respective WACC, indicating that they potentially generate positive returns and contribute to increasing shareholder wealth.

It is important to note that this analysis is based solely on the expected returns and does not consider other factors such as project size, timing, or potential risks beyond the assigned risk levels.