Corporate Finance

posted by .

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

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Financial Management

    What are reasonable cost of capitol for evaluating average risks projects, high risks projects, and low risk projects?
  2. finance management

    Suppose a firm estimates its cost of capital for the coming year at 10%, what are reasonable costs of capital for evaluating average-risk, high-risk, and lo-risk projects?
  3. investing

    Suppose a firm estimates its cost of capital for the coming year to be 10 percent. What are reasonable costs of capital for evaluating average-risk projects, high-risk projects, and low-risk projects?
  4. Fin215

    You are to assume that a firm’s cost of capital is 10%. Using this information, what are reasonable costs of capital for evaluating average-risk projects, high-risk projects, and low-risk projects. Based on your knowledge about this …
  5. investing

    1. What does calculating the weighted average cost of capital (WACC) tell you about a company's financial strategy including the level of risk involved in the business?
  6. Finance ( Please help)

    Warnock Inc is considering a project that has the following cash flow and WACC Data What is the projects NPV ?
  7. Financial Management

    Reading Foods is interested in calculating its weighted average cost of capital (WACC). The company’s CFO has collected the following information: • The target capital structure consists of 40 percent debt and 60 percent common …
  8. Math (Accounting)

    Reading Foods is interested in calculating its weighted average cost of capital (WACC). The company’s CFO has collected the following information: • The target capital structure consists of 40 percent debt and 60 percent common …
  9. Accounting PLEASE HELP!!!!!!!!!

    Reading Foods is interested in calculating its weighted average cost of capital (WACC). The company’s CFO has collected the following information: • The target capital structure consists of 40 percent debt and 60 percent common …
  10. Finance

    Houston Inc. is considering a project which involves building a new refrigerated warehouse which will cost $7,000,000 at year = 0 and which is expected to have before tax operating cash flows of $500,000 at the end of each of the next …

More Similar Questions