Corporate Finance

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?

  1. 👍
  2. 👎
  3. 👁
  1. 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%

    1. 👍
    2. 👎
  2. bgfxbv

    1. 👍
    2. 👎
  3. 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

    1. 👍
    2. 👎

Respond to this Question

First Name

Your Response

Similar Questions

  1. finance

    Residual dividend model Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a $3.00 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to remain

  2. Business Finance

    Jungle, Inc., has a target debt−equity ratio of 0.72. Its WACC is 11 percent, and the tax rate is 31 percent. (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16)) Required: (a) If

  3. Paine College

    Morningside Nursing Home, a not-for-profit corporation, is estimating its corporate cost of capital. Its tax-exempt debt currently requries an interst rate of 6.2 percent and its target capital structure calls for 60 percent debt

  4. Corporate Finance

    Taxes and WACC. Rainbow in the Dark Manufacturing has a target debt-equity ratio of .65. Its cost of equity is 13%, and its cost of debt is 8%. If the tax rate is 35%, what is the company's WACC?

  1. 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

  2. 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

  3. Finance

    You are provided the following information on a company. The total market value is $40 million. The capital structure, shown here, is considered to be optimal. Accounting Value Market Value Bonds, $1000 par, 6% coupon, 6% YTM

  4. Finance

    Evans Technology has the following capital structure. Debt ............................................ 40% Common equity .......................... 60 The aftertax cost of debt is 6 percent, and the cost of common equity (in the

  1. finance

    You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained

  2. finance

    The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long-term debt and 60 percent common equity. The before-tax cost of debt is estimated to be 10

  3. Business

    Why is WACC important to an organization? Thank you for using the Jiskha Homework Help Forum. It is difficult to calculate the WACC but it is a solid way to measure the quality of y our investment. What impact does WACC have on

  4. Finance for Business

    The taught capital structure for QM Industries is 45% common stock 7% preferred and 48% debt. If the cost of common equity for the firm is 17%, the cost of preferred stock is 10%, the before-tax cost of debt is 8.4% and the firm

You can view more similar questions or ask a new question.