5. Langston Labs has an overall (composite) WACC of 10%, which reflects the cost
ID: 2750379 • Letter: 5
Question
5. 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-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects:
Expected
Project
Risk
Return
A
High
15%
B
Average
12%
C
High
11%
D
Low
9%
E
Low
6%
Which set of projects would maximize shareholder wealth? EXPLAIN ANSWER AND SHOW WORK
Expected
Project
Risk
Return
A
High
15%
B
Average
12%
C
High
11%
D
Low
9%
E
Low
6%
Explanation / Answer
Answer: The combination of Projects A, B & D would maximize the shareholder's wealth.
To maximize the share holders wealth the return of a project must be higher than the risk involved with the project.
Only in project A, B and D are having return higher than its cost of capital. So this is the set of projects to be undertaken.
Projects Return Risk associated Cost of capital A 15% High 12% B 12% Average 10% C 11% High 12% D 9% Low 8% E 6% Low 8%Related Questions
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