Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of

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?


Project (A)--HIGH (risk), 15% (expected return)
Project (B)--AVERAGE (risk),12%(expected return)
Project (C)---HIGH (risk), 11% (expected return)
Project (D)--LOW(risk),9% (expected return)
Project (E)--LOW (risk), 6% (expected return)


Answer:

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.


*Please show how to derive answer, thanks!

Explanation / Answer

c)A, B, and D.

all projects whose expected return is greater than the WACC for that level of risk should be undertaken.

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