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

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.

Quizplus · Accepted Answer

Project A has a 8% WACC, which is lower than the composite WACC of 10%, making it a low-risk project. Project B has a WACC of 10%, which is equal to the composite WACC, making it an average-risk project. Project D has a WACC of 12%, which is higher than the composite WACC, making it a high-risk project. Projects A, B, and D cover all levels of risk and would maximize shareholder wealth while ensuring diversification of risk. Project C is unnecessary as it is an average-risk project with a WACC of 10%, which is already covered by Project B. Therefore, the best choice is C, A, B, and D.

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