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? $\begin{array}{l}
\begin{array}{ccc}
\underline { \text { Project } } &&\underline { \text {Risk }} \
\text { A } & & \text { High } \
n & & \text { Average } \
\text { C } & & \text { High } \
\text { D } & & \text { Low } \
\text { E } & & \text { Low }
\end{array}
\begin{array}{c}
\underline { \text {Expected Return} } \
15 \% \
12 \
11 \
9 \
6
\end{array}
\end{array}$
A)A, B, and C
B)A, B, and D
C)A, B, C, and D
D)A, B, C, D, and E

Question

Quizplus · Accepted Answer

To maximize shareholder wealth, Langston Labs should choose projects with a higher expected return than their respective WACC. Projects A and C have an expected return higher than the WACC for high-risk projects (12%), but they are also riskier, which makes them less attractive. Project B has an expected return equal to the WACC for average projects (10%), which means it is not adding any value. Projects D and E, on the other hand, have expected returns above their respective WACCs (8% and 10%), which makes them attractive. Therefore, the best choice is to select projects A, B, and D, which have expected returns of 15%, 12%, and 9%, respectively.

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