Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset

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:

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

Which set of projects would maximize shareholder wealth? Why?

Expert Solution

ANSWER :

Risk-adjusted WACC :

Low risk : 8%

Average risk : 10%

High risk : 12%

Whichever projects offer greater than the risk-adjusted WACC will increase the wealth of shareholders.

Hence , set of following projects will maximise the wealth of shareholders :

- High risk project with 15% return

- Average risk project with 12% return

- Low risk project with 9% return.

Amanda K answered 2 years ago

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