Laramie Labs Uses a Risk-Adjustment When Evaluating Projects of Different

question 24

Multiple Choice

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 risk-adjusted project cost of capital of 8%, average-risk projects at 10%, and high-risk projects at 12%.The company is considering the following projects: $\begin{array}{ccr}\text { Project }& \text { Risk }& \text { Expected Return }\\\text { A } & \text { High } & 15 \% \\\text { B } & \text { Average } & 12 \% \\\text { C } & \text { High } & 11 \% \\\text { D } & \text { Low } & 9 \% \\\text { E } & \text { Low } & 6 \%\end{array}$ Which set of projects would maximize shareholder wealth?

• A) A and B.
• B) A, B, and C.
• C) A, B, and D.
• D) A, B, C, and D.
• E) A, B, C, D, and E.

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Definitions:

Cold Current

A mass of seawater that moves from higher to lower latitudes, typically colder than the surrounding waters and influencing local climates.

Arid Lands

Regions characterized by a severe lack of available water, to the extent of hindering or preventing the growth and development of plant and animal life.

Subtropics

Geographical zones located directly north and south of the tropics, approximately centered on 30°S and 30°N.

Equator

An imaginary line around the Earth equidistant from the poles, dividing it into northern and southern hemispheres and marking the 0-degree latitude line.