Laramie Labs uses a risk-adjustment when evaluating projects of different risk. Its overall (composite) WACC is 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Laramie 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%
Required:
1. Which set of projects would maximize shareholder wealth?
O A and B.O A, B, and C.O A, B, and D.O A, B, C, and D.O A, B, C, D, and E.

Question

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Respuesta :

andromache andromache · Answer 1 · 2020-05-11T11:41:42+02:00

Answer:

A, B, and D.

Explanation:

According to the situation, computation of the given data is shown below:

We'll need to evaluate the WACC with the expected return, to figure out which project set would maximize the wealth of the shareholder.

Particular Risk WACC(required return) (%) Expected Return (%) Accept or Reject Reason

Project A High 12 15 Select WACC is lower than expected return.

Project B Average 10 12 Select WACC is lower than expected return.

Project C High 12 11 Reject WACC is higher than expected return.

Project D Low 8 9 Select WACC is lower than expected return.

Project E Low 8 6 Reject WACC is greater than expected return.

As per the analysis, option C (project A,B and D) should be selected to maximize shareholder’s wealth.