Langston Labs Has an Overall (Composite) WACC of 10%, Which

question 8

Multiple Choice

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-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects: $\begin{array} { c c c } \underline{\text { Project} } & \underline{\text { Risk }} & \underline{\text { Expected Return} } \\\text { A } & \text { High } & 15 \% \\\text { B } & \text { Average } & 12 \% \\\text { C } & \text { High } & 11 \% \\\text { D } & \text { Low } & 9 \% \\\text { E } & \text { Low } & 6 \%\end{array}$ 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:

Compounded Monthly

Interest on an investment calculated each month and added to the principal, increasing the amount on which future interest is computed.

End-Of-Month Payments

Payments made at the conclusion of a calendar month, often relating to salaries, bills, or loans.

Compounded Quarterly

The process of calculating interest on both the initial principal and the accumulated interest over four periods within a year.

Initial Deposit

The first sum of money placed in an account, marking the beginning of an investment or savings plan.