Vanguard has an overall (composite) WACC of 10%, which reflects the cost of capi

Question

Vanguard has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Vanguard 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:

Project                Risk                 Expected Return

A                              High                    15%

B                               Average           12%

C High             11%

D Low                 9%

            E    Low             6%

Which set of projects would maximize shareholder wealth?

Explanation / Answer

To maximize the shareholder wealth the company has to invest in risky assets, because return on high risk assets is higher that is 15%. if company wants to create a portfolio of different sets of project to maximize the wealth then company should choose project A and Project B. because return on project A is 15% with high level of risk and return on project B is 12% with Average level of risk.

Project C is no desirable because return are less than Average risk level project and risk is very high. Company can choose project D in portfolio because risk level is low and return is 9%.

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