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

Question

18

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?

Select one:

a. A, B, and C.

b. A, B, C, D, and E.

c. A and B.

d. A, B, and D.

e. A, B, C, and D.

Project Table Project Risk Expected Return A High 15% B Average 12% C High 11% D Low 9% E Low 6%

Explanation / Answer

Ans-a)A,B & C

project A,B & c have postive return which is maximise shareholders wealth.

Project Risk Expected Return WACC Expected return -Aveage return Remarks 1 2 3 4 5 A High 15% 12% 4.40 Positive B Average 12% 10% 1.40 Positive C High 11% 12% 0.40 Positive D Low 9% 8% -1.60 Negative E Low 6% 8% -4.60 Negative Total 53% Average return 10.6

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