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 WACC of 8%,average-risk projects at 10%,and high-risk projects at 12%.The company is considering the following projects: $$\begin{array} { c c c }
\underline{\text { Project }} &\underline{ \text { Risk }} &\underline{ \text { Expected Return }} \
\text { A } & \text { High } & 15 \% \
\text { B } & \text { Average } & 12 \% \
\text { C } & \text { High } & 11 \% \
\text { D } & \text { Low } & 9 \% \
\text { E } & \text { Low } & 6 \%
\end{array}$$ 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

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 WACC of 8%,average-risk projects at 10%,and high-risk projects at 12%.The company is considering the following projects: $$\begin{array} { c c c } 
\underline{\text { Project }} &\underline{ \text { Risk }} &\underline{ \text { Expected Return }} \
\text { A } & \text { High } & 15 \% \
\text { B } & \text { Average } & 12 \% \
\text { C } & \text { High } & 11 \% \
\text { D } & \text { Low } & 9 \% \
\text { E } & \text { Low } & 6 \%
\end{array}$$ 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.

Quizplus · Accepted Answer

The goal is to maximize shareholder wealth. To do this, we must select projects that have a higher expected return than their corresponding WACCs. Project A has an expected return of 15%, which is greater than the WACC of 12%. Project B has an expected return of 12%, which matches the WACC of 10%. Project C has an expected return of 11%, which is greater than the WACC of 12%. Project D has an expected return of 9%, which is greater than the WACC of 8%. Project E has an expected return of 6%, which is less than the WACC of 8%. Therefore, the best choice(s) to maximize shareholder wealth are projects A, B, and D.

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