Laramie Labs uses a risk-adjustment when evaluating projects of different risk.Its overall (composite) WACC is 10%, which reflects the cost of capital for its average asset.Its assets vary widely in risk, and Laramie evaluates low-risk projects with a risk-adjusted project cost of capital of 8%, average-risk projects at 10%, and high-risk projects at 12%.The company is considering the following projects: $\begin{array}{ccr}\text { Project }& \text { Risk }& \text { Expected Return }\
\text { A } & \text { High } & 15 \% \
\text { B } & \text { Average } & 12 \% \
\text { C } & \text { High } & 11 \% \
\text { D } & \text { Low } & 9 \% \
\text { E } & \text { Low } & 6 \%
\end{array}$ Which set of projects would maximize shareholder wealth?
A) A and B.
B) A, B, and C.
C) A, B, and D.
D) A, B, C, and D.
E) A, B, C, D, and E.

Question

Quizplus · Accepted Answer

Projects A, B, and D should be selected because their expected returns exceed the risk-adjusted cost of capital for their respective risk categories: Project A (15% > 12%), Project B (12% > 10%), and Project D (9% > 8%). Project C (11% < 12%) and Project E (6% < 8%) do not meet this criterion.

Laramie Labs Uses a Risk-Adjustment When Evaluating Projects of Different