Vang Inc Estimates That Its Average-Risk Projects Have a WACC of of 10

question 7

Multiple Choice

Vang Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

• A) Project B is of below-average risk and has a return of 8.5%.
• B) Project C is of above-average risk and has a return of 11%.
• C) Project A is of average risk and has a return of 9%.
• D) None of the projects should be accepted.

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Definitions:

Interest Allowance

A mechanism for dividing earnings of a partnership based on a percentage of capital balances of the partners (not an expense).

Net Income

The total profit of a company after all expenses and taxes have been subtracted from total revenue.

Profit and Loss Ratio

A financial metric that compares the gains and losses of a business over a specific period, often used to assess profitability.

Initial Investment

The initial amount of capital used to start a business venture, purchase an asset, or make an investment.