J Construction Corporation has an overall cost of capital of 11.5%. This cost of
ID: 2659593 • Letter: J
Question
J Construction Corporation has an overall cost of capital of 11.5%. This cost of capital reflects cost of capital for a project with average risk. Like any company, the firm takes on projects with various degrees of risk. In the past, the company has considered low-risk projects to have a cost of capital of 9% and high-risk projects to have a cost of capital of 15%. Which of the following projects should the company select to maximize shareholder wealth.
Project Expected Return Risk
How would this impact your decision if they were independent vs. mutually exclusive? Explain your answers.
Explanation / Answer
As J Construction Corporation has an overall cost of capital of 11.5% and low-risk projects to have a cost of capital of 9% and high-risk projects to have a cost of capital of 15%.we see that Single Family Homes project has return 12% and and risk is low. As for low risk, company has considered 9%. but as it is giving 12% which is 3% more , so it should consider this project.
ans : 1.Single Family Homes 12% Low
If they are independent Commercial 17% High project also can be choosen as it is 2% more than high risk project of 5% . So both project 1 and 3 can be choosen .But for mutually exclusive only project 1 is choosen
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