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: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

To maximize shareholder wealth, Langston Labs should choose projects with a higher return than their cost of capital. Projects A, B, and D have a return higher than their respective WACCs, while Project C has a return equal to its WACC. Therefore, the optimal choices would be A, B, and D. Project E has a return lower than its WACC and should be rejected. Projects A and B are both low-risk and have a WACC of 8%, while Project D is high-risk and has a WACC of 12%. This combination of projects would help to diversify Langston's portfolio and potentially increase returns while managing risk.

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