Homework Help: Corporate Finance

Posted by Andy on Monday, March 1, 2010 at 1:21pm.

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 - Chimaren, Tuesday, April 27, 2010 at 11:57am
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 - Anonymous, Sunday, May 9, 2010 at 3:05pm
bgfxbv
Corporate Finance - Grace, Saturday, February 16, 2013 at 10:34am
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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