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: Which set of projects would maximize shareholder wealth?
A) A, B, and C.
B) A, B, and D.
C) A, B, C, and D.
D) A, B, C, D, and E.

Question

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:  Which set of projects would maximize shareholder wealth?
A) A, B, and C. 
B) A, B, and D. 
C) A, B, C, and D. 
D) A, B, C, D, and E.

Quizplus · Accepted Answer

The projects that would maximize shareholder wealth are those that provide a return on investment greater than their respective WACCs. In this case, projects A, B, and D have expected returns of 12%, 14%, and 15%, respectively, which are all greater than their corresponding WACCs of 8%, 10%, and 12%. Project C has an expected return of 10%, which is equal to its WACC and does not create shareholder value. Project E has an expected return of 9%, which is less than Langston's WACC of 10%. Therefore, projects A, B, and D would maximize shareholder wealth.

Langston Labs Has an Overall (Composite) WACC of 10%, Which