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

To maximize shareholder wealth, Langston Labs should select projects with a higher expected return than their WACC. Among the given projects, low-risk project A and average-risk project B both have a return higher than their WACC (8% and 10% respectively), so they should definitely be selected. However, high-risk project D has a return lower than its required return of 12%, making it unsuitable for selection. Therefore, the best option would be to select projects A, B, and C, which have returns of 8%, 10%, and 10%, respectively, all exceeding their corresponding WACCs.

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