1. 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 projects at 10%, and high-risk projects at 12%. The company is considering the following projects:

Question

Risk Expected Return
High 15%
Average 12
High 11
Low 9
Low 6

Which set of projects would maximize shareholder wealth? Why?

Answer 1

The answer is all about the risk, not the percentages.

In other words, there are only three projects that exceed the minimum WACC required based on the risk criteria:
15% because it exceeds the high risk WACC of 12%
12% because it meets and exceeds the average WACC of 10%
and the 9% because it exceeds the low WACC of 8%

Answer 2

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Answer 3

PROJECT RISK RETURN
A High 15%
B Average 12
C High 11
D Low 9
E Low 6

so the projects A, B, and D will maximize the shareholder wealth