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?

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?

Quizplus · Accepted Answer

The projects with the highest expected return are A, B, and D with a WACC of 12%. These projects would provide the greatest increase in shareholder wealth. Project C has an expected return of 10%, which is exactly the average risk WACC and does not offer a significant increase in shareholder wealth compared to Langston Labs' average asset. Project E has an expected return of 8%, which is lower than the low-risk WACC of 8% and would not provide a sufficient increase in shareholder wealth. Therefore, the best choice would be projects A, B, and D (Choice C).

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